DEBUONO v. NYSA-ILA MED. AND CLIN. SERVICE FUND
New York's Health Facility Assessment (HFA) imposes a tax on gross receipts for patient services at diagnostic and treatment centers. The NYSA ILA Medical and Clinical Services Fund, which administers a plan subject to the Employee Retirement Income Security Act (ERISA), owns and operates New York treatment centers for longshore workers, retirees and their dependents. The Fund's trustees discontinued paying the New York tax and filed to enjoin the state from making future assessments and to obtain a refund. Lawyers for the Fund alleged that the HFA is preempted by the ERISA, as it applies to hospitals run by it. The District Court ruled that the HFA is not preempted because it is a tax of general application having only an incidental impact on benefit plans. In reversing, the Court of Appeals found that the HFA directly reduces the amount of Fund assets that would otherwise be available to provide plan members with benefits, and could cause the plan to limit its benefits or to charge plan members higher fees; therefore, the HFA was preempted by the ERISA.
Does the Employee Retirement Income Security Act preclude New York's Health Facility Assessment from imposing a gross-receipts tax on the income of medical centers operated by ERISA funds?
Legal provision: Employee Retirement Income Security
No. In a 7-2 decision, authored by Justice John Paul Stevens, the Court ruled that the Employee Retirement Income Security Act does not preclude New York from imposing a gross receipts tax on ERISA funded medical centers. Justice Stevens wrote, "Any state tax, or other law, that increases the cost of providing benefits to covered employees" will affect the benefit plan, "but that simply cannot mean that every state law with such an effect is pre- empted.
Argument of M. Patricia Smith
Chief Justice Rehnquist: We'll hear argument next in Number 95-1594, Barbara DeBuono v. NYSA-ILA Medical and Clinical Services.
Mr. Smith: Mr. Chief Justice, and may it please the Court:
State laws of general applicability relate to ERISA plans only when they both operate upon a plan in its capacity as a plan, and when the effect of that law is to dictate or restrict and not merely influence plan choice.
The health facility assessment, a gross receipts tax imposed upon hospitals in New York, does not relate to ERISA plans which operate their own hospitals because neither of these elements is present.
The impact of the HFA upon plans is no more than that of the laws that were upheld by this Court in the Blue Cross v. Travelers case and the Court's recent opinion in California v. Dillingham.
Like those laws, the HFA does not dictate or restrict plan choice.
Like the surcharges in Travelers, the HFA may have an economic impact upon a plan's cost of providing benefits.
This impact may occur regardless of whether plans own their own hospitals or purchase hospital care services from third parties.
In either case, the economic impact of the law is not enough to make the law relate to plans.
Notwithstanding the fund's ownership of the hospital in this case, the HFA also does not relate to the plan because it operates upon the fund not in its capacity as a plan but as a provider of medical services.
The HFA is part and parcel of the State regulation of hospitals, and the provision of medical services is not a plan function which ERISA preemption was designed to protect.
When plans choose to provide the types of benefits which are not strictly financial but which involve services, those services remain subject to generally applicable State regulation whether plans purchase those services from third parties or choose to provide those services in kind.
The operation of a hospital, like the operation of a day care center, the practice of law, and employees' training programs, are not plan functions--
Unknown Speaker: Ms. Smith, do you agree with the outline offered by the Solicitor General as sort of a summary of this Court's holdings in this area?
Mr. Smith: --Yes, Your Honor.
Unknown Speaker: Would you adopt the same outline yourself without variation?
Mr. Smith: Your Honor, the outline of this... what this Court has decided--
Unknown Speaker: Well, they construct a kind of four-part simple test.
Mr. Smith: --Yes.
Unknown Speaker: Do you agree with that?
Mr. Smith: Yes, Your Honor.
Where we differ from the Solicitor is not necessarily in outcome but somewhat in analysis.
In this case, the respondents, who would agree that many generally applicable laws would not relate to them even if they were imposed directly upon them, respondents claim that this case is different because when you operate your own hospital you're acting as a provider of medical services, which they say is what an ERISA plan is meant to do.
Unknown Speaker: And do you agree that all general health laws that would affect clinic operations are validly applied to an ERISA health clinic?
Mr. Smith: Yes, Your Honor.
Unknown Speaker: The standards of degrees required for people engaged in the health care business, and so forth?
Mr. Smith: Absolutely, Your Honor.
When the State is regulating generally in the health care area, those are areas of traditional State concern.
If ERISA plans choose to operate in those areas, they take basically the marketplace as the State is regulating the marketplace of those areas.
Unknown Speaker: And I suppose there might be some disagreement by respondents on that issue.
