Harold N. Iselin, Albany, NY (Couch, White, Brenner, Howard & Feigenbaum, Albany, NY, of counsel) for plaintiffs-appellees.

Alan J. Davis, Philadelphia, PA (Ballard, Spahr, Andrews & Ingersoll, Philadelphia, PA, of counsel), for plaintiff-appellee U.S. Healthcare, Inc..

Eileen M. Considine, Albany, NY (Hinman, Straub, Pigors & Manning, Albany, NY, of counsel), for intervenor-appellant.

Jennifer S. Brand, New York City (Attorney General's Office, New York, of counsel), for defendant-appellant.

Judith D. Heimlich, Washington, DC (U.S. Department of Labor, Washington, DC, of counsel), for movant.

Before: WINTER and LEVAL, Circuit Judges, and BURNS, District Judge.

Defendant-Appellant Salvatore B. Curiale, in his official capacity as the Superintendent of Insurance for the State of New York ("the State"), and intervenor-defendant New York Conference of Blue Cross & Blue Shield Plans ("the Blues") appeal from a judgment of the Southern District of New York (Mukasey, J.) granting summary judgment in favor of plaintiff-appellees, NYS Health Maintenance Organization Conference ("HMOs"). NYS Health v. Curiale, Nos. 93 Civ. 1298 & 93 Civ. 1487 (S.D.N.Y. Mar. 30, 1994). Appellants claim that the District Court erred when it enjoined the State from enforcing Regulation 146, 11 N.Y.C.R.R. Sec. 361.1 (1992) ("Regulation 146"), on the ground that Regulation 146 is preempted by the Employee Retirement Income Security Act of 1974, 88 Stat. 829, as amended, 29 U.S.C. Sec. 1001, et seq. ("ERISA"). Because we find that Regulation 146 is not preempted by ERISA, we vacate the District Court's decision and remand for further findings.

The New York State Legislature enacted Chapter 501 of the Laws of 1992 in response to the state's growing health insurance problems. According to the Governor's Approval Memorandum, Chapter 501's overall purpose is to "provide [New York's] residents with a health insurance system in which all who apply must be accepted and offered a rate that cannot vary because of their age, sex, occupation or medical condition." Joint App. 353. Another purpose--perhaps more immediate--is to rescue the failing non-profit insurance organizations, particularly Empire Blue Cross and Blue Shield, from financial failure by stabilizing the insurance market.1

The non-profits' financial disintegration is due, in part, to commercial insurers' use of experience rating to price insurance premiums,2 rather than open enrollment and community rating, the method utilized by the Blues.3 Although HMOs also community rate, they fail to attract--or devise to avoid4--poorer insurance risks such as the very old and the very sick. Consequently, non-profit insurers, such as the Blues, tend to insure the sickest members of the population without the benefit of a healthy subscribers' pool to offset costs.

Appellants argue that the cure for this discrepancy (and ultimately the Blues' financial predicament) is found in the combined effects of Secs. 4317 and 3233 (Secs. 14 and 6 of Chapter 501). Under Sec. 4317, all insurers doing business in New York's individual and small group markets, including HMOs,5 must engage in open enrollment and community rating.6 Presumably, with the field so leveled, individuals and small groups with higher risk factors--those who otherwise would be insured only by non-profit carriers--will choose to enroll for coverage with commercial insurers and HMOs, thereby reducing the financial strain on the Blues.

Likewise, Sec. 3233 is intended to stabilize the insurance market, particularly upon the impact of Sec. 4317, by reallocating resources and risks among insurers.7 Specifically, Sec. 3233 directs the Superintendent of Insurance to draft a regulation which "include[s] reinsurance or a pooling process involving insurer contributions to, or receipts from, a fund which shall be designed to share the risk of or equalize high cost claims, claims of high cost persons, cost variations among insurers and health maintenance organizations based upon demographic factors of the persons insured which correlate with such cost variations designed to protect insurers from disproportionate adverse risks of offering coverage to all applicants...." N.Y.Ins.Law Sec. 3233(c).8 This provision is the legal root of Regulation 1469 and the basis for the parties' dispute.

