Rebaldo v. Cuomo

• Citation: 749 F.2d 133
• Decision Date: 26 November 1984
• Docket Number: D,No. 1466,1466
• Parties: , 6 Employee Benefits Ca 1001, Medicare&Medicaid Gu 34,256 Sebastian REBALDO, as Chairperson of the Board of Trustees of the United Optical Workers Insurance Fund, Plaintiff-Appellee, v. Mario CUOMO, Governor of the State of New York; and David Axelrod, Commissioner of Health of the State of New York, Defendants-Appellants. Cal.ocket 84-7388.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 133

749 F.2d 133

53 USLW 2303, 6 Employee Benefits Ca 1001,

Medicare&Medicaid Gu 34,256

Sebastian REBALDO, as Chairperson of the Board of Trustees of the United Optical Workers Insurance Fund, Plaintiff-Appellee, v. Mario CUOMO, Governor of the State of New York; and David

Axelrod, Commissioner of Health of the State of

New York, Defendants-Appellants.

Cal. No. 1466, Docket 84-7388.

United States Court of Appeals, Second Circuit.

Argued June 14, 1984.

Decided Nov. 26, 1984.

Judith A. Gordon, Asst. Atty. Gen., New York City, (Robert Abrams, Atty. Gen. of the State of New York, New York City, of Counsel), for defendants-appellants.

Susan Martin, New York City (Sipser, Weinstock, Harper, Dorn & Leibowitz, I. Philip Sipser, Richard Dorn and Jerome Tauber, New York City of Counsel), for plaintiff-appellee.

Robert A. Bicks, New York City (Breed, Abbott & Morgan, Alan C. Drewsen and Daphne E. Telfeyan, New York City, of Counsel), for amicus curiae Blue Cross and Blue Shield of Greater New York.

Wood, Lucksinger & Epstein, New York City (George Kalkines, Fredrick I. Miller and William S. Bernstein, New York City, of Counsel), for amicus curiae The Hospital Ass'n of New York State.

Before FRIENDLY, VAN GRAAFEILAND and NEWMAN, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

This is an appeal from a judgment of the United States District Court for the Southern District of New York (Conner, J.), which invalidated section 2807-a(6)(b) of New York's Public Health Law to the extent it prohibits a hospital from establishing inpatient charges for self-insured employee benefit plans that are other than the charges authorized by the section. The provisions of the statute thus invalidated precluded self-insured employee benefit plans such as the United Optical Workers Insurance Fund (United) from negotiating discount rates with hospitals similar to the rates permitted for payors such as Blue Cross, which operate under Article IX-C of New York's Insurance Law.

In holding as it did, the district court adopted appellee's contention that New York's right to set hospital rates chargeable to employee benefit plans was preempted by section 514(a) of the Employee Retirement Income Security Act (ERISA), 29 U.S.C. Sec. 1144(a), which states with certain exceptions that the provisions of ERISA shall supersede State laws insofar as they "relate" to any employment benefit plan. For reasons hereafter stated, we believe that appellee's contention should have been rejected.

During the past several decades, the cost of hospital care has spiraled. See Greater New York Hospital Association v. Blum, 634 F.2d 668, 669 (2d Cir.1980); California Welfare Rights Organization v. Richardson, 348 F.Supp. 491, 496 (N.D.Cal.1972). In 1983, approximately $8 billion was spent on inpatient hospital care in the State of New York alone. Because approximately two-thirds of this amount was paid by Medicaid and Medicare, both the federal and state governments have sought to develop systems of cost control. However, since Medicaid controls have been more exacting than those of Medicare, administrative attempts to contain hospital costs have been more successful in the former than in the latter.

Medicaid is a joint state and federal program designed to provide medical care to those who otherwise could not afford it. Hospital Association of New York State, Inc. v. Toia, 577 F.2d 790, 792 (2d Cir.1978). New York State is one of the voluntary participants in this plan, which it administers in compliance with applicable federal statutes and regulations. In return for such compliance, the federal government has obligated itself to fund up to 60% of the cost of New York's program. 42 U.S.C. Sec. 1396a(a)(2).

Almost from the time when New York opted to participate in the Medicaid program, see N.Y.Soc.Serv.Law Sec. 363-a, the State has been engaged in a continuing attempt to keep hospital costs within reasonable limits. Prior to 1970, New York reimbursed hospitals on the basis of their actual costs. In 1969, the State decided that this method was too costly and that, effective January 1, 1970, payments would be made in accordance with predetermined rate schedules that reasonably were related to the costs of the services performed. See Hospital Association of New York State, Inc. v. Toia, supra, 577 F.2d at 792 n. 1; National Union of Hospital and Health Care Employees v. Carey, 557 F.2d 278, 279-80 (2d Cir.1977). Although modified by subsequent legislation, that is the basic manner in which payments are made today.

