united states district · pdf fileunited states district court eastern district of michigan...

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

SELF-INSURANCE INSTITUTE OF

AMERICA, INC.,

Plaintiff,

v

RICK SNYDER, in his official capacity as

Governor of the State of Michigan; R. KEVIN

CLINTON, in his official capacity as Director of

the Office of Financial and Insurance

Regulation of the State of Michigan; and

ANDREW DILLON, in his official capacity as

Treasurer of the State of Michigan,

Defendants.

No. 2:11-cv-15602

HON. JULIAN ABELE COOK

MAG. DAVID R. GRAND

/

DEFENDANTS’ MOTION TO DISMISS

UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(B)(6)

Bill Schuette

Attorney General

John J. Bursch

Solicitor General

Bradley K. Morton

Division Chief

Attorneys for Defendants

Revenue and Collections Division

P.O. Box 30754

Lansing, Michigan 48909

517-373-3203

[email protected]

[P55459]

Dated: February 16, 2012

2:11-cv-15602-JAC-DRG Doc # 14 Filed 02/16/12 Pg 1 of 32 Pg ID 33

The Defendants, Rick Snyder, in his official capacity as Governor of the State of

Michigan, R. Kevin Clinton, in his official capacity as Director of the Office of Financial

and Insurance Regulation of the State of Michigan, and Andrew Dillon, in his official

capacity as Treasurer of the State of Michigan, through their attorneys state the

following in support of their motion under federal rule of civil procedure 12(b)(6):

1. Plaintiff Self-Insurance Institute of America, Inc., (“ the Institute”) filed a

complaint on December 22, 2011, seeking declaratory judgment and injunctive relief

through a request that this Court find that Michigan’s Health Insurance Claims

Assessment Act (“claims tax”), Public Act 142 of 2001, is preempted by the Employee

Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1001 et seq., that the

claims tax violates the Supremacy Clause of the United States Constitution, and for an

injunction against implementation and enforcement of the claims tax.

2. The Institute granted the Defendants (collectively “the State”) an

extension of time to respond to the complaint, which response is currently due for filing

on February 16, 2012.

3. The State for its initial responsive pleading is filing this motion for failure

to state a claim upon which relief can be granted pursuant to federal rule of civil

procedure (FRCVP) 12(b)(6).

4. The primary basis for the State’s motion is that the claims tax is not

preempted by ERISA because the claims tax does not relate to ERISA or an ERISA

covered plan where any reference to or connection with ERISA or such covered plan

does not affect ERISA or a covered plan in more than a tenuous, remote, or peripheral

manner. Alternatively, the claims tax is saved as a law that regulates insurance and is


therefore not preempted with respect to any insurer (including stop loss insurers) or

TPA that pays health care claims subject to the tax, even if the paid claims generating

the claims tax liability are attributable to an ERISA plan.

5. Pursuant to E.D.Mich. LR 7.1, the State, as the moving party, requested a

conference with the Institute to obtain its concurrence to the subject matter of this

motion on February 15, 2012, by calling and emailing the Institute’s counsel at the

counsel’s phone number and email address specified in the complaint caption.

6. The Institute, through its counsel, stated that it will not concur to the

subject matter of the State’s motion.

FOR THE REASONS set forth in this motion and the accompanying brief in

support the State respectfully requests that this Court grant this motion, hold that the

claims tax is not preempted by ERISA, deny the Institute’s request for declaratory

judgment and injunctive relief, and dismiss the Institute’s complaint with prejudice.

Respectfully submitted,

Bill Schuette

Attorney General

John J. Bursch

Solicitor General

/s/ Bradley K. Morton

Division Chief



P.O. Box 30754


517-373-3203

[email protected]

[P55459]


UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

SELF-INSURANCE INSTITUTE OF

AMERICA, INC.,

Plaintiff,

v

RICK SNYDER, in his official capacity as

Governor of the State of Michigan; R. KEVIN

CLINTON, in his official capacity as Director of

the Office of Financial and Insurance

Regulation of the State of Michigan; and

ANDREW DILLON, in his official capacity as

Treasurer of the State of Michigan,

Defendants.

No. 2:11-cv-15602

HON. JULIAN ABELE COOK

MAG. DAVID R. GRAND

/

DEFENDANTS’ BRIEF IN SUPPORT OF MOTION TO DISMISS

UNDER FEDERAL RULE OF CIVIL PROCEDURE 12(B)(6)

Bill Schuette

Attorney General

John J. Bursch

Solicitor General

Bradley K. Morton

Division Chief



P.O. Box 30754


517-373-3203

[email protected]

[P55459]



i

TABLE OF CONTENTS

Page

Table of Contents ............................................................................................................ i

Index of Authorities ....................................................................................................... ii

Concise Statement of Issues Presented ........................................................................ v

Controlling or Most Appropriate Authority ................................................................. vi

Introduction ................................................................................................................... 1

Background .................................................................................................................... 2

Argument ....................................................................................................................... 7

I. ERISA does not preempt the claims tax because it is a law of

general applicability that does not affect an ERISA plan’s

benefits, structure, or administration. .................................................... 7

II. Even if the claims tax did “relate to” ERISA plans, it is

insurance regulation not subject to federal preemption. ...................... 14

Conclusion and Relief Requested ................................................................................ 20