Pursuant to Sec. 3233's pooling requirement, Regulation 146, effective on April 1, 1993, establishes two market stabilization mechanisms: a regional demographic pool and a regional high cost medical condition pool. See N.Y.Comp.R. & Regs. tit. 11, Sec. 361. The demographic pool relies upon an age/sex morbidity table to determine whether the carrier's subscribers are, for example, older or younger than the average for the region in question.10 A carrier which has a regionally younger population contributes a weighted amount to the pool; a carrier with a regionally older population collects a proportionally weighted sum from the pool. The demographic averages are recalculated quarterly to reflect changes in the insurer's subscribers.

Similarly, each carrier also contributes a pre-set amount per subscriber to the high-risk medical pool. Funds are redistributed by the pool's administrator based upon a carrier's population of high-risk subscribers. The medical conditions meriting a refund and the amount consequently refunded are pre-set by the Superintendent.

Regulation 146 also expressly permits carriers that contribute money into the demographic pool to raise their premium rates based upon the increased expense. N.Y.Comp.Codes R. & Regs. tit. 11, Sec. 361.1(e)(1). According to appellees, most HMOs have obtained rate increases based, in part, on this provision. These rate increases, passed on to the consumer--particularly employee benefit plans--are at the core of appellees' arguments.

Appellees filed suit against the State in March, 1993, claiming that Regulation 146 is preempted by ERISA because it relates to employee benefit plans and is not exempted from preemption by ERISA's savings clause.11 The Blues intervened as defendants shortly thereafter.

In their two count complaint,12 appellees requested an injunction against the regulation's enforcement. The court granted appellees' motion for a preliminary injunction on April 6, 1993, but required the parties to make pool payments into an escrow account rather than to the pool administrator. Joint App. 387.

On February 25, 1994, the district court issued an oral decision, holding that Regulation 146 is preempted by ERISA and permanently enjoining the enforcement of that regulation. According to the court, the "only question [was] whether the regulation comes within the savings clause." Finding initially that the regulation failed the common sense test for divining whether the regulation regulates the business of insurance, see Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 740, 105 S. Ct. 2380, 2389, 85 L. Ed. 2d 728 (1985), the court then concluded that the regulation failed the tri-part standard for determining whether a practice constitutes the "business of insurance," as articulated in Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 102 S. Ct. 3002, 73 L. Ed. 2d 647 (1982).

[T]he regulation in question does not spread any risk, it merely shifts costs[;] [n]or does it affect the policy relationship between the insurer and the insured, except insofar as it might have an indirect effect on price[; and,] it is certainly not limited to entities within the insurance industry ... because of its impact on HMO[s].

Joint App. 755-56. Appellants appeal from this decision. Review by this Court is de novo.

A federal statute preempts a state law if the intent "to occupy the field to the exclusion of the States," Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 209, 105 S. Ct. 1904, 1910, 85 L. Ed. 2d 206 (1985), "was the clear and manifest purpose of Congress." Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S. Ct. 1305, 1309, 51 L. Ed. 2d 604 (1977).

The federal ERISA statute "comprehensively regulates employee pension and welfare plans." Metropolitan Life, 471 U.S. at 732, 105 S.Ct. at 2385. Its preemption clause, widely noted as "conspicuous for its breadth," FMC Corp. v. Holliday, 498 U.S. 52, 58, 111 S. Ct. 403, 407, 112 L. Ed. 2d 356 (1990), reaches "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." ERISA Sec. 514(a), 29 U.S.C. Sec. 1144(a). Clearly, Congress intended to "establish pension plan regulation as exclusively a federal concern." Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523, 101 S. Ct. 1895, 1906, 68 L. Ed. 2d 402 (1981).

In light of Congress's intent, the Supreme Court favors a broad reading of the "relate to" standard. Consequently, a 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." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97, 103 S. Ct. 2890, 2900, 77 L. Ed. 2d 490 (1983). Thus, a law which "provide[s] an alternative cause of action to employees to collect benefits protected by ERISA, refer[s] specifically to ERISA plans and appl[ies] solely to them, or interfere[s] with the calculation of benefits owed to an employee" breaches ERISA's regulatory reach. Aetna Life Ins. Co. v. Borges, 869 F.2d 142, 146 (2nd Cir.), cert. denied, 493 U.S. 811, 110 S. Ct. 57, 107 L. Ed. 2d 25 (1989). Furthermore, ERISA's preemptive breadth encompasses even a law of general applicability if it has an impermissible effect on an ERISA plan. See Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 139, 111 S. Ct. 478, 483, 112 L. Ed. 2d 474 (1990) (noting that ERISA may preempt a state regulation "even if the law is not specifically designed to affect such plans, or the effect is only indirect") (citing Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47, 107 S. Ct. 1549, 1553, 95 L. Ed. 2d 39 (1987)). But see Aetna Life, 869 F.2d at 146 (explaining that laws of general application, which are "often traditional exercises of state power or regulatory authority," are not preempted if their effect upon ERISA plans is incidental).