Mr. Smith: The respondents' argument is that at least in the health care area, but I think that their theory is equally applicable to those other four benefit areas that involve services... day care, prepaid legal services, and apprenticeship training... that when plans operate in those areas, the State may not regulate them.
At least, they may not tax them, I believe is the respondents' argument.
Our disagreement is that in those areas, those services remain subject to State regulation.
One looks at the plan as--
Unknown Speaker: Well, do you think the same principles should govern whether a general tax law or a general State requirement for background training or cleanliness concerns or something of that kind--
Mr. Smith: --In these--
Unknown Speaker: --the same principles govern the answer to both questions?
Mr. Smith: --In these service areas... in these service areas, yes, so a generally applicable health care tax, a generally applicable day care tax, or in these four service areas, whether, if you can regulate in those areas in a generally applicable way you can tax in those areas in a generally applicable way.
Unknown Speaker: Ms. Smith, I don't understand what you think the effect of the very broad language, relates to, is.
What does it bring to this enterprise that we're engaging in that wouldn't be affected by our ordinary preemption principles?
Mr. Smith: Justice Scalia, the way that the Court has formulated preemption analysis to date, there are two prongs.
There's the refer-to prong, as the Court refers to it, and the connection prong.
What the relates-to analysis does to date is that if you had general preemption provisions, conflict-of-field preemption provisions, a State law which referred to ERISA plan which kept them out of those fields would not be preempted.
But to date, the... this Court has held that a State law which specifically refers to ERISA plans, even if it gives ERISA plans better protection... for instance, in the Mackey case the part of the law that required the State garnishment law not to apply to ERISA plans this Court held was preempted, so--
Unknown Speaker: But that's normal field preemption, isn't it, that you cannot... you can neither reduce nor increase the protection that the Federal Government gives.
That's what normal field preemption would produce.
Mr. Smith: --My understanding of field preemption, Your Honor, is that a State law that specifically kept whatever was being regulated out of the field would not be preempted.
Unknown Speaker: I don't know what you mean.
What... that kept whatever was being regulated out of the field?
Mr. Smith: Right.
For instance, if it was a question of nuclear safety and the law said something about State, whatever... and you can't be in the nuclear safety area, that that would not be preempted.
That is my understanding of field preemption.
But in this case, when the State garnishment law says ERISA plans are not subject to the garnishment law, this Court has held that because it specifically referred to and applied only to ERISA plans, it was not preempted... it was preempted, sorry.
Unknown Speaker: In any event, do I understand that... you said you agreed with the Government's outline as a summary of what this Court has held, that however you might wish Justice Scalia's concurring opinion in the Dillingham case to be speaking for the majority, the majority has not yet spoke that way.
Mr. Smith: That's correct, Your Honor.
We do agree with the Government's outline.
Unknown Speaker: But how would this case come out, do you think, under Justice Scalia's field preemption theory?
Mr. Smith: Your Honor, we are asking the Court basically, in making this distinction between services and plans, to carve out--
Unknown Speaker: Well, I think the question I asked you was, how would the case come out if you were to apply normal field preemption principles to it?
Mr. Smith: --It would come out that this law does not relate to plans because the service area is outside the field of employee benefit plans, that while employee benefit plans are concerned with the funding and payment of benefits, that the services which those benefit payments may fund, the quantity of the services, the quality of the services, the availability of the services, are not an area with which ERISA is concerned with.
Unknown Speaker: But does it work to distinguish that which is doing the providing, namely the plan, and that which the plan buys, like the services?
I mean, that distinction seems to run throughout the cases, but for the area of pensions itself, where the fund is basically writing a check, so it's quite closely tied up with the fund.
But in the benefits area, they're buying something, so is it the case... how does that distinction work between the plan itself... this is another case in which we've... other cases have tried to make the same distinction.
The Government's tended to resist it, I think... and that which the plan buys.
When you get to that which the plan buys, there's no field preemption.
Rather, you look bit-by-bit to see if that which the plan buys and the State's regulating that conflicts specifically with the purpose of Congress.
Mr. Smith: That distinction works very well, Your Honor.
In this case, the respondents are claiming that they're not buying anything.
Unknown Speaker: No, no, but that just happens to be because they went and supplied it themselves.
Mr. Smith: Right, but--
Unknown Speaker: That's just an artifact of the situation.
Mr. Smith: --But basically that is the distinction that we are asking the Court to draw.
Most ERISA benefits are strictly financial.
It's money and the contingency upon.
Pension benefits, money and the contingency of retirement.
Death benefits and the contingency of death.
There are only four ERISA benefits that actually involve services.