Certificate of Service (e-file) ........................................................................................ 22


ii

INDEX OF AUTHORITIES

Page

Cases

Associated Builders & Contractors v. Mich. Dep’t of Labor & Econ. Growth,

543 F.3d 275 (6th Cir. 2008) ............................................................................... vi, 13

Boyle v. Anderson,

68 F.3d 1093 (8th Cir. 1995) ...................................................................................... 8

California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A.,

Inc.,

519 U.S. 316 (1997) ....................................................................................... 3, 12, 13

Connecticut Hosp. Ass’n v. Weltman,

66 F.3d 413 (2d Cir. 1995).......................................................................................... 9

De Buono v. NYSA-ILA Medical & Clinical Servs. Fund,

520 U.S. 806 (1997) .......................................................................................... passim

FMC Corp. v. Holliday,

498 U.S. 52 (1990) ........................................................................................ 18, 19, 20

Franchise Tax Bd. of Cal. v. U.S. Postal Service,

467 U.S. 512 (1984) .................................................................................................... 7

General Motors Corp. v. California State Bd. of Equalization,

815 F.2d 1305, 1310 (9th Cir. 1987) ........................................................................ 17

Golden Gate Rest. Ass’n v. City & Co. of San Francisco,

546 F.3d 639 (9th Cir. 2008) .................................................................................... 13

Harris v. McRae,

448 U.S. 297 (1980) .................................................................................................... 4

Ingersoll-Rand Co. v. McClendon,

498 U.S. 133 (1990) .................................................................................................... 2

Kentucky Ass’n of Health Plans v. Miller,

538 US 329 (2003) ........................................................................................ 14, 15, 16

Metropolitan Life Ins. Co. v. Massachusetts,

471 U.S. 724 (1985) .................................................................................................. 20


iii

New England Health Care Employees Union v. Mount Sinai Hosp.,

65 F.3d 1024 (2d Cir. 1995)........................................................................................ 9

New York Conference of Blue Cross & Blue Shield Ins. v. Travelers Ins. Co.,

514 U.S. 645 (1995) .......................................................................................... passim

Safeco Ins. Co. v. Musser,

65 F.3d 647 (7th Cir. 1995) ........................................................................................ 5

Shaw v. Delta Air Lines, Inc.,

463 U.S. 85 (1983) ...................................................................................................... 4

Thiokol Corp. v. Roberts,

76 F.3d 751 (6th Cir. 1996) .................................................................................... 3, 4

Travelers Ins. Co. v. Pataki (On Remand),

63 F.3d 89 (2d Cir. 1995) ........................................................................ 7, 10, 11, 18

Statutes

15 U.S.C. § 1012(a) ........................................................................................................ 7

2011 P.A. 142 ....................................................................................................... passim

2011 P.A. 38, § 635(2) .................................................................................................. 10

2011 P.A. 38, §605(1) ................................................................................................... 10

2011 P.A. 38, 623(1) ..................................................................................................... 10

29 U.S.C. § 1002(1) ........................................................................................................ 2

29 U.S.C. § 1144(a) .......................................................................................... 2, 3, 5, 18

29 U.S.C. § 1144(b)(2)(A) ............................................................................. 2, 14, 15, 18

29 U.S.C. § 1144(b)(2)(B) ......................................................................................... 2, 17

42 U.S.C. § 1396b ........................................................................................................... 4

42 U.S.C. §§ 1396 et seq ................................................................................................. 4

M.C.L. § 208.1235(2) .................................................................................................... 10

M.C.L. § 500.5208 ........................................................................................................ 18

M.C.L. § 5208a ............................................................................................................. 18


iv

M.C.L. § 550.1732(a) .................................................................................................... 15

M.C.L. § 550.1733(1) .................................................................................................... 15

M.C.L. § 550.1733a(2) .................................................................................................. 16

M.C.L. § 550.1740 ........................................................................................................ 16

M.C.L. §§ 400.105 et seq ................................................................................................ 4

M.C.L. §§ 500.100 et seq .............................................................................................. 18

M.C.L. §§ 550.901 et seq .............................................................................................. 18


v

CONCISE STATEMENT OF ISSUES PRESENTED

1. Michigan’s uniform, one-percent claims tax is a revenue-raising measure

enacted to fund the State’s Medicaid program. Although the claims tax

has a minimal economic impact experienced equally by all payors of

health care claims, the tax does not otherwise affect an ERISA plan’s

benefits, structure, or administration. Is such a tax preempted by ERISA

§ 514(a)?

2. Even if a state law falls within ERISA’s preemptive scope, ERISA

§ 514(b)(2)(A) saves the law if it regulates insurance. The claims tax

applies expressly and exclusively to entities engaged in insurance-related

activities; the methodology that insurers and TPAs use to pass through

the tax to their customers must be provided to the Michigan Insurance

Commissioner; non-payment of the claims tax may result in the Insurance

Commissioner suspending or revoking an insurer’s or TPA’s license to do

business in Michigan; and the tax’s purpose is insurance-based: to ensure

adequate funding to provide health care coverage to Michigan’s

uninsured, indigent residents. Does ERISA’s insurance savings clause

preserve the tax?


vi

CONTROLLING OR MOST APPROPRIATE AUTHORITY

New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.,

514 U.S. 645 (1995)

De Buono v. NYSA-ILA Medical & Clinical Servs. Fund,

520 U.S. 806 (1997)

Associated Builders & Contractors v. Mich. Dep’t of Labor & Econ. Growth,

543 F.3d 275 (6th Cir. 2008)

Thiokol Corp. v. Roberts,

76 F.3d 751, 758 (6th Cir. 1996)


1

INTRODUCTION

This dispute involves the validity of the Health Insurance Claims Assessment

Act, 2011 P.A. 142 (Act), which imposes a 1% tax on the value of all health care claims

processed and paid in the State of Michigan. For example, if Blue Cross Blue Shield of

Michigan pays a doctor or hospital $1,000 for a patient’s covered treatment, Blue Cross

must remit 1% of that claim, $10, to the State. The purpose of this “claims tax” is to

fund a critical $400 million of the State’s $10 billion Medicaid program.