Regulation 146, appellants argue, is a state law of general applicability and any effect it has on ERISA-regulated plans is too tenuous and insubstantial to merit preemption. Appellees, on the other hand, contend that Regulation 146 is a law of specific applicability because it expressly refers to employee benefit plans; therefore, preemption is automatic. Second, even if the Court finds that the regulation is a law of general applicability, appellees assert, it has a connection to employee benefit plans because the cost of the pool payments, passed from the HMOs to their customers, will have a direct adverse impact on ERISA-regulated funds. Faced with higher rates, these employee benefit programs will be forced to either raise their premium fees or decrease the range of benefits available. ERISA is designed, appellees argue, precisely to avoid such an effect.13

State laws that refer to employee benefit plans fall within ERISA's preemptive scope. See, e.g., District of Columbia v. Greater Washington Bd. of Trade, --- U.S. ----, ----, 113 S. Ct. 580, 583, 121 L. Ed. 2d 513 (1992) ("Greater Washington") (finding that the act "specifically refers to welfare benefit plans regulated by ERISA and on that basis alone is preempted"); Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825, 829, 108 S. Ct. 2182, 2185, 100 L. Ed. 2d 836 (1988) (noting that "a state statute's express reference to ERISA plans suffices to bring it within the federal law's preemptive reach"). Once a statute is found to have a reference to an ERISA plan, the statute is preempted automatically; no further analysis of the "connection with" standard is required. See New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., --- U.S. ----, ---- - ----, 115 S. Ct. 1671, 1680-81, 131 L. Ed. 2d 695 (1995) ("Travelers") (commenting that when a state law refers to an ERISA plan, there is "no reason to distinguish between the effects on insurers that are sufficiently connected with employee benefit plans to 'relate to' the plans and those effects that are not").

Loosely defined, Shaw 's "reference to" prong may be read to include statutes which merely "make mention" or "allude" to ERISA plans.14 Such a reading, however, over-extends ERISA's preemptive scope because Sec. 514(a) preempts only those laws which "relate to" ERISA.15 Therefore, the "reference to" prong--derived, in fact, from Black's Law Dictionary 's definition of the word "relate"16--must be read to imply a relationship between the state law and ERISA plans.17

Furthermore, despite statements alluding to a stricter standard, the Supreme Court has never found a statute to be preempted simply because the word ERISA (or its equivalent) appears in the text. In Greater Washington, for example, the preempted worker's compensation statute required employers to provide to certain disabled employees health insurance coverage " 'equivalent to the existing health insurance coverage' " provided by the employer. --- U.S. at ----, 113 S. Ct. at 584 (quoting D.C.Code Ann. Sec. 36-307(a-1)(1) and (3) (Supp.1992)). Although the Court's first response is to comment that the statute "specifically refers to welfare benefit plans regulated by ERISA and on that basis alone is preempted," it continues in the same paragraph to observe that, to comply, employers had to evaluate employee benefits under their existing ERISA plan and then use those figures to calculate the benefits due to disabled employees. Id., --- U.S. at ---- - ----, 113 S. Ct. at 583-84. The interaction such compliance requires between the act and ERISA plans, the Court finds, forms a relationship between the two texts that is inconsistent with federal law.18

Accordingly, a state law has a reference to ERISA if its text mentions or alludes to ERISA plans, and if the law affects ERISA plans in some manner. Accord United Wire, 995 F.2d at 1192 n. 6 ("[T]he test for preemption ... is whether the existence of ERISA plans is necessary for the statute to be meaningfully applied.").