In other words, services that plans may buy, and that would be day care, apprenticeship training, prepaid legal services, and health--
Unknown Speaker: I mean, you've really looked into this a lot, and so what I'm quite serious is... if there were some words in an opinion that said when you look into that area which, when you look into those things which the plan buys, as opposed to the management of a trust, when you look into that area, normally there is no preemption unless the State law conflicts with a purpose of Congress, and a rather specific purpose at that.
Now, would that cause trouble?
Mr. Smith: --No, Your Honor, not in our view.
Unknown Speaker: Not in this case it wouldn't but I mean, in your experience in general would it cause trouble?
Mr. Smith: No, Your Honor, not in our view, because in general, again, we're dealing with a very limited area of ERISA benefits that actually involve something that the plan purchases as opposed to money that the plan is giving, and when ERISA plans are operating as ordinary commercial entities, they may well purchase services.
They may purchase... they may purchase, you know, fiduciary services.
They may purchase stationery.
They may purchase whatever, and clearly we don't think that anyone would contest that when they're operating in those commercial capacities, purchasing those entities, that ERISA preemption would apply.
Unknown Speaker: But you don't want to draw a line... the difference between buying the service, because I think this is a case where the plan itself is providing it, so I think in your brief you try to look at the other side of it and say when you're talking about plan funding, plan administration, that's what ERISA covers.
Mr. Smith: --That's correct, Your Honor, but you could also look at this when an ERISA plan provides services in kind, they're simply purchasing them in a different way.
Unknown Speaker: Yes--
Mr. Smith: Instead of purchasing them from a third party, they are directly purchasing them from the doctors and--
Unknown Speaker: --But it would have a direct financial effect.
If the ERISA plan buys clinic services elsewhere in New York, then this tax is going to be paid by the entity that actually provides the service, and so it may in fact cost ERISA something less, because it's not paying the tax.
Mr. Smith: --Your Honor--
Unknown Speaker: But if it were to provide the services itself, then the ERISA plan is certainly liable for the full tax, so it may end up costing ERISA less to contract out.
Mr. Smith: --Your Honor, in this case the incidence of the tax is not on the ERISA plan but on the hospital which, although it's not critical to my argument, is a separately incorporated corporation.
The hospital can, like any other entity, determine how it's going to fund the tax.
It could pass it on to its customers, in this case, the ERISA plan participants, in higher copays.
In this particular case, it could decide to pass it on to its other customers, the other plans that have services there, or the Worker's Comp carriers, or the fund could pay it.
It's really no different than if it's Mount Sinai that's paying the tax.
In this case, it's not the fund that's paying the tax, or that has the incidence of the tax.
It's the medical centers themselves.
Unknown Speaker: But what I run into, you know, with my own thought there is, I run into a problem.
I mean, I can easily say, let's distinguish what's normally bought, even though in your case it happens to be provided, from the running of the fund, and let's say in the former situation and grouping your case with the former, normally there is no preemption unless you find a specific conflict.
Then I run into these... the benefit cases where the fund was buying certain medical benefits, really, and the Court said no, it's preempted where you have the pregnancy... you know, the certain rules on what you can buy or not buy, which were really regulations of what was bought, rather than regulations of the fund, so how do you work with those cases?
Mr. Smith: Your Honor, in those cases you're impacting upon what the fund is paying, what services, as opposed to the services themselves.
So, for instance, the State of New York can regulate surgery, and it could say, there's too much surgery in the State of New York.
No one can have surgery unless there's a second opinion.
What the court... what the State can't say is, and anyone who pays for the surgery must also pay for the second opinion, because you're dealing with coverage issues: what is a plan paying for, as opposed to what services are available in the marketplace.
If there are no further questions, Your Honor, I will reserve the rest of my time.
Unknown Speaker: Very well, Ms. Smith.
Mr. Kneedler, we'll hear from you.
Argument of Edwin S. Kneedler
Mr. Kneedler: Mr. Chief Justice, and may it please the Court:
The health facilities assessment tax at issue in this case as applied to the hospitals owned by the plan is not superseded by ERISA under ERISA's express preemption provision.
The assessment law is a law of general applicability that operates in the field of health care, a field that this Court identified in Travelers as one of traditional State regulation.
The legal incidence of the tax, and in tax law legal incidence is often very important, is on hospitals.
The impact on the plan is only incidental from its capacity as the owner of the hospital.
It is not on the plan in its capacity as such.
The assessment law, therefore, does not relate to the ERISA plan at issue in this case because it does not intrude into the field of regulation of ERISA welfare benefit plans which section 514(a) preserves for exclusive Federal regulation.
The purpose of section 514(a)--
Unknown Speaker: Mr. Kneedler--
Mr. Kneedler: --Yes.
Unknown Speaker: --how do you think the so-called field preemption notice, the field preemption doctrine would play out in these ERISA cases--
Mr. Kneedler: I think--
Unknown Speaker: --and how would that apply here?
