In an effort to make up for a funding shortfall in the Commonwealth of Massachusetts’ Medicaid program, state policymakers have proposed solutions that include a “play-or-pay” option under which employers who fail to offer major medical coverage, or who offer coverage but have low take-up rates, would be required to pay an additional “employer contribution” to the Commonwealth based on multiple factors and complex computations. Another option would make up the shortfall with an across-the-board increase, similar to a payroll tax increase, in the Employer Medical Assistance Contribution (or “EMAC”), which helps defray Medicaid financing.

This post argues in favor of the latter option. We are of the view that an across-the-board increase in EMAC payments, would be vastly preferable because of its simplicity and ease of administration. The “play-or-pay” option would not only be extremely complicated to comply with and enforce, but, as we explain below, it may be preempted by federal law, i.e., the Employee Retirement Income Security Act of 1974 (ERISA).

Background

Massachusetts has traditionally maintained a comprehensive and generous Medicaid program—referred to as “MassHealth.” The $16.6 billion program includes coverage of children, pregnant women, as well as coverage under the Children’s Health Insurance Program (CHIP), which is available to families with income up to 300 percent of FPL. (The particulars of the MassHealth coverage are available here.) The generosity of MassHealth has had unintended consequences. Because MassHealth coverage is cheaper, low-income individuals increasingly eschew employer-sponsored coverage in favor of MassHealth. Having determined that this trend is unsustainable, Gov. Baker in his fiscal year 2018 budget called for Massachusetts employers to make new contributions to help the state pay for its surging Medicaid costs.

A recent budget proposal by the Massachusetts Senate authorizes the Governor to pursue one of two options designed to collect at least $180 million in fiscal 2018 to offset the state’s rising MassHealth costs. The particulars of the proposal are included in draft legislation that offers a choice between a new “play-or-pay” option that would impose a per employee assessment on companies that don’t offer their workers’ health plans, or, alternatively, increasing the state’s EMAC payments, which are used to  subsidize insurance plans for low income residents and medical care for the uninsured. The increases under either option, as proposed, would sunset after two years.

At bottom, the new “play-or-pay” proposal is similar to the play-or-pay regime under the 2006 Massachusetts Health Care Reform law. Under that law, Massachusetts employers with 11 or more employees were required to make a “fair and reasonable premium contribution” to employees’ health insurance costs, or pay an annual “fair share” contribution of up to $295 per full-time equivalent employee. What is different this time is the amounts involved, which are much larger.

“Employer Medical Assistance Contributions” or “EMAC” apply to employers who have been in business for at least two years and have an average of at least six employees per quarter. Employers pay the contribution on the first $15,000 of each employee’s wages during the calendar year. The Senate budget proposal permits the administration to increase the existing EMAC contributions as an alternative to a play-or-pay scheme.

The Senate Budget Proposal

Section 96 of the Senate budget proposal describes the two options summarized above as follows:

The secretary may:

(i)        Notwithstanding section 189 of chapter 149 of the General Laws, increase the employer medical assistance contribution rate percentage, as established in said section 189 of said chapter 149, up to an additional .41 per cent for a total contribution rate of not more than .75 per cent; or

(ii)       Require an employer to make an employer contribution to health care as provided for in subsection (b).

The choice is stark and simple: Either impose an across the board EMAC increase or require “an employer contribution to health care as provided for in subsection (b).”

Section 93(b)(3) establishes the basic play-or-pay structure:

(3) The commissioner shall calculate an employer’s liability based on the employer contribution rate established for those employers that either:

(i)        Do not provide a minimum qualified offer to their employees; or

(ii)       Do not meet the minimum uptake rate.

(Emphasis added).

The “employer contribution rate” is a rate established by regulation by the Secretary of Administration and Finance that is either based on the employer’s number of employees or a marginal contribution rate that is greater for employers with a large number of employees. In setting these rates, the Secretary must consider factors including, but not limited to:

“an employer’s contribution towards the minimum qualified offer; an employer’s number of employees; whether an employee resides in the commonwealth; the number of part-time employees employed by an employer; and employee access to alternative qualifying health insurance through a spouse’s plan, a parent’s plan, a veteran’s plan, Medicare, a retirement plan, a disability plan or a multiemployer plan that an employer contributes to under a collective bargaining agreement.”

Further limits are imposed in the case of employers with more than 25 full-time equivalent employees but less than 50 full-time equivalent employees. Full-time employees include full-time equivalents but exclude temporary employees. The number of “full-time employees” is based on “the number of hours worked in a quarter by all employees, not to exceed 500 hours per employee,” although the denominator may be less than 500 hours “if the employer is in an industry characterized by non-traditional employee hours, as determined by the secretary in consultation with participating agencies.” A “temporary employee” is defined to mean, “an employee whose employment does not exceed 12 consecutive weeks during the 12-month period ending on the last day of the reporting quarter and is for a finite purpose.”

The terms “minimum qualified offer” and “minimum uptake rate” are defined as follows:

• “Minimum qualified offer,” an employer sponsored group health insurance plan, health reimbursement account or other plan deemed equivalent to an employer sponsored group health insurance plan by the secretary in consultation with participating agencies.

• “Minimum uptake rate,” the uptake rate set by the secretary, in consultation with participating agencies, as the minimum threshold an employer shall meet in order for the employer contribution to be zero.