Regulation 146 defines "small group health policy" to include "a group remittance policy written by a carrier pursuant to Section 4304 of the Insurance Law and a group health insurance policy covering from 3 to 50 employees or members, exclusive of dependents and spouses...." N.Y.Comp.Codes R. & Regs. tit 11, Sec. 361.2(o ).19

The regulation's use of the word employee to modify group health insurance policy implicates ERISA. ERISA comprehensively regulates employee welfare plans, defined as "any plan, fund or program ... established or maintained by an employer or by an employee organization ... to the extent that such plan ... is maintained for the purpose of providing ... medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability [or] death." ERISA Sec. 3(1), 29 U.S.C. Sec. 1002(1)). Employee group health insurance policies fall within this definition. See, e.g., Greater Washington, --- U.S. at ----, 113 S. Ct. at 584 (equating the phrase " 'existing health insurance coverage of the employee' " to "welfare benefit plans regulated by ERISA") (quoting D.C.Code Ann. Sec. 36-307(a-1)(1) and (3) Supp.1992)).20

Regulation 146's allusion to ERISA, however, is not tantamount to a reference because the regulation can be applied without guidance from or interference with an ERISA plan. First, the calculation of an insurer's pool contributions or reimbursements is undisturbed by the presence, or absence, of an ERISA plan. Regulation 146 obliges insurers to calculate their contributions (or reimbursements) based upon that insurer's membership population, not on the benefits provided to those members under an ERISA plan. Whether any member purchases his policy through an employee benefit plan or directly from the insurer is meaningless; only the member's physical characteristics--his age and gender--are relevant.

Second, Regulation 146 is unconcerned with the contents of an insurer's benefits package. Although an insurer may choose to manipulate its membership roster by manipulating its benefits packages, Regulation 146 does not require any such changes; each insurer is free to offer the identical benefits it offered prior to the regulation's enactment.21

Absent a reference to ERISA, a law still may be found to relate to ERISA if it has a connection with employee welfare benefit plans. A law is connected impermissibly to ERISA plans if it has "an effect on the primary administrative functions of benefit plans, such as determining an employee's eligibility for a benefit and the amount of that benefit." Aetna Life, 869 F.2d at 146-47. See also General Electric Co. v. New York State Department of Labor, 891 F.2d 25, 29 (2nd Cir.1989) (stating that a "connection exists where a state statute prescribes either the type and amount of an employer's contributions to a plan, ... the rules and regulations under which the plan operates ... or the nature and amount of the benefits provided thereunder....") (citations omitted), cert. denied, 496 U.S. 912, 110 S. Ct. 2603, 110 L. Ed. 2d 283 (1990). If a connection is found, preemption generally is compelled unless the effect on the plan is "too tenuous, remote, or peripheral ... as is the case with many laws of general applicability." Shaw, 463 U.S. at 100, 103 S.Ct. at 2901.

Regulation 146's demographic pooling provision requires all New York insurance carriers with fewer high-risk or elderly consumers than the regional average to contribute money into an independently administered fund. Many HMOs, to which Regulation 146 expressly applies, are among those carriers which have statistically younger and less risky members than other carriers. The Blues, on the other hand, cater to statistically older and less healthy consumers. Consequently, HMOs, together with other similarly situated carriers, initially will support the fund from which the Blues will draw compensation.

Mindful that financial disbursements under the demographic pooling mechanism could deplete the HMOs' corporate reserves, the legislature built into Regulation 146 a provision designed to simplify the process for obtaining rate increases under Article 43 of the New York Insurance Code.22 Accordingly, any carrier that must contribute money into the demographic pool may "include [its] projected contributions in [its] premium rates as if the contributions were claims expenses...." N.Y.Comp.R. & Regs., tit. 13, Sec. 361.1(e)(1).23 Most HMOs have used these simplified procedures to obtain rate increases based, in part, on their anticipated contributions to this pool.24

Employee benefit plans or funds are among those customers whose rates are affected by Sec. 361.1(e)(1). Faced with increased rates, those plans must either pass the rate increases on to their customers or circumscribe the benefits which had been offered at the previous, lower rate. Thus, the cost of Regulation 146 is borne ultimately by the individual insureds, the majority of whom purchase health care insurance through employee benefit plans. See New England Health Care Employees Union District 1199 v. Mount Sinai Hosp., 846 F. Supp. 190, 195 (D.Conn.1994) ("According to current United States census data, 70 percent of all privately-insured persons are covered by ERISA plans.").