The Legislature wanted to avoid the administrative difficulty of collecting the 1%

tax at the time of medical treatment, either from millions of Michigan citizens or tens of

thousands of hospitals, doctors, pharmacists, therapists, and other health care

providers. So the Legislature instead required the claims tax to be remitted by all

claims processors, defined as carriers and third-party administrators (TPAs), who are

free to develop reasonable methods to recoup the tax if they so choose.

Plaintiff Self-Insurance Institute of America, Inc. (the Institute), represents self-

funded ERISA welfare plans, including plan sponsors, administrators, and TPAs. The

Institute alleges that ERISA expressly preempts the tax and conflicts with it. The

Institute is wrong, for two basic reasons. First, ERISA’s preemption provision ensures

national uniformity by prohibiting state laws that affect an ERISA plan’s benefits,

structure, or administration; it does not preempt a simple tax like P.A. 142. Second,

P.A. 142 regulates insurance, and ERISA does not preempt state laws that regulate

insurance. Accordingly, the State of Michigan respectfully requests the Court to enter

judgment on the pleadings in its favor.


2

BACKGROUND

ERISA Preemption

The Employee Retirement Income Security Act of 1974 (ERISA) regulates

employee-welfare and pension-benefit plans, including health plans. 29 U.S.C.

§ 1002(1). Generally speaking, Congress intended ERISA to create a uniform, national

body of benefits law by preventing conflicting state regulations that would require

employer-sponsored plans to be tailored to comply with each state’s laws. Ingersoll-

Rand Co. v. McClendon, 498 U.S. 133, 142 (1990).

To accomplish those purposes, ERISA § 514(a) preempts state laws “insofar as

they . . . relate to any employee benefit plan” covered by the statute. 29 U.S.C. § 1144(a)

(the preemption clause). ERISA § 514(b)(2)(A) carves out from the preemption clause

any state law “which regulates insurance,” 29 U.S.C. § 1144(b)(2)(A) (the saving clause).

ERISA § 514(b)(2)(B) prohibits a state from deeming a benefit plan an insurance

company or engaged in the business of insurance to avoid ERISA preemption. 29 U.S.C.

§ 1144(b)(2)(B) (the deemer clause).

For the first 20 years of ERISA preemption analysis, decisions suggested that

the words “relate to any employee benefit plan” connoted a very broad preemptive

scope. Not so. In New York State Conference of Blue Cross & Blue Shield Plans v.

Travelers Ins. Co., 514 U.S. 645 (1995), the Supreme Court rejected a challenge brought

by various ERISA plan administrators against a New York statute that required

hospitals to collect surcharges from patients covered by a commercial insurer or HMO,

but excluded non-profit insurers like Blue Cross. The Court enforced “the starting

presumption that Congress does not intend to supplant state law.” Id. at 654. The


3

Court clarified that “to read the pre-emption provision as displacing all state laws

affecting costs and charges . . . would effectively read the limiting language in § 514(a)

out of the statute.” Such an interpretation would be contrary to the reality that

preemption does not apply to state laws that have only a peripheral connection with

covered plans, “as is the case with many laws of general applicability.” Id. at 661

(citation omitted).

Accordingly, § 514(a) does not preempt state laws that have only an indirect

economic influence on an ERISA plan’s choices. To be preempted, a state law must

bind plan administrators to a particular choice about coverage, or otherwise preclude

uniform administration or the provision of a uniform interstate benefit package. Id. at

659-60; accord California Div. of Labor Standards Enforcement v. Dillingham Constr.,

N.A., Inc., 519 U.S. 316, 334 (1997) (California’s prevailing wage and apprenticeship

laws did not “relate to” ERISA plans because, although the laws altered an ERISA

plan’s incentives, they did not dictate plan choices).

Under Travelers’ focus on the Congressional purpose for the preemption clause,

the ERISA preemption analysis seeks to determine the fundamental question: “whether

the state law has an impermissible effect on a covered plan.” Thiokol Corp. v. Roberts,

76 F.3d 751, 758 (6th Cir. 1996). In Thiokol, the Sixth Circuit reviewed the Supreme

Court’s ERISA preemption cases, which considered whether state laws “refer to” an

ERISA plan or have a “connection with” an ERISA plan. Id. at 757-61. The Thiokol

court concluded that these two categories are not analytically distinct because they seek

to answer the same fundamental question regarding the state law’s effect on the

objectives of the ERISA statute. Id. at 758. When a state law’s reference to or


4

connection with ERISA plans is “tenuous, remote, or peripheral,” the state law is not

preempted. Id. at 759 (citing Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983)).

Under Travelers’ and Thiokol’s inquiry whether a state law has an “impermis-

sible effect” on a plan, a law is not preempted solely because it refers to group health

plans or imposes a tax on self-insured plans. As explained infra, the Michigan Act has

no such impermissible effect because it imposes a plan-neutral, broad-based tax and

does not impair the uniform administration of ERISA plans that Congress protected

through the preemption statute.

2011 P.A. 142

Medicaid is a jointly funded state-federal program that pays for certain health

care treatment for eligible indigent individuals. 42 U.S.C. §§ 1396 et seq and M.C.L.

§§ 400.105 et seq. The Centers for Medicare & Medicaid Services (CMS) reimburses

each state a portion of its Medicaid expenditures, 42 U.S.C. § 1396b, if the state’s

program operates in accordance with its CMS-approved state plan and other federal

program requirements. Harris v. McRae, 448 U.S. 297, 301 (1980).

In response to CMS concerns about the validity of Michigan’s existing Medicaid

funding mechanism, which imposed a 6% tax on Medicaid managed-care organizations,

the Legislature enacted 2011 P.A. 142 (Ex. A), which creates “an assessment of 1% on

[every] carrier’s or third party administrator’s paid claims.” Sec. 3. The Act defines

“carrier” to include sponsors of certain group health plans, Sec. 2(a)(v), and it considers

the assessment a tax. Sec. 6. The proceeds of this tax will be deposited in a “health

insurance claims assessment fund,” used to finance Medicaid program expenditures.


