Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of Ownership Society: How the Defined Contribution Paradigm Changed America which looks at how defined contributions (IRAs, 401(k) accounts, 529 programs, FSAs, HRAs, HSAs…) have transformed tax and social policy in fundamental ways. In the article below he reflects on a recent U.S. Court of Appeals for the Ninth Circuit decision and its affects on health care reform. Check out Zelinsky’s previous article here.
In an important decision under the Employee Retirement Income Security Act (ERISA), the U.S. Court of Appeals for the Ninth Circuit, reversing the U.S. District Court for the Northern District of California, permitted San Francisco’s new health care ordinance to go into effect. On the merits, the Ninth Circuit’s reasoning does not persuasively implement the ERISA preemption case law of the U.S. Supreme Court. Consequently, the Ninth Circuit’s opinion will not be followed by other appeals courts nor will it ultimately be sustained by the U.S. Supreme Court. Moreover, and more seriously, the Ninth Circuit’s opinion reduces the political pressure on Congress to amend or repeal ERISA’s preemption provision to grant the states greater latitude to regulate in the health care arena.
While the courts’ interpretation of ERISA’s preemptive effect has evolved over the years, that interpretation has consistently recognized a core area of employer autonomy into which states and their subdivisions may not tread. According to the U.S. Supreme Court, ERISA Section 514(a) preempts state and local laws which “mandate…employee benefit structures or their administration” or which “refer to” ERISA regulated plans.
The San Francisco ordinance requires an employer subject to the ordinance to make minimum health care outlays for any employee who has been employed for at least 90 days and who works more than 10 hours per week. An employer which fails to make these health care expenditures must make an equal contribution to a municipal health fund. The San Francisco health care law also requires employers to maintain accurate records of their medical care outlays, to make those records available for municipal inspection, and to provide yearly such additional data as the city may demand. Moreover, a San Francisco employer is forbidden to reduce the size of its workforce to avoid the mandate of the San Francisco health care ordinance.
In light of these requirements, District Judge Jeffrey White properly held the San Francisco ordinance to be ERISA-preempted as the ordinance “both has an impermissible connection to ERISA plans and makes unlawful reference to such benefit plans.” Judge White thus came to the same conclusion as the U.S. Court of Appeals for the Fourth Circuit when it analyzed Maryland’s “Wal-Mart” Act and as did Judge Arthur D. Spatt of the U.S. District Court for the Eastern District of New York when he examined Nassau County’s similar health care ordinance: ERISA Section 514(a) preempts state and local laws mandating expenditures for employer-provided medical care.
Now, Judge William Fletcher, writing for himself and two colleagues on the U.S. Court of Appeals for the Ninth Circuit, has reversed and stayed Judge White‘s decision, thus permitting the San Francisco ordinance to go into effect. Although Judge Fletcher’s opinion is technically not a ruling on the merits, that opinion leaves no doubt of the court’s conclusion that ERISA permits the San Francisco ordinance and, by extension, similar state and local laws which mandate minimum employer expenditures on their employees’ health care. The Ninth Circuit opinion thereby puts that court in direct conflict with the U.S. Court of Appeals for the Fourth Circuit which held Maryland’s “Wal-Mart” Act, a similar employer mandate, preempted by ERISA.
For the long run, the Fourth Circuit, as a matter of law, has the better argument as its opinion more convincingly reflects the relevant case law of the U.S. Supreme Court. Particularly unpersuasive is the Ninth Circuit’s contention that the San Francisco ordinance (and, by extension, any similar employer mandate) “does not require any employer to adopt an ERISA plan or other health plan…Any employer covered by the Ordinance may fully discharge its expenditure obligations by making the required level of employee health care expenditures, whether those expenditures are made in whole or part to an ERISA plan, or in whole or in part to the City.”
As the Fourth Circuit observed, no rational employer would view the penalty payment to the government as a realistic alternative to the equivalent payment for its own employees. An employer which consistently pays “employee health care expenditures” has an ERISA plan, i.e., a “plan, fund, or program” to provide medical care for employees.
Of more immediate concern are the political consequences of the Ninth Circuit’s opinion. ERISA preemption is a creature of federal statute. ERISA preemption can and should be changed by Congress. Nevertheless, there has been, so far, no concerted effort to press Congress to revise or repeal ERISA Section 514(a) to permit states and localities to experiment as to employer-provided health care.
Had the Ninth Circuit aligned itself with the Fourth Circuit and affirmed Judge White, Congress would have been under increasing political pressure to consider such amendment or repeal. Now, instead, we confront more protracted litigation – not a great way to make health policy.
The ERISA preemption debate should instead shift from the courthouses to the Capitol. Unfortunately, many (perhaps most) advocates of state health care laws will view the Ninth Circuit’s decision as obviating the need for that shift. It is, however, time for Congress to act by repealing or amending ERISA Section 514(a) to free states and localities from ERISA preemption. Until Congress acts in this fashion, states and localities are threatened with bystander status in our ongoing national debate on health care.