Guest Article

Group Health Plan Unsuccessfully Argued That New York Surcharge Violated Federal Commerce Clause

Summary: A federal district court rejected a California-based group health plan's argument that a New York surcharge on third-party payers violated federal commerce laws because it disproportionately affected out-of-state plans. The court said it did not have jurisdiction over the case because the surcharge had the characteristics of a state tax.

(Sept. 8, 2000) - A California-based self-funded plan attempted to argue that because it pays medical bills through interstate commerce-- such as the postal service-- a New York surcharge on third-party payers violated the U.S. Constitution's Commerce and Due Process Clauses by disproportionately affecting out-of-state payers. However, the claim was dismissed by a federal district court for procedural reasons. The case is United Food and Commercial Workers Unions and Food Employees Benefit Fund v. DeBuono, 101 F. Supp. 2d 74 (N.D.N.Y., March 29, 2000).

What sets this case apart from other rulings on the New York surcharge is the argument presented by the plaintiffs - that the surcharge violated the federal commerce clause. Plaintiffs challenging the surcharge in other cases - most notably, in New York State Conference of Blue Cross and Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (S. Ct., 1995) - argued that ERISA preempted the state surcharges.

New York's Health Care Reform Act (HCRA) imposes a surcharge on charges for patient care provided by state licensed health care providers. The surcharge applies to any third-party payer - including group health plans - that is responsible for paying for medical expenses incurred within the state of New York. Third-party payers have two options for paying the HCRA surcharges.

Cypress Calif.-based United Food and Commercial Workers Union (UFCW) operated a self-funded health plan. UFCW receives and pays the medical bills through interstate commerce - generally the U.S. Postal Service. It is not registered with the state of New York and has no offices there (although, occasionally, UFCW Fund beneficiaries travel, relocate or attend school in New York); therefore, it follows the conditions of the non-registration option.

UFCW sued the New York health insurance commissioner in federal district court, arguing that the non-registration option forces plans to register with the state and comply with burdensome regulations, and is disproportionately imposed on out-of-state payers that have little, if any, contact with the state. Therefore, UFCW argued that HCRA violated the federal commerce and due process clauses. The commissioner argued that the non-registration option did not discriminate against out-of-state payers, adding that 90 percent of the payers using the registration option are out-of-state payers. The commissioner also noted that the non-registration option is a more economic and practical alternative option for payers who have few participants in New York.

Before making a ruling, the court first had to determine whether it had jurisdiction to hear the case, noting that the federal Tax Injunction Act (TIA) strips federal courts of jurisdiction over state tax issues if: (1) the payment at issue is deemed to be a tax; and (2) states provide an adequate remedy. The court found that the HCRA surcharge fell under TIA's definition of a tax because it was: (1) imposed by the state legislature; (2) targeted at individuals who received health care from a provider licensed in New York; and (3) designed to raise revenue to fund health care programs. Therefore, the court ruled that it did not have jurisdiction in this case, recommended the appropriate state law remedy and dismissed UFCW's claims.

Because of the onerous financial implications for group health plans created by the surcharge, many out-of-state plans limit coverage in New York to emergency services and encourage participants to minimize care in New York through financial incentives. Some plans even deny coverage for any medical treatment received in New York.

Excerpted from the Employer's Guide to Self-Insuring Health Benefits, ©Thompson Publishing Group, Inc., 2000. All rights reserved.

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