The surcharges' effect on insurers reflects the legislature's design: to make competing insurance plans less attractive than the Blues by increasing their cost to the consumer. However, by forcing insurers to raise their rates to cover the cost of the surcharges, the state indirectly forces ERISA plans to either increase plan costs, reduce benefits or change insurers. This result, appellees argue, creates an impermissible connection between Regulation 146 and ERISA plans.

The Supreme Court's recent analysis of ERISA's preemptive scope in Travelers, however, forecloses appellees' argument. In Travelers, the state, similarly motivated by the Blues' financial crisis, devised a plan by which hospitals would collect a surcharge--in addition to the pre-set diagnostic-related-group ("DRG") fee schedule otherwise permitted--from commercial insurers and HMOs. To compensate for the higher hospital fees, insurers affected by the state's surcharge scheme raised their premium rates to cover the additional expenses. Consequently, the Blues, exempted from the surcharges, became economically more attractive as insurers because they offered relatively cheaper policies. As a result, the surcharges encouraged ERISA plans to transfer coverage to the Blues to avoid paying higher premiums.

Certainly, as the Court found, the manipulation of health care prices affects ERISA plans.

Although there is no evidence that the surcharges will drive every health insurance consumer to the Blues, they do make the Blues more attractive (or less unattractive) as insurance alternatives and thus have an indirect economic effect on choices made by insurance buyers, including ERISA plans.

Travelers, --- U.S. at ----, 115 S. Ct. at 1679. Congress's intent, however, was not to foreclose every state action with a conceivable effect upon ERISA plans, but to maintain exclusive federal control over the regulation of such plans. The health care price manipulation at issue in Travelers does no harm to the latter.

An indirect economic influence ... does not bind plan administrators to any particular choice and thus function as a regulation of an ERISA plan itself; commercial insurers and HMOs may still offer more attractive packages than the Blues. Nor does the indirect influence of the surcharges preclude uniform administrative practice or the provision of a uniform interstate benefit package if a plan wishes to provide one. It simply bears on the costs of benefits and the relative costs of competing insurance to provide them. It is an influence that can affect a plan's shopping decisions, but does not affect the fact that any plan will shop for the best deal it can get....

Id.25 In other words, an indirect economic effect upon ERISA plans generally provides a connection too "tenuous, remote or peripheral" to justify preemption.26 Id., --- U.S. at ----, 115 S. Ct. at 1680 (quoting Shaw, 463 U.S. at 100 n. 21, 103 S. Ct. at 2901 n. 21).

Here, Regulation 146's effect on ERISA plans is no less indirect. By increasing the relative cost of avoiding the high-risk market, the regulation creates an incentive for insurance companies either to raise their rates to meet the cost of pool contributions or to attract enough high risk members to avoid payments to the pool. In either case, however, the benefits package insurers offer to ERISA plans depends not upon the pooling provision, but upon the insurer's own cost-benefit analysis. Regulation 146 merely adds another factor to the same equation insurers balance daily.

Furthermore, an insurer's analysis presumably will take into account the more important factor in this Court's decision that Regulation 146 is not connected to ERISA plans: that, however insurers choose to proceed, ERISA plans remain free to make a similar cost-benefit analysis and to choose a more competitive alternative. Thus, the only link Regulation 146 has with ERISA plans is its indirect effect on rate diversification among insurers. As the Travelers Court noted, however, such an effect is immaterial for preemption purposes because insurance "cost-uniformity was almost certainly not an object of preemption." --- U.S. at ----, 115 S. Ct. at 1680.27

In sum, Regulation 146 is not related to ERISA plans because it has neither a reference to nor a connection with those plans. Although the regulation contains an allusion to ERISA plans, that allusion does not associate the regulation with the plans' administration, enforcement or policy compositions. Additionally, because ERISA's preemption clause is not intended to reach state actions which impact only upon the relative cost of insurers' products, Regulation 146 is not connected with ERISA. Therefore, preemption is inappropriate under ERISA's Sec. 514(a).

Appellees also claim that Regulation 146 is preempted by the Federal Employees Retirement Income Security Act of 1974 ("FEBHA"), 5 U.S.C. Secs. 8901-8914 (1988 & Supp. IV 1992). The District Court made no findings as to this claim by appellees. Therefore, appellees' FEHBA claim is remanded to the District Court for further findings.