Mr. Kneedler: --In this case, the field preemption analysis would certainly lead to sustaining the State tax, because the State tax operates, again, in the area of health care.
It operates with respect to a facility owned by the plan.
It does not operate in the field of ERISA plans as such, and therefore we think it would not be preempted.
Unknown Speaker: Do you think that principle would explain most or all of our previous cases?
Mr. Kneedler: --It would explain most.
It would not explain all.
I agree with counsel for the State that it would not in particular explain the Mackey case, or not as readily.
Unknown Speaker: Which is what?
Mr. Kneedler: --The portion of the Mackey case that held that an express exemption from State garnishment laws for ERISA plans was preempted.
Ordinarily, when you have field preemption, if the State enacts a law that gets State law out of the way to secure the field for Federal occupation, that would ordinarily not be something that would be preempted by field preemption.
Having said that, with all respect, there is a bit of an anomaly about having an express exception for ERISA plans in a case like Mackey preempted where the State is trying to clear the way for exclusive Federal regulation and get out of the way something that is beneficial to a plan, not something that just regulates it in a more beneficial way, but removes State law from the setting altogether, would not normally be a problem with field preemption.
Unknown Speaker: Mr. Kneedler, there... is it not fair to say that there is also some inconsistency in our expression of the rule we were applying in the earlier cases as compared with the expression that we've used in the last few?
Mr. Kneedler: Yes.
I think the Court's more recent cases have tended to focus on the objectives of the... of ERISA, and that can be tied, we think, rather directly as a textual matter to the field preemption argument.
Unknown Speaker: What is the field preemption?
That is to say, I've never fully understood this.
If a State passes a law, and it was the purpose of Congress in a Federal statute that the State not pass this kind of law, then it's preempted.
Mr. Kneedler: Right.
Unknown Speaker: Is that called conflict preemption, or field preemption?
I mean, in the instance when there is no direct conflict, I mean, isn't it in both instances a question of looking to the purpose of Congress and seeing if this is the kind of law that--
Mr. Kneedler: Right.
Now, in this case--
Unknown Speaker: --If that's right, then if you use the word field preemption, what will it do in general?
How should it be used?
Mr. Kneedler: --Well, for example, it's very important under ERISA because the Court has said on a number of occasions, and we agree with this, that ERISA preempts State laws in some circumstances even where ERISA itself does not furnish governing law, in particular in the design of ERISA plans themselves, what benefits to offer, who they would be paid for, paid to, what the amount of them will be.
Even though ERISA does not dictate particular benefit levels, its purpose was to leave that to employers and employees to negotiate to come up... to leave to private ordering, and so State law that would regulate the benefit structure, even though it doesn't conflict with any particular provision of ERISA addressing that, would conflict with Congress' purpose to insulate that from State regulation.
Unknown Speaker: In a broad sense, Mr. Kneedler, I suppose any preemption involves a conflict.
Mr. Kneedler: That's--
Unknown Speaker: Any preemption is conflict preemption.
Mr. Kneedler: --In that sense, under this, and particularly when you have an express preemption clause, anything that conflicts with the express preemption clause.
Unknown Speaker: And I thought in our cases what conflict preemption meant was, where an inconsistent obligation is placed upon the regulated party.
If the Federal Government tells you to do X, and the State tells you to do not X--
Mr. Kneedler: Right, or--
Unknown Speaker: --that is a conflict.
Mr. Kneedler: --Right, or perhaps including the category where the State law would stand as an obstacle to the full accomplishment of the Federal purpose.
Unknown Speaker: Yes.
Mr. Kneedler: Which affecting benefit structure would, we think--
Unknown Speaker: Whereas I thought we've said field preemption would apply where the Federal law tells you to do X, and the State law says do X plus 10, which wouldn't... you're doing X, but you're doing more than X.
Mr. Kneedler: --Right.
Unknown Speaker: But if the Government wanted this thing to be complete, and we're occupying the field, you're not supposed to address this area at all, X plus 10 would be preempted.
Mr. Kneedler: That's correct, and so the sorts of things that are occupied by the field, some of them are addressed by ERISA itself, but things having to do with the internal management of the plan... benefit structures, investment decisions, fiduciary responsibilities, things having to do with the way the administrator handles the plan... and with respect to those things, we think the things that the State can't regulate it ordinarily can't tax.
The things that the State can regulate the State ordinarily can tax, and it's instructive that subsection b5(b)i, which was part of a special provision adopted for the Hawaii health care plan, specifically says that the exemption for that does not affect State tax laws as they may relate to ERISA plans, and the background and structure of that shows, we think, that Congress intended that State tax laws be treated generally as... the same way that regulation is and, after all, tax is a species of regulation.