5

Sec. 7. Like any tax, P.A. 142 requires claims processors to submit tax forms and retain

supporting documentation. Secs. 4, 5.

The Litigation

The Institute claims to represent “companies which sponsor and administer self-

funded ERISA welfare plans, including plan sponsors, plan administrators and TPAs

who function as fiduciaries within the meaning of ERISA § 3(21),” as well as

“employers.” (Compl. ¶¶ 5, 20.) The Institute makes no effort to distinguish these

entities or their respective interests and responsibilities under the Act.

The Complaint combines in its single count two claims: First, it alleges that the

Act is preempted under § 514(a) of ERISA. (Compl. ¶ 33.) Second, it alleges that the

claims tax “impermissibly interferes with the uniform national administration of

ERISA plans and contains record-keeping and reporting provisions which conflict with

ERISA.” (Compl. ¶ 34.)

A preliminary note regarding the four types of ERISA plans

The Institute’s Complaint does not appear to challenge the claims tax as it

applies to insurance companies or stop loss (reinsurance) companies, nor could it.

Insurance and reinsurance companies are not ERISA plans and, therefore, imposing

the tax on such companies does not “relate to” ERISA plans under Travelers.1 Instead,

the Complaint discusses “ERISA plans” generically. But ERISA plans come in four

1 Safeco Ins. Co. v. Musser, 65 F.3d 647, 653-54 (7th Cir. 1995) (state law imposing fees

on companies selling health insurance did not “relate to” ERISA plans, even when effect

was to increase costs of insurance purchased by plans).


6

varieties, and a preemption analysis differs slightly with respect to each. Accordingly,

a brief summary of the four varieties is instructive:

1) A fully self-insured (or self-funded) and self-administered ERISA plan – A “fully

self-insured” plan means that all of the health care claims/benefits of plan

participants are paid directly from the plan’s assets, as opposed to purchasing an

insurance policy to pay these benefits. The plan bears the risk of having

sufficient funds to pay all claims rather than transferring this risk to an

insurance company by purchasing a policy and paying premiums. In addition, a

“self-administered” plan means that the plan handles all administration of the

plan internally (including claims payment and processing) and does not contract

with an outside TPA for these services.

2) A fully self-insured ERISA plan using a TPA for administrative services – An

ERISA plan that self-insures all the risk of paying claims, but contracts with an

outside TPA (which may also be an insurance company) to handle

“administrative services only.” The administrative services provided by the TPA

typically include processing and payment of plan participants’ health care

claims, and may also include eligibility determinations, access to the TPA’s

provider networks and reimbursement rates, and other services.

3) A partially self-insured ERISA plan that purchases excess loss or stop loss

insurance – An ERISA plan that self-insures part of the risk of paying claims,

but transfers the risk of claims exceeding a certain value (on an aggregate and/or

per individual basis) to an outside insurance company by purchasing an “excess

loss” or “stop loss” insurance policy and paying premiums. The purchase of stop

loss insurance addresses only risk allocation and is independent from how an

ERISA plan allocates administrative functions. Thus, a plan that self-

administers or uses a TPA may also purchase stop loss insurance. A plan that

purchases stop loss insurance is not “fully self-insured.”

4) A fully-insured ERISA plan – The converse of a “fully self-insured” plan, a “fully-

insured” ERISA plan transfers all of the risk of paying participants’ health care

claims to an insurance company by purchasing a policy and paying premiums.

Because the insurance company’s policy dictates plan design and benefits, the

insurance company also handles administration of the policy, either itself or

using its own third-party administrator.


7

ARGUMENT

I. ERISA does not preempt the claims tax because it is a law of general

applicability that does not affect an ERISA plan’s benefits, structure, or

administration.

As noted above, Congress enacted ERISA’s preemption provision to ensure

national uniformity of private-sector employer-sponsored health plans. If every state

could regulate the terms and scope of employer plans, few national employers would

offer an employee health plan, because the plan would have to look different in every

state where the company had employees.

But just like a corporate tax,2 Michigan’s claims tax is not the kind of state law

that the Supreme Court would characterize as offensive to nationally uniform employer

plans. Like the surcharge on hospital rates imposed by New York in Travelers,3 the

claims tax has only a “tenuous, remote, or peripheral” effect on plans and their

administrators, but this incidental economic burden “does not bind plan administrators

2 The power to levy taxes is a traditional exercise of state authority. They are the

“lifeblood of government.” Franchise Tax Bd. of Cal. v. U.S. Postal Service, 467 U.S.

512, 523 (1984). Congress has reserved to the states authority to enact laws “which

relate to the regulation or taxation” of the business of insurance. 15 U.S.C. § 1012(a).

3 Unlike Michigan’s uniform 1% claims tax, the New York hospital rate surcharges in

Travelers varied depending on whether the patient was covered by Blue Cross (no

surcharge), an HMO (up to 9% surcharge), a self-insured plan (13% surcharge), or a

commercial insurer (24% surcharge). Travelers, 514 U.S. at 650. Although the

admitted intent of these significant, widely disparate surcharges was to raise costs for

private insurer, HMO, and self-insured ERISA plans and to steer business to less-costly

Blue Cross plans, Travelers Ins. Co. v. Pataki (On Remand), 63 F.3d 89, 92 (2d Cir.

1995), the Supreme Court nevertheless held that the surcharges’ indirect economic

influence “simply b[ore] on the costs of benefits” and did not “relate to” ERISA plans.

