Appeals Court holds that ERISA preempts Maryland's effort to expand health coverage

In a ruling that could have a broad impact on states' efforts to expand health care coverage, the Fourth Circuit has struck down Maryland's "Fair Share" law.  In July we posted our summary of the Maryland Fair Share Act that required employers with more than 10,000 employees (i.e., Wal-Mart) to provide health benefits that cost at least 8% of payroll, or pay the difference to the state.  Wal-Mart challenged the statute, claiming ERISA preempted it.  The trial court agreed, finding that the statute mandated a Maryland-specific level of benefits that conflicted with the Wal-Mart benefit plan.  The court held that  ERISA prohibits states from enacting such statutes.  Otherwise, national employers like Wal-Mart would have to provide 50 or more different benefit plans to their employees, with the resulting costs and complexity.

Maryland appealed, and argued that the Act did not have an impermissible "connection with" ERISA plans because it did not directly impose any actual benefit or coverage requirements on an employer's health benefits plan. Rather, it gave employers two alternatives to increasing benefits to employees: (1) paying to the state the difference between actual health care expenses and 8%; or (2) increasing health care spending in ways that did not qualify as an ERISA plan.

Rejecting this argument, the Fourth Circuit held this week that the Act violated ERISA's preemption clause by effectively mandating the structure of health benefits to meet the Act's minimum spending threshold.  Also, the court stated, the Act would disrupt employers' administration of plans on a uniform, nationwide basis by requiring them "to segregate a separate pool of expenditures for Maryland employees."

The Fourth Circuit points out that other states and local governments have adopted or are considering similar laws, so the Maryland law would require Wal-Mart to tailor its health plans to each state--the very thing ERISA is designed to avoid.  In fact, last week California's Governor Schwarzenegger proposed a similar minimum benefit/tax program to provide universal health care in California. 

Although this decision renders Maryland's Fair Share Act unenforceable, similar laws already adopted or under consideration by other states or local governments may be sufficiently different to avoid ERISA preemption.  However, observers expect challenges to those laws, as well as greater Congressional interest in ERISA and its effects.