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By Roy Whitehead, Jr., JD, LLM, University of Central Arkansas, and Kris Jones, CPA, Southeastern Louisiana University

Faced with a deficit in its Medicaid funding program, New York, in 1990, imposed a .6% Health Facility Assessment (HFA) tax on the gross receipts for patient services at all hospitals and diagnostic and treatment centers. The NYSA-ILA Medical and Clinical Services Fund (FUND) operated two diagnostic and treatment medical centers in New York that provided medical and dental benefits for longshoremen, retirees, and their dependents. The fund sued the State of New York to recover taxes paid and enjoin the continued collection of taxes under HFA. The fund claimed that the Federal Employee Retirement Income Security Act (ERISA) controlled employee benefit plans and preempted any state law that "relates to" benefits received from treatment and diagnostic centers operated by an employee benefit plan.

The District Court denied relief. It concluded that HFA was not preempted because it was a "tax of general application" that did not interfere with the calculation or provision of health benefits to the retirees and thus had only an incidental impact on employee benefit plans. The Second Circuit Court of Appeals swiftly reversed, finding that HFA targets the health-care industry where, by definition, ERISA benefit plan regulations must control. The court said that HFA "operates as an immediate tax on payments and contributions which were intended to pay for participant's
medical benefits." The court concluded that the New York tax directly "related to" the fund benefits because it effected the fund assets, could cause a reduction in benefits, or lead to
higher charges.

The U.S. Supreme Court, on June 2, 1997, ruled that New York may collect the tax (De Buono, New York Commissioner of Health v. NYSA-ILA Medical and Clinical Services Fund, No. 95-1594). The court began by noting that heath and safety of its citizens is an area that falls within the historic police powers of the state. While HFA is a revenue raising measure, rather than regulation of hospitals, it still operates in a "field
traditionally occupied by the States," said the court. Justice Stevens wrote that HFA is one of a myriad of state laws that place some burden on employee benefit plans governed by ERISA but never-theless do not directly "relate to" them by unduly impacting the benefits. He pointed out that if the fund had purchased medical services at other New York hospitals, rather than operating its own medical facilities, those facilities would have passed the costs of the tax along in its rates. Finally, the court rejected the Court of Appeals attempt to distinguish the Supreme Court's holding in Travelers Insurance Company, 514 U.S. 645 (1995), a previous New York case, that allowed the state to collect a surcharge from all insured patients. The Court of Appeals had characterized the Travelers holding as standing for the proposition that only the "indirect," as opposed to "direct," economic impact of a surcharge on insured patients was allowed under ERISA. Justice Stevens disagreed and said the relevant issue was not "direct or indirect' economic impact but whether Congress intended to supplant state law. In this instance, Congress did not so intend.

The holding here allowing a tax on the gross proceeds of medical facilities operated by an ERISA fund coupled with the Traveler's decision that allowed the imposition of a surcharge on commercially insured patients, conveys a powerful message that the Supreme Court is convinced that states possess the inherent police power to tax in this area. The court stated that the inquiry here started with the presumption that "Congress does not intend to supplant state law." Justice Stevens clearly stated that Congress did not intend for ERISA to negate the state's police power to
regulate health and safety concerns. Taken together, the cases are a "green light" for states to impose taxes
or surcharges on the proceeds of
medical facilities to remedy shortfalls in other areas.

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