Travelers, 514 U.S. at 659-60. A fortiori, because the claims tax’s uniform, relatively

low rate is neither designed to nor will it have any effect on ERISA plans’ decisions

regarding how to provide health care coverage to their employees (where all claims

processors pay the same 1% rate), the law does not “relate to” ERISA plans.


8

to any particular choice and thus function as a regulation of an ERISA plan itself.”

Travelers, 514 U.S. at 659.

Even more analogous to Michigan’s claims tax is New York’s uniform .6% tax on

the gross receipts of patient services provided at “diagnostic and treatment centers,”

which was at issue in De Buono v. NYSA-ILA Medical & Clinical Servs. Fund, 520 U.S.

806, 810 (1997). In De Buono, the Supreme Court rejected an ERISA plan’s challenge

to this facility tax, even though the plaintiff ERISA plan owned and operated facilities

subject to the tax. The Court recognized that although the tax was “a revenue raising

measure, rather than a regulation of hospitals,” it nonetheless operated “in a field that

‘has been traditionally occupied by the States.’” Id. at 814 (citation omitted). As a

result, the ERISA-plan plaintiff bore “the considerable burden of overcoming ‘the

starting presumption that Congress does not intend to supplant state law.’” Id.

(quoting Travelers, 514 U.S. at 654)).

The Court was not convinced that the tax was “the type of state law that

Congress intended ERISA to supercede.” Id. While the facility tax was one of “myriad

state laws” of general applicability that imposed some burdens on ERISA plan

administration, the tax did not “relate to” ERISA plans within the meaning of the

preemption provision. Id. at 815. Since Travelers and De Buono, courts have held that

state taxes and surcharges on health care providers are not preempted even if the costs

are ultimately passed along to ERISA plans. Boyle v. Anderson, 68 F.3d 1093 (8th Cir.

1995) (gross receipts tax on health care providers; act permitted providers to pass

through costs to purchasers including ERISA plans); New England Health Care


9

Employees Union v. Mount Sinai Hosp., 65 F.3d 1024 (2d Cir. 1995) (surcharge on

hospital bills); Connecticut Hosp. Ass’n v. Weltman, 66 F.3d 413 (2d Cir. 1995) (same).

With respect to the four types of ERISA plans, the tax most clearly does not

“relate to” taxes assessed against the contracted insurers of fully or partially insured

ERISA plans. When the Michigan claims tax is imposed on primary or stop loss

insurers, these companies are not ERISA plans and the tax does not affect plan

administrators’ choices so as to be preempted under Travelers and De Buono.

As the claims tax is applied to a fully or partially insured ERISA plan itself, the

analysis is not appreciably more difficult, regardless of whether the plan self-

administers4 or contracts with a TPA for administrative services. There are numerous

reasons that suggest the Supreme Court would extend its rulings in Travelers

(disparate hospital surcharges designed to have an indirect economic influence on

4 Although when a self-insured ERISA plan also self-administers it is the plan itself

that must pay the claims tax and keep the records, the generally applicable, uniform

tax still does not “relate to” an ERISA plan. While this part of the Act, at first glance,

might appear to “relate to” a self-insured plan because it would require an ERISA plan

(rather than its insurer, TPA, or stop loss carrier) to directly pay the assessment,

Travelers and De Buono demonstrate that the financial cost imposed on a plan is not

the relevant factor. Instead, the governing standard is the impact on the purposes

furthered by preemption. If the tax simply affects “a plan’s shopping decision,”

Travelers, 514 U.S. at 660, such as by influencing whether to self-insure (which the

broad-based, uniform claims tax does not), the Act does not impair the Congressional

purposes and is not preempted.

In fact, De Buono ruled that the “supposed difference between direct and indirect

impact . . . cannot withstand scrutiny.” 520 U.S. at 816. “Any state tax, or other law,

that increases the cost of providing benefits to covered employees will have some effect

on the administration of ERISA plans, but that simply cannot mean that every state

law with such an effect is pre-empted by the federal statute.” Id. Like the laws in

Travelers and De Buono, the Michigan Act is a law of general applicability and does not

affect a plan’s benefits, structure, or administration.


10

ERISA plans) and De Buono (uniform tax on health facilities owned and operated by

ERISA plans) to this application of Michigan’s claims tax.

First, the claims tax is not a tax that singles out ERISA plans, but a uniform,

generally applicable tax on the health care coverage market, assessed against all

organizations that pay medical claims, including insurers, HMOs, specialty prepaid

health plans, TPAs, and public and private-sector group health plan sponsors. Sec. 2(a)

and 3(1). Such a tax is akin to a tax on hospitals contracting with or being operated by

ERISA plans, which were upheld in Travelers and De Buono. On remand from the

Supreme Court in Travelers, the Second Circuit determined that there is “no statutory

basis for treating self-insured plans differently from the other plans when determining

whether a state law ‘relates to,’ and is thus preempted by ERISA.” Travelers Ins. Co. v.

Pataki, 63 F.3d at 93. Although the Institute complains of the tax’s monetary and

administrative burdens, the Institute cannot complain that the tax, or its

documentation requirements, impacts plans with or without TPAs disproportionately

compared to insurance companies and other claims processors.

Second, accepting the Institute’s position here would nullify a wide variety of

other generally applicable taxes. For example, both the former Michigan Business Tax

and the new Corporate Income Tax impose a tax on insurance companies “equal to

1.25% of gross direct premiums written on property or risk located or residing in this

state.” See M.C.L. § 208.1235(2) (repealed); 2011 P.A. 38, § 635(2). And under the new

Corporate Income Tax, third-party administrators organized as “traditional” or C

corporations must pay a tax on corporate income at the rate of 6.0%. See 2011 P.A. 38,

§§ 605(1) and 623(1). Like the claims tax, these taxes apply to insurance companies


11

and TPAs regardless of whether the tax base (gross direct written premiums for

insurers, corporate income for TPAs) was generated in whole or in part from ERISA

plans. Similarly, ERISA plans, their insurers, and TPAs are subject to a variety of

other generally applicable state and local taxes, including real and personal property

taxes, sales tax, and unemployment taxes. Although these taxes have the incidental

effect of raising an ERISA plan’s cost of doing business, no tenable argument can be

made that they “relate to” ERISA plans such that they are preempted. The same is

true for the claims tax.