Unknown Speaker: Well, how would field preemption play out in the context of direct State regulations going to the educational background of employees in the clinic, and cleanliness requirements, and so forth?
Mr. Kneedler: As to that, they would not be preempted because they do not address the internal affairs of an ERISA plan as such in its capacity as a plan with respect to funding, and financing, and what services will be paid for.
Such a State law regulates the services that are in turn either purchased or furnished in kind by the ERISA plan, so under that view of field preemption what the... the field the State is in is substantive health care regulation, licensing of the facility and what-not.
And in general, the distinction that Justice Breyer made we would agree with, and it was essentially our position in Travelers as well that where the ERISA plan steps out of its internal management of plan structure and purchases something in the market, either pencils for the office or services in kind, State substantive regulation or taxation of a... a sales tax for purchasing something wouldn't be preempted.
Unknown Speaker: What else besides sales tax?
What taxes does an ERISA plan have to bear?
Mr. Kneedler: We think it would have to pay, for example, unemployment compensation taxes that... for its employees.
We think, on the other hand, if the State tried to tax the income to the plan itself, which is a species perhaps of regulating the corpus of the trust funds, if there's a separate trust fund, if the State tries to regulate the corpus of the trust by regulating investment decisions, we think that's at the core of what ERISA would not allow, and therefore it may well be that the State could not tax the corpus of the trust itself.
But where the State is leaving... or the trust, the plan is leaving its internal operations and going out into the marketplace by hiring employees or purchasing goods and services, including services in kind that are paid for by the ERISA plan--
Unknown Speaker: Well, what if the State--
Mr. Kneedler: --the State could regulate it.
Unknown Speaker: --What if the State taxes numerous other corpuses that have nothing to do with ERISA plans as well?
Mr. Kneedler: That would... it's that point we think that may make that a closer question, and we would urge the Court not to decide that question in this case.
Unknown Speaker: Would that be field preemption or conflict preemption?
Would you... if you feel it couldn't be taxed, wouldn't that be because you think that there is an indication in the legislation that Congress did not want it taxed?
Mr. Kneedler: Right.
Congress intended to preserve the assets in the fund for the benefit of the employees, but we think that that could also be a species of field preemption, because the State could not directly regulate investment decisions by holding fiduciaries to different standards or requiring diversification requirements in the portfolio.
Unknown Speaker: But that's just why... that's exactly why I'm nervous about the words, field preemption, because in trying to work out what the field is you have to make roughly the same analysis that you'd have to make on purpose.
Do you have a use of the word, field?
I mean, if we were to use the word field preemption, how would you use it?
Mr. Kneedler: I would, I think, refer to whether the State law is addressing the ERISA plan as an ERISA plan, in its capacity as an ERISA plan, not when it is purchasing goods and services outside of the plan's operations.
Unknown Speaker: Thank you, Mr. Kneedler.
Mr. Kneedler: I think it's the former that's the field.
Unknown Speaker: Thank you.
Mr. Caruso, we'll hear from you.
Argument of Donato Caruso
Mr. Caruso: Mr. Chief Justice, and may it please the Court:
We are dealing here with a State tax on the corpus of the fund.
What's being taxed are the contributions that are being paid to the fund by the employers required under the collective bargaining agreements to make those contributions, and benefit payments being made for the benefits that the ERISA fund is paying, so this case involves a tax.
There's a clear indication in the legislation itself and in the legislative history of ERISA that Congress intended tax... State tax laws to enjoy no charmed existence.
They were to be treated like any other law, any other State law that relates to a plan.
That is the language of the statute.
And when the fund is being required to pay a State assessment on the very activities that makes the fund a fund, the very health care benefits that the fund is paying out, the contributions that the employers are paying for those benefits, I submit to you that it's self-evident that the tax in this case relates to the fund.
Unknown Speaker: Why not the sales tax on items that the fund uses to operate?
Mr. Caruso: I think in that case the fund is actually acting not as a fund but as a purchaser.
What we're saying there is, we would tend to agree that if you use the concept that was first developed I believe in the Shaw case, the tenuous, remote, and peripheral concept, that when the plan is acting in a capacity that any other private entity would be involved in, then the plan is to be treated like any other private entity.
Unknown Speaker: But when the plan is operating a private hospital, why shouldn't it be treated like any other hospital?
Mr. Caruso: Because a plan does provide benefits.
If you look at the definition of ERISA, ERISA says that any plan or program to provide health benefits through insurance or otherwise, and the ERISA definition--
Unknown Speaker: What about other benefits that a plan might provide, like legal services?
Do you say the same thing about that?
