Mid-Atlantic Health Law TOPICS

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Wal-Mart Irony

The Maryland health care initiative, popularly known as the "Wal-Mart bill," has been shelved permanently. Maryland Attorney General Douglas F. Gansler announced on April 16, 2007, that he will not challenge a federal appeals court decision striking down the legislation, officially named the "Fair Share Health Care Fund Act." By doing so, Maryland not only closed the book on the Wal-Mart bill, but perhaps also closed the book on other states ever successfully implementing so called "play or pay" schemes.

A. The Law

The Fair Share Health Care Fund Act was passed by the Maryland legislature in January 2006, to become effective January 1, 2007. It required any employer with at least 10,000 Maryland employees that did not spend at least 8% of total Maryland employee wages on health insurance costs to pay the State the difference between the amount it did spend and 8% of total Maryland wages. (Nonprofit employers were subject to a 6% spending requirement.)

When the Act was passed, four employers had at least 10,000 employees in Maryland: Giant Food, Johns Hopkins, Northrup Grumman and Wal-Mart. Giant Food and Johns Hopkins were not affected by the Act because they satisfied the spending requirement. Also, the Act protected Northrup Grumman by excluding Northrup Grumman's highest paid employees from the calculation of Maryland wages. Only Wal-Mart would have been affected by the Act.

After the Act was vetoed by then-Governor Robert Ehrlich, the Maryland legislature overturned the veto.

B. The Judicial Challenge

Before the Act took effect, it was challenged in federal court by the Retail Industry Leaders Association, a trade group in which Wal-Mart is a member. In a July 2006 decision, Retail Industry Leaders Association v. Fielder, Judge J. Frederick Motz ruled that the Act violated the Employee Retirement Income Security Act (ERISA), the federal law that governs employee benefits, and on January 17, 2007, a federal appeals court, in a 2-1 decision, agreed with Judge Motz.

The appeals court invalidated the Act under ERISA's preemption clause. That clause provides that ERISA supersedes any state law that "relates to" an employee benefit plan that is subject to ERISA.

The majority found that the primary objective of ERISA was to establish uniform, nationwide regulation of employee benefit plans. To that end, Congress enacted the preemption clause to minimize the administrative and financial burden that employers with employees in multiple states (for example, Wal-Mart) would have in complying with conflicting state employee benefit laws.

The majority concluded that a state law is preempted if it has an "impermissible connection" with an ERISA plan. That standard is violated, according to the majority, if the state law "directly regulates or effectively mandates some element of the structure or administration of employers' ERISA plans."

Although the Act ostensibly gave an affected employer the choice of paying the State or increasing health care benefits, the majority said that amounted to no choice at all, since no "reasonable" employer would choose to pay the State. Thus, the Act required employers to change the way they structure their benefit plans to meet the 8% spending requirement, in violation of the ERISA preemption standard.

The dissenting judge concluded that the Act was not preempted because it did not force employers to choose to increase health care spending. Furthermore, the Act did not mandate a particular level of benefits or impact plan administration, either of which would have resulted in preemption.

C. The Irony

Curiously, the Wal-Mart bill was not overturned because it singled out Wal-Mart. That argument was made, but was not adopted by Judge Motz.

Nevertheless, by adopting a very narrow bill, Maryland presented an unsympathetic set of facts to a federal court. For example, the State tried to characterize the bill as a "tax" on companies that "choose" to provide a lower level of health care benefits to their employees. However, that argument is difficult to accept when the so-called "tax" in question only applies to one company.

While one will never know if the judges were or were not influenced by the Wal-Mart bill's narrow impact, in hindsight, pay or play proponents may now wish that the first test case had a broader focus. The Retail Industry decision now constitutes a considerable obstacle to the implementation of broader, state "pay or play" employer mandated health care initiatives elsewhere.

Both Massachusetts and Vermont have passed measures that make employers "pay" the state if they don't "play" the game by providing sufficient health care benefits to their employees. Not only will the Retail Industry decision surely be cited if those measures are challenged in court, but the decision may also deter other states from adopting similar measures in the first place.