Third, the claims tax does not require plans or TPAs to treat or process claims

any differently than they did before the Legislature enacted P.A. 142. The legislation

does not influence the decision to pay claims, but simply imposes a tax at the rate of 1%

on a tax base measured as the total dollar value of health care claims that the ERISA

plan or its TPA would otherwise normally pay. The tax does not affect scope of

coverage or the rules for claim processing.

Fourth, the de minimis, 1% claims-tax rate is unlikely to change ERISA plan or

TPA conduct. In the Travelers case on remand, 63 F.3d at 94, the Second Circuit held

that even the intentional pressure exerted by the widely variant New York hospital

surcharges on a plan’s decision whether to self-insure did not result in preemption.

“[S]tates may create rate differentials that influence” the choice whether to self-insure.

Id. In Michigan, the uniform claims tax that raises all claims processors’ costs equally

exerts absolutely no pressure on a plan’s decision to self-insure. Moreover, even if a

TPA passes the claims tax along to an ERISA plan it administers, the fee does not

dictate (or even influence) the underlying plan’s benefits, structure, or administration.


12

And the fact that Michigan’s 1% claims tax (or any other tax for that matter) might

make a TPA’s cost of doing business slightly greater in Michigan than in another state

does not function as a regulation of the plan itself, and thus does not make the tax a

“conflicting directive” subject to preemption. Assessing ERISA plans or their

contracted TPAs is comparable to taxing hospitals contracting with or owned by ERISA

plans, which the Supreme Court upheld in Travelers and De Buono. And at 1%, the

claims tax is far less than the 9%, 13%, and 24% surcharges that the Supreme Court

and Second Circuit approved in Travelers.

Fifth, TPAs are not required to collect the tax from the self-funded plans with

which they contract. P.A. 142 simply requires a TPA to “develop and implement a

methodology” by which it may recover the tax from the individual, employer, or group

health plan. Sec. 3a(2). So the Act provides a TPA a choice regarding whether and how

to recover the tax. An ERISA plan’s decision to contract with a particular TPA might

be influenced by whether the TPA elected to pass through the tax, but that would not

result in preemption, just as the indirect economic influence of hospital surcharges on a

plan’s decision to self-insure did not preempt in Travelers. Accordingly, although P.A.

142 may modestly increase the cost of providing coverage for ERISA and all other

health benefit plans, the generally applicable, uniform tax does not “relate to” an

ERISA plan under Travelers and De Buono. As the Supreme Court stated, “[w]e could

not hold pre-empted a state law in an area of traditional state regulation [here, general

taxation, health care, and insurance] based on so tenuous a relation without doing

grave violence to our presumption that Congress intended nothing of the sort.”

Dillingham, 519 U.S. at 334. It thus cannot be concluded that Congress intended to


13

prevent Michigan from funding its Medicaid program through a tax on paid health care

claims.

Sixth, in a slightly different context, the Sixth Circuit has applied Travelers and

De Buono to uphold a Michigan law involving electrician training against an ERISA

challenge. In Associated Builders & Contractors v. Michigan Dep’t of Labor & Econ.

Growth, 543 F.3d 275 (6th Cir. 2008), the Court recognized the limits on the phrase

“relate to”: “While the ‘relate to’ clause might at first glance seem to have an

horizonless reach, Travelers counsels that ‘infinite relations cannot be the measure of

pre-emption.’” Id. at 280 (citation omitted). Rather, “Travelers tells us to ‘look . . . to

the objectives of the ERISA statute as a guide to the scope of the state law that

Congress understood would survive.’” Id.

The key distinction, the Sixth Circuit observed, is whether a state regulation

“effectively mandates an aspect of law with which ERISA is concerned—i.e., a statute

that mandates ‘employee benefit structures or their administration’—and a statute that

does not.” Id. The Court’s reasoning applies equally to the claims tax:

[A]s with state laws that undoubtedly will prevent ERISA-governed

outfits from providing some forms of medical care, prepaid legal services

and day-care services, state laws that prevent electrical contractors from

providing some forms of apprenticeship training address matters that “are

quite remote from the areas with which ERISA is expressly concerned.”

Id. at 285 (quoting Dillingham, 519 U.S. at 330). Michigan’s tax on health care claims

is similarly remote from the areas with which ERISA is expressly concerned. Accord

Golden Gate Rest. Ass’n v. City & Co. of San Francisco, 546 F.3d 639, 648 (9th Cir.

2008) (upholding a San Francisco ordinance that created a health care program and

required city employers to contribute toward that program for their covered employees;

“[b]ecause the City-payment option offers San Francisco employers a realistic


14

alternative to creating or altering ERISA plans, the Ordinance does not ‘effectively

mandate[ ] that employers structure their employee healthcare plans to provide a

certain level of benefits.’”) (citation omitted).

Finally, assuming that Michigan may impose the claims tax consistent with

ERISA, it would be illogical to say that Michigan cannot require claims processors

subject to the tax to submit basic tax forms or retain supporting documentation. Taxes

and forms are inseparable twins. Such a paper burden is again de minimis and also

appropriate to enforce a law of general applicability, necessary to secure Michigan’s

Medicaid program. Accordingly, the State respectfully requests that the Court uphold

2011 P.A. 142’s validity with respect to all four types of ERISA plans.

II. Even if the claims tax did “relate to” ERISA plans, it is insurance

regulation not subject to federal preemption.