Mr. Caruso: --Well, if the plan is providing legal services and there's been a tax imposed on the contributions that the plan is providing to the attorneys who are providing the services, I would say yes, that that tax would be preempted, because that tax is being imposed on the very activities that make the plan a plan.
Unknown Speaker: Well, what about the State requirement that anyone giving legal services has to be a licensed attorney?
I mean, that affects the cost.
That's going to cost the plan more if it's legal benefits, so you'd be back here arguing that, I suppose.
Mr. Caruso: Well, obviously that's not the case that we have here today, but we're not looking at it from a cost standpoint, Justice O'Connor.
What we're saying is, look at the activity.
What we're saying is, if you're buying pencils, you're a purchaser.
You can impose the sales tax.
If you're engaging in employing individuals as part of your operations of the clinic and there are employment taxes to be paid, well, you are an employer.
You're not a plan.
But when you're providing benefits, and it's the contributions for those benefits that the State is taxing, we say there, there you are taxing the plan as a plan.
Unknown Speaker: But my question related not to the tax but to this sure knowledge that the State law requirement that legal advice be given by licensed attorneys will cost more.
It's going to cost the ERISA plan, the fund, more money.
Mr. Caruso: We would say, and the probabilities are in that situation, if you look at the structure and objectives and ERISA, that there probably was not an indication of congressional intent, as there was in the Travelers case, that Congress intended ERISA to preempt that type of regulation, and in this case we have explicit language in the statute that says State tax laws, they don't have a charmed existence.
We want them treated like anything else.
Unknown Speaker: Well, that refers to the Hawaii exception, doesn't it?
Mr. Caruso: I'm sorry, Justice Souter.
Unknown Speaker: Doesn't that reference to State tax laws refer to the specific provisions for the Hawaiian plans?
Mr. Caruso: I think it refers to the Hawaiian plan, but what it says is, it kind of mirrors the language of the preemption clause and says State tax laws that relate to plans shall not... shall be preempted, in essence.
And I think the concern there was that the Hawaii... the dispensation for the Hawaii plan might have created some indications that there were certain tax aspects of the Hawaii plan, that in fact Hawaii in some prior litigation involving a prototype of its plan had taken the position that the State enactment there was a tax, and therefore there was some Tenth Amendment protection.
There's some indication then that Congress was specifically concerned about the approach being taken by Hawaii in this prior litigation and saw the need to point out, as it did in 1974 when it rejected the executive branch's request that State tax laws be exempted from the preemption provision, that they should not have any charmed existence--
Unknown Speaker: Mr. Caruso--
Mr. Caruso: --that they should be treated like any other law.
Unknown Speaker: --May I ask you a different question?
Am I right that your argument assumes the definition of provide as that word occurs in ERISA, and I think you're assuming that provide means provide in any way or by any means, whereas I would have thought that provide means... in order to have general application, I would have thought that provide meant, provide the means or the funds for the purchase or obtaining of these various kinds of benefits, and if it... if provide is defined in the latter way, then I take it that would be the end of your argument, but perhaps I don't understand your argument.
Mr. Caruso: Of course, I disagree with your definition because I think the term otherwise was being used.
Otherwise has a very broad meaning.
Unknown Speaker: Okay, but if the definition were as I've suggested, then your argument would fail, I take it.
Mr. Caruso: Then I take it you would be saying that the tax is being imposed not on the plan but on a hospital.
Unknown Speaker: To put it crudely, to provide means to finance.
If that is what provide means in ERISA, then your argument would not... would not get you to victory in this case.
Mr. Caruso: I'm afraid I'm not... I don't feel that I can concede that point, because I think what Congress was saying is that they have structured a system of national tax exemption.
It's very clear, ERISA plans are not subject to taxation under the Federal system, and I think what was intended by the legislative history was, there was an indication by Congress that we're going to not allow the States to tax--
Unknown Speaker: No, but on my theory, if we're going to treat pro... if we're going to treat the word provide as, in effect, synonymous with financing, then it would follow that the taxation here is not on the ERISA plan as the financing authority but, rather, on the ERISA plan wearing a different hat in operating a hospital, and if that's the way we analyze it, then I take it your argument would fail.
Mr. Caruso: --I mean, that's one way to look at it, but the way I look at it, if Congress said that a State law that... a State tax law that relates to a plan is preempted, and the plan is the party that's paying that tax on the activities that make it a plan, then I would submit that if this type of law is not preempted, I don't know what other type of tax--
Unknown Speaker: So in other words, if they have a travel bureau, if they decide in the... the ERISA plan decides to set up its own travel agent to arrange for employee vacations, and there's a uniform tax in the State on travel agents, it doesn't have to pay.
Mr. Caruso: --That... we would take the position that that doesn't involve the activities of the plan as a plan.
