Opinion ID: 661453
Heading Depth: 3
Heading Rank: 2

Heading: The Surcharges: Saving Clause

Text: 64 To determine whether a state law regulates insurance within the meaning of the saving clause, a court must first consider the 'common-sense view' of the term 'regulates insurance' which suggests that 'in order to regulate insurance, a law must not just have an impact on the insurance industry, but must be specifically directed toward that industry. Howard v. Gleason Corp., 901 F.2d 1154, 1158 (2d Cir.1990) (quoting Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 50, 107 S.Ct. 1549, 1554, 95 L.Ed.2d 39 (1987)). The court must next assess whether the law satisfies the three criteria developed for determining whether a practice constitutes the business of insurance within the meaning of the McCarran-Ferguson Act, 15 U.S.C. Secs. 1011-1015 (1988 & Supp. IV 1992). 4 See Pilot Life, 481 U.S. at 48, 107 S.Ct. at 1553. Those criteria are:  'First, whether the practice has the effect of transferring or spreading a policyholder's risk; second, whether the practice is an integral part of the policy relationship between the insurer and the insured; and third, whether the practice is limited to entities within the insurance industry.'  Id. at 48-49, 107 S.Ct. at 1553 (quoting Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S.Ct. 3002, 3008, 73 L.Ed.2d 647 (1982)). 65 Applying these tests, we conclude, first of all, that the 13% and 11% surcharges do not regulate insurance within the meaning of the saving clause. 5 Our common-sense inquiry reveals that these surcharges are not specifically directed toward the insurance industry; rather, they aim to regulate hospital rates. Although the surcharge laws provide for different payment rates based on whether a patient is uninsured, covered by an HMO, a commercial insurer or a self-insured health plan, they do not address matters typically within the purview of state insurance regulations such as: the solvency and qualification of an insurance company's management, the sale and advertising of insurance, rates and the content of insurance policies. See Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 727-28 & n. 2, 105 S.Ct. 2380, 2382-83 & n. 2, 85 L.Ed.2d 728 (1985). 66 Defendants argue that the 13% and 11% surcharges are designed to affect the insurance marketplace by giving the Blues a competitive advantage over commercial insurers, self-insured funds, and a number of other players in the marketplace--and thus may be characterized as the regulation of insurance. This argument, however, confuses laws regulating the business of insurance with laws regulating hospital rates that have an effect on the insurance marketplace. Although the surcharge laws clearly have some impact on insurance companies, this alone is not enough. As the Supreme Court has made clear in interpreting Sec. 2(b) of the McCarran-Ferguson Act, there is a difference between the business of insurance and the business of insurers. See Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 210-17, 99 S.Ct. 1067, 1071-76, 59 L.Ed.2d 261 (1979). 67 In our view, defendants' arguments proceed from an impermissibly broad reading of the saving clause. Congress intended that ERISA's preemption provision would clear the field of any state law interfering with benefit plans, see, e.g., FMC Corp. v. Holliday, 498 U.S. 52, 58, 111 S.Ct. 403, 407, 112 L.Ed.2d 356 (1990); Pilot Life, 481 U.S. at 47-48, 107 S.Ct. at 1552-53, and installed the saving clause to preserve only those state laws precisely directed at the insurance business. The more expansively the saving clause is read, the more deeply it cuts into the preemption, a result that would render the entire scheme unworkable. 68 Nor do the McCarran-Ferguson factors suggest otherwise. The Blues--unlike commercial carriers--offer health insurance to anybody, no matter who they are or what physical shape they are in. As the insurer of last resort, the Blues insure persons and groups that are, on the whole, older and less healthy, and therefore constitute unacceptably high risks for other insurers. Most high risk policyholders, therefore, are insured under the Blues. Because the 13% and 11% surcharges are designed to encourage ERISA plans--with generally healthier persons--to shift to the Blues, the State's reimbursement system would help spread the risk of health care costs. 69 Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979), does not alter this conclusion. There, the Supreme Court ruled that Blue Shield's arrangement with certain pharmacies to charge Blue Shield's insureds only $2 for every prescription drug did not constitute the business of insurance under McCarran-Ferguson. As noted by the district court here, [t]he Supreme Court held that the agreements between Blue Shield and the participating pharmacies did not spread any risk because those agreements merely reduced Blue Shield's costs for fulfilling an obligation which Blue Shield had already assumed. 813 F.Supp. at 1008 n. 15 (citing Royal Drug, 440 U.S. at 212-14, 99 S.Ct. at 1073-74). Here, the challenged surcharges do not merely raise the cost of inpatient hospital services, but play a significant role in encouraging ERISA plans to shift to the Blues. Thus, unlike Royal Drug, the surcharges here can be said to have the effect of transferring or spreading a policyholder's risk. Pilot Life, 481 U.S. at 48, 107 S.Ct. at 1553 (quoting Union Labor Life Ins., 458 U.S. at 129, 102 S.Ct. at 3008). 70 The 13% and 11% surcharges, however, fail to satisfy the remaining two McCarran-Ferguson factors. These surcharges do not regulate any practice that is integral to the insurer-insured relationship. As we noted on an earlier occasion, the essence of the second McCarran-Ferguson factor is whether a statute dictate[s] any of the terms of the insurance contract itself, the principal embodiment of the insurer-insured relationship. Howard, 901 F.2d at 1159. True, the surcharges here were designed to induce ERISA plans to switch their hospital coverage from commercial insurers to the Blues; but they do not directly change any of the terms, conditions or scope of coverage in commercial insurance contracts. Rather, because the surcharges expressly regulate hospital rates, they relate only to the contractual obligations between hospitals and insurers or insureds, but do not directly implicate the policy relationship between insurers and their insureds. 71 Finally, the surcharges are not limited to entities within the insurance industry. Pilot Life, 481 U.S. at 49, 107 S.Ct. at 1553 (quoting Union Labor Life Ins., 458 U.S. at 129, 102 S.Ct. at 3008). In Howard, a provision of the New York Insurance Law required that either the insurer or the employer (in certain circumstances) give notice of conversion privileges upon termination of employment. Id. at 1156. We found that this provision was not a regulation of insurance. Id. at 1159. We noted that since the notice could be given by either the employer or the insurer, the law was not limited to entities within the insurance industry. Id. Here, the surcharges set rates that hospitals must charge patients, and thus involve entities beyond the insurance industry, including: the State, hospitals, patients, HMOs, and self-insured funds. Thus, the third McCarron-Ferguson factor is not satisfied. 72 Accordingly, because of our common-sense determination that the surcharges do not regulate insurance, and because two of the three McCarran-Ferguson factors are not satisfied, we agree with the district court that the 13% and 11% surcharges are not preserved by the saving clause. Accordingly, the New York statutes imposing the surcharges are preempted by ERISA. 6