The ERISA “savings clause” provides that a state law, which would otherwise be

preempted under § 1144(a) because it “relates to” ERISA plans, may still be enforced if

it is a “law which regulates insurance.” 29 U.S.C. § 1144(b)(2)(A). Thus, assuming

arguendo that the Act is preempted under § 1144(a), it would be saved from preemption

as a law regulating insurance and apply to all insurers, reinsurers, and TPAs

(including those that contract with ERISA plans) that pay health care claims subject to

the tax.

The test for determining whether a state regulation is a “law . . . which regulates

insurance” is now well-settled. First, “the state law must be specifically directed

toward entities engaged in insurance.” Kentucky Ass’n of Health Plans v. Miller, 538

US 329, 342 (2003). Second, “the state law must substantially affect the risk pooling


15

arrangement between the insurer and the insured.” Id. Applying this standard, the

Supreme Court held that Kentucky’s “any willing provider” law5 was saved from

preemption. Similarly, Michigan’s claims tax satisfies both requirements and is saved

as a state law that regulates insurance.

There can be no serious question that the claims tax satisfies the first part of the

Kentucky Ass’n test. The claims tax is “specifically directed toward entities engaged in

insurance.” Section 3(1), M.C.L. § 550.1733(1) levies upon and requires collection from

“every carrier and third party administrator an assessment of 1% on that carrier’s or

third party administrator’s paid claims.” Section 2(a) of the Act, M.C.L. § 550.1732(a),

defines “carrier” to include insurers, health maintenance organizations, health care

corporations (i.e., Blue Cross Blue Shield of Michigan, the State’s largest provider of

health care coverage), group health plan sponsors, and others engaged in health

insurance-related activities. The tax also applies to TPAs that process and pay claims

on behalf of entities that insure health care, which the Supreme Court concluded is

“within the activity of insurance for purposes of § 1144(b)(2)(A).” Id. at 336-37 n.1. In

this vein, Kentucky Ass’n emphasized that § 1144(b)(2)(A) “saves laws that regulate

insurance, not insurers,” id. at 334 (emphasis in original), explaining that even a law’s

inclusion of self-insured plans, which “engage in the same sort of risk pooling

arrangements as separate entities that provide insurance to an employee benefit plan,”

does not remove the law from the insurance savings clause. Id. at 336 n.1. Because the

claims tax applies exclusively to entities engaged in insurance-related activities and

5 An “any willing provider” law prohibits insurers from precluding qualified providers

from participating in the insurer’s “closed” or preferred provider network.


16

imposes “conditions on the right to engage in the business of insurance” in Michigan, id.

at 338, it therefore meets the first Kentucky Ass’n requirement.6

The claims tax also satisfies the second prong of the Kentucky Ass’n test. It is a

law that “substantially affect[s] the risk pooling arrangement between the insurer and

the insured.” 538 U.S. at 342. The claims tax accomplishes this by adding a cost to the

processing of claims by or on behalf of all entities that provide coverage for health care,

as did Kentucky’s requirement that insurers include “any willing providers” in their

managed-care networks. Carriers and TPAs are then permitted (within stated

limitations) to “pass through” the claims tax in the rates they charge to individuals and

employer groups. Sec. 3a(2); M.C.L. § 550.1733a(2). The methodology a carrier or TPA

uses to pass through the claims tax to the ultimate customer must be provided to the

Insurance Commissioner, who ensures that the claims tax has been allocated in

accordance with the statutory requirements. Id.

In this way, the claims tax results in an unavoidable cost—necessary to fund the

State’s Medicaid program—to the purchase of health care coverage in Michigan.

Because health insurers and insured customers in the State cannot avoid this cost, the

claims tax “alter[s] the scope of permissible bargains between insurers and insureds.”

Id. at 338-39. Entities providing health care coverage in Michigan must factor payment

of the claims tax into their cost of doing business, which directly affects the price they

ultimately charge their customers. No longer may insurers offer insurance at a rate

based purely on expected claims risk, administrative expenses, and profit/surplus

6 Section 10 of the Act, M.C.L. § 550.1740, authorizes the Michigan Insurance

Commissioner to suspend or revoke a carrier’s or third-party administrator’s certificate

of authority (i.e., license) based on non-payment of the claims tax.


17

margin. Now, the claims tax must be considered and factored into the insurer’s rate-

setting process. Similarly, TPAs and certain reinsurers (depending upon whether they

pay claims) must factor the claims tax cost into their respective rates. Based on these

pricing decisions that entities engaged in insurance-related activities must make,

together with their related impact on customers, the claims tax satisfies the second

Kentucky Ass’n requirement. See General Motors Corp. v. California State Bd. of

Equalization, 815 F.2d 1305, 1310 (9th Cir. 1987) (“The saving clause must also be

construed to cover taxation of insurance.”).

In sum, the claims tax is a law that regulates insurance and is therefore “saved”

from ERISA preemption. The tax applies expressly to entities engaged in insurance-

related activities. The methodology that insurers and TPAs use to pass through the tax

to their customers must be provided to the Michigan Insurance Commissioner. Non-

payment of the claims tax may result in the Insurance Commissioner suspending or

revoking an insurer’s or TPA’s license to do business in Michigan. Even the purpose of

the tax is insurance-based, which is to ensure adequate funding to provide health care

coverage to Michigan’s uninsured, indigent residents through the State’s Medicaid

program.