The total employer contribution of each employer is determined quarterly as follows:

• If an employer does not make a minimum qualified offer, then the employer is assessed ¼ of the employer contribution rate multiplied by the employer’s total full-time equivalent employees minus 10 full-time equivalent employees;

• If an employer makes a minimum qualified offer but has an uptake rate less than the minimum uptake rate, the employer contribution is ¼ of the employer contribution rate multiplied by the product of the difference between the minimum uptake rate and the employer’s uptake rate times the total full-time equivalent employees minus 10 full-time equivalent employees; or

• If an employer makes a minimum qualified offer and has an uptake rate of greater than, or equal to, the minimum uptake rate, the employer contribution is zero.

As explained below, a mandate by the Commonwealth that employers either offer a group health plan with specified minimum coverage and uptake levels, or pay an assessment, is potentially subject to federal preemption under ERISA.

ERISA Preemption

The text of ERISA’s preemption clause—which the Supreme Court has characterizes as “terse but comprehensive”—says that ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” This provision makes ERISA the sole source of rules governing the maintenance and operation of employee benefit plans by preempting, or rendering inoperative, all state laws relating to such plans. (ERISA does, however, include an exception under which state laws regulating insurance, banking, and securities are saved from preemption.)

The early Supreme Court cases construed the term “relates to” expansively. In Shaw v. Delta Air Lines, 463 U.S. 85 (1983), for example, the Supreme Court stated that the term “relates to” was to be given its broad common sense meaning, such that a state “law ‘relates to’ an employee benefit plan, in the normal sense of the phrase, if it has a connection with or reference to such a plan.” But a state law would survive a preemption-based challenge where the relationship between the state law and ERISA is “tenuous, remote or peripheral.” Shaw identified, and later cases fleshed out, two categories of state laws that ERISA preempts:

• State laws that have a reference to ERISA plans. Thus where a State’s law acts immediately and exclusively upon ERISA plans or where the existence of ERISA plans is essential to the law’s operation, such reference will result in preemption.

• State laws that have “an impermissible connection with” ERISA plans. Thus, a state law that governs a central matter of plan administration or interferes with nationally uniform plan administration would fail this test.

A state law also might have an impermissible connection with ERISA plans if acute, albeit indirect, economic effects of the state law force an ERISA plan to adopt a certain scheme of substantive coverage or effectively restrict its choice of insurers.

In N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995), the Supreme Court held that ERISA did not preempt a state hospital surcharge statute because the statute’s indirect economic influence did not bind plan administrators to any particular choice and thus did not itself function as a regulation of an ERISA plan. Travelers curbed the Court’s earlier, expansive reading of ERISA preemption. The Travelers Court was worried that “[i]f ‘relate to’ were taken to extend to the furthest stretch of its indeterminacy, then for all practical purposes preemption would never run its course.” 514 U.S. at 655. The Court also expressed concern for the role of the states, noting that there is nothing in the language of the ERISA statute “or the context of its passage” that “indicates that Congress chose to displace general health care regulations, which historically has been a matter of local concern.”

Travelers was followed by two other cases, California Div. of Labor Standards Enforcement v. Dillingham Constr., N.A., 519 U.S. 316, 328 (1997) and De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806 (1997). These three cases, which are sometimes referred to as the “Travelers Trilogy,” established a new test under which a state law has the requisite connection with an employee benefit plan only if it affects the plan’s structure or administration, binds plans to particular choices, or establishes alternative remedies.

As the previous discussion illustrates, the contours of ERISA preemption are not fixed. They instead vary from time-time-time. Last year, in Gobeille v. Liberty Mutual Insurance Company, the pendulum arguably swung toward a stronger preemption rule. There, the Supreme Court struck down as impermissibly intrusive a Vermont law that required certain public and private entities (including health insurers) that provide and pay for health care services to report claims information to a state agency. But despite this apparent strengthening of preemption, it nevertheless remains generally the case that a state law has the requisite connection with an employee benefit plan only if it affects the plan’s structure or administration, binds plans to particular choices, or establishes alternative remedies.

Also relevant here is Retail Industry Leaders Assoc. v. Fielder, 475 F.3d 180 (2007), which involved a challenge to the Maryland Fair Share Health Care Fund Act. The law in question required employers with 10,000 or more Maryland employees to spend at least eight percent of their total payroll on employees’ health insurance costs or pay the amount their spending falls short to the state. (The law was directed at Wal-Mart, which the legislature believed provided a substandard level of healthcare benefits, forcing many Wal-Mart employees to depend on state-subsidized healthcare programs.) The Court held that a state law that directly regulates the structuring or administration of an ERISA plan is not saved by inclusion of a means for opting out of its requirements. And because the court found that any reasonable employer would increase its spending on employee healthcare rather than pay monies to the state, it concluded that “the only rational choice employers have under the Fair Share Act is to structure their ERISA healthcare benefit plans so as to meet the minimum spending threshold.” The law was, therefore, preempted by ERISA.

Under governing preemption principles, the proposed new play-or-pay option would be preempted if it has “an impermissible connection with” ERISA plans.” It strikes us that the requirement to pay money to the Commonwealth if the employer does not have a plan that meets the law’s specifications could be viewed as a mandate to have such a plan per the Fourth Circuit’s ruling in Fielder. Or it might be viewed as a mere tax, which a la Travelers would not rise to the level of preemption. But the requirement to determine take-up rates clearly strikes us as affecting plan administration. While we obviously cannot say for certain whether the proposed legislation would be preempted, it is not a remote possibility. (The same can be said of the 2006 Massachusetts fair share law, which was never challenged—likely, most observers believe, because the employer penalties were nominal.  The amounts in the Senate budget proposal are significantly larger.)

Conclusion

The proposed law offers two options—one that is simple to understand, easy to administer, and free from any conflicts with Federal law; the other, complex in the extreme, is likely to result in significant compliance and enforcement  costs, and may well fall to a challenge under ERISA. Our vote is with the former.