Unknown Speaker: Well, why... so if they have to pay that if they set up a travel bureau to arrange for employee vacations, why do they have to... how do they get out of paying when they set up a hospital to provide the employee medical treatment?
In both cases it's something that a plan normally buys--
Mr. Caruso: Right, but it's not--
Unknown Speaker: --from others, but in this particular instance it provides it itself.
Mr. Caruso: --But it isn't buying it here.
I mean, there seems to be this understanding on the part--
Unknown Speaker: It isn't buying it with the travel agent either.
It's their own travel agent.
Mr. Caruso: --But when... a travel agency may have one point, but in the case of a clinic that we operate, this is not like a commercial clinic.
We don't open this clinic to the public.
We're limiting these operations only to our ERISA-covered participants.
Unknown Speaker: Mr. Caruso, it says through insurance or otherwise.
Suppose your plan decided to provide its health benefits through insurance, and instead of buying insurance from anybody, it ran its own insurance company.
Would State insurance laws not apply?
Mr. Caruso: Well, we're getting into the other area where we get into the--
Unknown Speaker: It's exactly parallel.
Through insurance or otherwise.
You're doing it otherwise, and you say since we're doing it otherwise, the State laws that regulate the otherwise don't apply.
Suppose you did it through insurance?
Would the State laws governing insurance apply?
You became your own insurance company.
Mr. Caruso: --I would say no, because there's a... there's the deemer clause in ERISA itself which says that the State may not consider an ERISA plan an insurance company for purposes of insurance regulation, so this issue here where--
Unknown Speaker: Well, but--
--You wouldn't need it, then.
That really means the... where you haven't set up an insurance company, the deemer clause.
Mr. Caruso: --It's where your... there is insurance regulation that the State is trying to apply to the fund as an insurer.
It's taking the position, well, this is really insurance regulation, and I think Congress has specifically said in that situation when you're the direct provider of insurance, in essence--
Unknown Speaker: Right--
Mr. Caruso: --you've got a different status--
Unknown Speaker: --You wouldn't have to say that.
Mr. Caruso: --as opposed to going out and purchasing it.
Unknown Speaker: Why was the deemer clause put in the statute if, as you tell us, it is clear from the general preemption provision that if you're providing insurance directly you can't be regulated, just as if you're providing otherwise directly you can't be regulated?
I mean, it seems to me that they envisioned insurance, but they said elsewhere in the statute the States aren't going to regulate you.
Mr. Caruso: Well, in the insurance area--
Unknown Speaker: As an insurer, okay.
Mr. Caruso: --In the insurance area they specifically say insurance regulation.
Unknown Speaker: But what about the otherwise?
The otherwise is hospitals.
That's the most obvious way.
Mr. Caruso: Right.
Unknown Speaker: But it doesn't say in a deemer clause, shall not be deemed to be a hospital.
Mr. Caruso: I understand that.
They didn't do it there because Congress didn't envision that a State was going to be taxing the operations of a plan when the plan was directly providing services as a plan.
There was no need for it to say that we have to deem it not to be a hospital, because a plan is a hospital.
And I understand that under Justice Souter's definition that if provide means only to finance, then I think perhaps the result would be different, but I'm suggesting to you that the word otherwise allows plans to do more than just pay insurance or provide financing, but rather to actually engage in the provision of the services directly.
Unknown Speaker: But you do agree that the plan-operated medical center would be subject to regulations, the State qualifications for physicians, for staff people--
Mr. Caruso: We're not suggesting otherwise.
I mean, again, it's not our case.
It hasn't arisen yet.
Maybe it's an area that may have to be addressed at some later time to see whether ERISA can be read to indicate that Congress had an intent to restrict regulation in that area.
Unknown Speaker: --But I don't--
Mr. Caruso: I can't see it.
Unknown Speaker: --I don't--
Mr. Caruso: I don't see it.
Unknown Speaker: --You don't see which, that--
Mr. Caruso: I do not see that anything in ERISA would suggest that the State could not exercise its traditional police powers in regulating health care service.
What I say here is, though, that when I look at ERISA there is a specific provision on taxation.
What I'm saying, when the tax is being imposed on the plan when the plan is engaging in hospital--
Unknown Speaker: --But if we take out your tax reference and say, we read that as discrete to this special Hawaii situation so please concentrate on the statute without that provision, then what is your distinction between the tax--
Mr. Caruso: --I would hope you wouldn't do that, because I think if you looked in 1974, the executive branch actually went to Congress and said to Congress--
Unknown Speaker: --Well, I'm asking you to do that.
And now distinguish for me the taxation from the regulation, without the special reference to taxation that you find.
Mr. Caruso: --Well, I think there's a direct relationship when the fund is being asked to take some of its assets and provide those assets to the State, to the State's general coffers.