When a state law “relates to” ERISA plans but is saved from preemption as a

law that regulates insurance, the ERISA “deemer clause” nevertheless prohibits the

application of that law directly to an ERISA plan. 29 U.S.C. § 1144(b)(2)(B). “State

laws that directly regulate insurance are ‘saved’ but do not reach self-funded employee

benefit plans because the plans may not be deemed to be insurance companies, other

insurers, or engaged in the business of insurance for purposes of such state laws.” FMC


18

Corp. v. Holliday, 498 U.S. 52, 61 (1990). However, “a plan’s self-insured status

matters only if a state law” would generally be preempted under § 1144(a) and then

saved under § 1144(b)(2)(A). Travelers Ins. Co. (On Remand), 63 F.3d at 93. Thus, only

if a law is first preempted and then saved, the deemer clause acts as an “exemption”

from the savings clause as to an ERISA plan itself, re-subjecting the saved state law to

ERISA preemption.

In this case, if the Court concludes that the claims tax in fact “relates to”

ERISA plans for purposes of § 514(a) preemption (which for the reasons stated earlier,

the State argues that it does not), the effect of the deemer clause would be to exempt

from the claims tax only health care claims paid by a self-insured ERISA plan that the

plan also self-administered. But the deemer clause has no further impact on the

application of the claims tax. Specifically, Michigan may collect the claims tax on any

health care claims paid by already state-regulated,7 licensed, and taxed: 1) insurance

companies that sell fully-insured policies to ERISA plans, 2) insurance companies that

sell excess loss or stop loss policies to ERISA plans to provide coverage for high-cost

claims; and 3) TPAs that contract with ERISA plans to provide claims processing and

payment services.

7 Insurance companies are regulated and licensed in Michigan pursuant to the

Michigan Insurance Code, M.C.L. §§ 500.100 et seq., which was enacted in 1956.

Notably, the Insurance Code contains two sections, M.C.L. § 500.5208 and 5208a, that

specifically regulate services provided by insurance companies “in connection with a

noninsured benefit plan,” in other words, insurance companies acting as a TPA for a

self-insured plan, ERISA or otherwise. TPAs are regulated and licensed in Michigan

pursuant to the Third Party Administrator Act, M.C.L. §§ 550.901 et seq., which was

enacted in 1985. To the State’s knowledge, these longstanding, comprehensive state

licensing and regulatory laws—which apply to insurance companies and TPAs doing

business in Michigan regardless of whether all or part of their business is attributable to

ERISA plans—have never been challenged on ERISA preemption grounds.


19

This result is mandated, first and foremost, by the plain language of the deemer

clause, which provides that “[n]either an employee benefit plan . . . nor any trust

established under such a plan shall be deemed to be an insurance company.” By its

express terms, the deemer clause only prevents states from deeming an ERISA plan—

not the insurance companies or TPAs that the ERISA plan contracts with—an

“insurance company” for the purpose of applying a saved insurance law directly to the

plan. The saved insurance law continues to apply to any other non-ERISA-plan

entities, including insurers, reinsurers, and TPAs, which are not exempted under the

deemer clause.

This interpretation is expressly supported by FMC Corp., in which the Supreme

Court considered whether a Pennsylvania law that prohibited subrogation by an

insurer from the tort recovery of a person injured in an auto accident was preempted as

to a fully self-insured ERISA plan.8 FMC Corp., 498 U.S. at 54. Although the Court

held that ERISA preempted application of the anti-subrogation law directly to the fully

self-insured FMC Salaried Health care Plan, the Court explained that this preemption

would not extend to an insurer of an ERISA plan:

An insurance company that insures a[n ERISA] plan remains an insurer

for purposes of state laws “purporting to regulate insurance” after

application of the deemer clause. The insurance company is therefore not

relieved from state insurance regulation. The ERISA plan is consequently

bound by state insurance regulations insofar as they apply to the plan’s

insurer.

8 Because a state law affecting the ERISA plan’s TPA was not at issue, the decision did

not discuss how the ERISA plan handled claims administration.


20

Id. at 61. The Court in FMC Corp. further noted, citing its similar conclusion in

Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724 (1985),9 that although this

interpretation “‘results in a distinction between insured and uninsured plans,’” it

“‘merely give[s] life to a distinction created by Congress in the ‘deemer clause,’ a

distinction Congress is aware of and one it has chosen not to alter.’” 498 U.S. at 62.

It is thus clear that Michigan may assess and collect the claims tax from any

insurance company, any stop loss insurer, and any TPA that pays health care claims

subject to the tax, even if the health care claims generating the claims tax liability are

attributable to an ERISA plan. As the Supreme Court explained, an insurance

company (or TPA) that contracts with an ERISA plan remains a state-regulated insurer

(or TPA) for purposes of state laws “purporting to regulate insurance,” even after

application of the deemer clause. These non-plan entities therefore are not relieved

from state insurance regulation.

In sum, regardless of whether the claims tax “relates to” ERISA plans, it is a

saved insurance law that Michigan may apply to any third-parties that contract with

ERISA plans and pay claims subject to the tax. This includes insurance companies

(including stop loss insurers) and TPAs that contract with an ERISA plan.

CONCLUSION AND RELIEF REQUESTED

Defendants’ motion to dismiss under Federal Rule 12(b)(6) should be granted.

9 In Metropolitan Life, the Court held that a state law requiring insurance policies to

provide minimum mental health benefits was not preempted as to ERISA insurers.


21

Respectfully submitted,

Bill Schuette

Attorney General

John J. Bursch

Solicitor General


Division Chief



P.O. Box 30754


517-373-3203

[email protected]

[P55459]



22

CERTIFICATE OF SERVICE (e-file)

I hereby certify that on February 16, 2012, I electronically filed the above

document(s) with the Clerk of the Court using the ECF System, which will provide

electronic copies to counsel of record.


Division Chief



P.O. Box 30754


517-373-3203

[email protected]

[P55459]


united states district · pdf fileunited states district court eastern district of michigan...

Documents