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 May 1, 2007
MARYLAND WILL NOT CHALLENGE APPELLATE COURT DECISION UPHOLDING A LOWER COURT’S RULING THAT THE STATE’S “FAIR SHARE” LAW IS PREEMPTED BY ERISA
On April 16, 2007, Maryland’s Attorney General announced that the State would not appeal the decision of the Fourth Circuit to the United States Supreme Court, which upheld a lower court’s ruling that Maryland’s “fair share” law was illegal because it is preempted by the Employee Retirement Income Security Act (ERISA).1 ERISA preempts state laws that “relate to” employee benefit plans. For example, it preempts, as applied to self-insured ERISA plans, state laws that mandate that plans provide specific types of coverage. Background on the Law On January 12, 2006, Maryland became the first state to enact so-called “fair share” legislation. The Maryland law required that large employers with 10,000 or more employees to either spend a minimum percentage of payroll on health care costs for employees or pay a certain amount into a state Medicaid fund.2 The legislation was passed over then Governor Ehrlich’s veto. Under the law, for-profit employers that did not spend at least 8 percent of payroll on health care costs, must pay the difference between what they pay now and the 8 percent into a special state fund that will be used to fund the state’s Medicaid program. Non-profit employers with 10,000 or more employees would have had to spend at least 6 percent of payroll on health care or pay into the fund. The law excluded from the definition of employer, federal, state or local governments. Thus, it did not apply to the public sector. Approximately three employers in the state have 10,000 or more employees, but only one, Wal-Mart, spends less than 8 percent of payroll on health care costs. The Legal Challenges On July 19, 2006, the U.S. District Court of Maryland struck down Maryland Fair Share law. The case was filed by the Retail Industry Leaders Association, a retail trade association in which Wal-Mart is a member. The court agreed with the plaintiff’s allegation that ERISA preempts the Maryland law.3 The decision was appealed to the U.S. Court of Appeals for the Fourth Circuit. On January 17, 2007, a panel of judges of the Fourth Circuit upheld the district court’s opinion holding that the Maryland law effectively mandates that the covered employers (in this case only Wal-Mart) structure their plan administration in a certain way to comply.4 The court held that the law does not offer a real choice between meeting the spending threshold or paying the assessment since most employers would opt to use the money to provide more health coverage. Thus, the law “relates to” an employee benefit plan, and is preempted by ERISA. One judge on the three-judge panel dissented from the ruling, stating that the law is a legitimate effort by the state to address escalating Medicaid costs, and that it does not require covered employers to have an ERISA plan or to administer the plan in an specific way. Employers, the judge argued, do have a real choice not to meet the payroll threshold, and instead pay the assessment, since nothing in the law compels employers to provide more coverage, and “Wal-Mart has not seen fit thus far to use comprehensive health insurance as a means of generating employee goodwill.” Outlook Massachusetts and Vermont have passed “fair share” laws that would make a larger group of employers subject to a fair share assessment if they either do not provide health coverage, or they do not provide coverage that meets certain standards. Other states, such as California, are looking at similar legislation. Maryland’s Attorney General stated that it is likely that health care will be a dominant issue in the State’s next legislative session and that the Maryland legislature will be looking closely at other state reforms, such as the Massachusetts law.5 As this important aspect of health policy evolves, Sibson Consulting will provide additional information.
As with all issues involving the interpretation or application of laws, health plan sponsors should rely on their legal counsel for authoritative advice on state health mandates. Sibson Consulting can be retained to work with plan sponsors and their attorneys to evaluate the impact of state laws and to comply with them.
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