I don't think ERISA intended that type of State imposition on ERISA plans.
I mean, it's just contrary to the whole structure of tax exemption--
Unknown Speaker: Well, it can't just be that it's getting money from the State, from... and putting it into the State's coffers, because you've already said unemployment compensation, sales tax, that's all okay, even though that comes out of the corpus.
Mr. Caruso: --I agree with you.
What I'm saying, when it's being imposed on the fund's contributions and benefit plans, not on it's incidental activities in providing the services, and I think if you take the position... what I'm particularly concerned about is if we're going to slice it that thin, that what's to prevent the States from taxing the income of the funds, from tax... if they're allowed to tax the contributions, that's the corpus.
Unknown Speaker: The line, I think, that they want to draw, the Government, is to say, distinguish between, in the benefit area, that which does the buying, namely the plan, and that which is bought, namely, the benefits, and in the case where you're talking about the latter, by and large you can impose uniform taxes, and if it turns out that in a particular instance the former, namely that which does the buying, itself decides to provide that which is normally bought, it's treated as if it bought it.
Now, that's a clear line.
It... you take away your horror cases by saying, fine, if they provide a horror tax, that's different, and what line would you provide?
I mean, you see, that's the virtue of--
Mr. Caruso: --Well, if you took that approach, then that's what saying, that--
Unknown Speaker: --Yes.
Mr. Caruso: --if ERISA... an ERISA plan cannot be defined as the direct provider.
That's what you're in essence saying, that it really becomes the hospital, even though becoming the hospital is what an ERISA plan is supposed to do.
Unknown Speaker: Well, they don't always... they don't necessarily... the ERISA plan I take it in many instances buys hospital care from others.
It doesn't often--
Mr. Caruso: It does that on occasion.
Unknown Speaker: --Yes, well--
Mr. Caruso: In that situation then it would be treated like other buyers.
Unknown Speaker: --So why... but if you take your position, then what you do is, you simply get the ERISA plans themselves, through a real tax advantage, to start going into the businesses of providing those things which normally would be bought from others, and they'd get a tax break.
Why would Congress want that?
Mr. Caruso: Because Congress has done it that way, and I think you'll find that if you look at the Metropolitan Life case, that the same type of special status was given to self-insured plans.
Unknown Speaker: So your actual answer, if you happen to have an ERISA plan that bought paid vacations for its employees, and they decide to go into the travel business limited to employees, the answer then to the question is, they're tax exempt, right, in your view?
Mr. Caruso: Correct.
Unknown Speaker: Yes, okay.
Mr. Caruso: Correct.
Unknown Speaker: But am I correct in understanding you do... you would not make the same argument about regulations such as the requirement of a second opinion of a physician?
Mr. Caruso: That's correct.
Unknown Speaker: You draw the--
Mr. Caruso: That is correct.
If there are no further questions, thank you.
Unknown Speaker: --Thank you, Mr. Caruso.
Ms. Smith, you have 5 minutes remaining.
Rebuttal of M. Patricia Smith
Mr. Smith: Your Honor, the HFA is not a tax on benefit contributions.
It's a tax on hospital receipts.
The characterization is equally applicable to any time a plan purchases services from any hospital, so when Mount Sinai, a private, nonplan-owned hospital, receives benefit payments from any other plan, Mount Sinai can claim we can't pay the HFA because the plan made these payments.
It's a contribution, and therefore it's a tax on plan contributions.
While to the plan that makes the payments when they're purchasing services, whether it's health care services or day care services, it may represent a benefit payment, to the taxed entity, to the hospital, to the day care center, it is simply income.
Secondly, in these service areas, if you can regulate these entities, you should tax them, you should be able to tax them, because ERISA makes no distinction in its preemption provision between regulatory laws and tax laws.
With or without the Hawaii prepaid legal services... I mean, sorry, the Hawaii prepaid... yes, health service exemption, State tax laws are treated the same.
They are relate... they are preempted only if they relate-to, and the State's argument is in these service areas you may regulate without regard to ERISA plans, and therefore you may tax in these areas without regard to the fact that ERISA plans are purchasing services in these areas.
Finally, Your Honor, outside of these service areas the tax issue is a complicated one, and one which is really not fully addressed in these briefs.
For instance, the notion that ERISA plans are carte blanche exempt from Federal and State taxation is simply not correct.
I would urge you in this case not to get into a general tax analysis, and the State itself is limiting its argument to the purchase of services and the taxing of services in these areas which are matters of traditional State concerns.
It's not necessary to determine whether the States can tax the corpus of trusts.
Those are... present different and perhaps more complicated issues.
Chief Justice Rehnquist: Thank you, Ms. Smith.
The case is submitted.