Medicare, which was established to provide medical care to the elderly, is funded entirely by the federal government. Traditionally, states have played no role in setting Medicare rates or handling Medicare payments. Mount Sinai Hospital of Greater Miami, Inc. v. Weinberger, 517 F.2d 329, 334 (5th Cir.1975), cert. denied, 425 U.S. 935, 96 S.Ct. 1665, 48 L.Ed.2d 176 (1976). Thus, in contrast to the prospective rate setting method adopted for Medicaid in New York, Medicare continued until 1982 to calculate hospital entitlements on the basis of costs computed at the end of each fiscal year.

As early as 1967, however, Congress realized that "the rigid commitment to a cost basis of reimbursement may provide insufficient incentive for participating providers of services to furnish health care economically and efficiently", and concluded that bases of Medicare reimbursement other than the cost method should be explored experimentally. S.Rep. No. 744, 90th Cong., 1st Sess. reprinted in 1967 U.S.Code Cong. & Ad.News 2834, 2905. This realization led to the enactment of Pub.L. No. 90-248, tit. IV, Sec. 402(a), (b), 81 Stat. 930, 931, the precursor of 42 U.S.C. Sec. 1395b-1. In substance, section 402(a), (b) authorized the Secretary of Health, Education and Welfare to develop and engage in experiments under which hospitals would be reimbursed in a manner leading to increased efficiency without any impairment of quality. Section 402(c) of the 1967 statute amended section 1875(b) of the Social Security Act, now 42 U.S.C. Sec. 1395ll to provide that the Secretary should submit an annual report to Congress concerning the experiments and demonstration projects authorized by Section 402(a), (b).

Section 222 of Pub.L. No. 92-603, tit. II, 86 Stat. 1390, enacted in 1972, continued and enlarged upon the Secretary's authority to conduct experiments and demonstration projects. Anticipating that Medicaid and private insurers might participate in these experiments, Congress expressed its intent that "Medicaid and private funds would also be used proportionately when medicaid and private programs participate in the project." H.R.Rep. No. 231, 92d Cong. 2d Sess., reprinted in 1972 U.S.Code Cong. & Ad.News 4989, 5068. See 42 U.S.C. Sec. 1395b-1(a)(2).

By the time Congress decided in 1983 to convert Medicare substantially to a system of predetermined prospective rates, see Pub.L. No. 98-21, tit. VI, Sec. 601, 97 Stat. 149 (1983), codified at 42 U.S.C. Sec. 1395ww(d), (e), (f), demonstration projects had been established in Maryland, Massachusetts, New Jersey, and New York. Section 603(b) of the 1983 Act, which may be found in the Historical Note following 42 U.S.C. Sec. 1395b-1, provided that "the amendments made by this title shall not affect the authority of the Secretary to develop, carry out, or continue experiments and demonstration projects." In commenting on section 603(b), the report of the House Ways and Means Committee stated:

Your Committee believes that State cost containment systems have proven effective in reducing the cost of hospital care and that such systems should be encouraged. It is the intent of this provision that the Secretary continue medicare waivers for States which currently have effective demonstration projects and provide an opportunity for new States to develop sound approaches to cost containment. State systems covering all payors have proven effective in reducing health costs and should be encouraged. Such State programs may be useful models for our national system.

H.R.Rep. No. 25, 98th Cong., 1st Sess. 147-48, reprinted in 1983 U.S.Code Cong. & Ad.News 143, 219, 366-67.

The Committee's report continues:

Your Committee bill provides that, upon the request of the State, the Secretary is required to modify the terms of the New York and Massachusetts waivers to eliminate the requirement that the State rate of increase in medicare hospital costs be below the national rate.

....

Under your Committee's bill and under the current demonstration authority of the Secretary, State systems are required to meet a savings test that is related to medicare.

Id.

The statute invalidated below is part of New York's experiment and demonstration project, a three-year program beginning January 1, 1983. The program was approved by the Secretary on December 21, 1982, pursuant to the authority granted by section 402(a). In pertinent part, this plan provides that the State Commissioner of Health shall establish for each hospital an "inpatient revenue cap", i.e., the maximum amount of inpatient revenue the hospital will be authorized to receive for services during a twelve-month period, N.Y.Pub.Health Law Sec. 2807-a(1), with additional allowances being made for bad debts and charity care, id. at (4). Each general hospital is required to establish a charge schedule sufficient to generate the inpatient revenue authorized by the revenue cap, with a proviso that the rate for Article IX-C corporations such as Blue Cross shall be at a discount of from 12% to 15% below that of other non-governmental payors such as United. The statute excepts from this rate differential health maintenance organizations certified under Article 44 of New York's Public Health Law and self-insured and self-administered groups that had hospital rate contracts in effect on May 1, 1982. Id. at (6). Because United is not an Article 44 health maintenance organization and had no rate...