Court Holds Maryland Health Care Law Is Preempted by ERISA

Recently, proposals have been considered by a number of state legislatures and other government bodies that seek to address the lack of health insurance among the "working poor" by requiring some or all employers operating in the jurisdiction to provide a minimum level of coverage to their employees. Such initiatives often would be enforced by assessing a charge or tax against non-complying employers, that would then be used to provide coverage for the uninsured. Legislation along these lines has already been adopted in Maryland, as well as by the Chicago City Council. Massachusetts has adopted somewhat different legislation that is designed to provide universal health coverage for citizens of that state.

A federal District Court recently held that ERISA preempts Maryland's Fair Share Healthcare Fund Act (Fair Share Act). The Fair Share Act required all employers with more than 10,000 workers resident in Maryland to fund employee health care at 8% of total wages (6% in the case of non-profit employers) or, alternatively, pay into Maryland's Medicaid fund the difference between the employer's actual health care spending and the required percent. As a practical matter, the only Maryland for-profit employer immediately affected by the Fair Share Act was Wal-Mart Stores, Inc.

On behalf of employers (particularly Wal-Mart), the Retail Industry Leaders Association sued Maryland in the U.S. District Court for Maryland. On July 19, the court ruled that ERISA preempts the Fair Share Act. By making this ruling, the court has made a significant contribution to the debate regarding such "fair share" laws. If the court's reasoning is affirmed on appeal, it could potentially have an adverse impact on other laws that have similar objectives.

The court's opinion passed over several jurisdictional arguments and rejected a constitutional issue, instead concentrating on how the Fair Share Act would contribute to inconsistent health care spending mandates in different states and localities. The court held that one of ERISA's core purposes is allowing nationwide employers to maintain nationwide health and welfare plans that are subject to uniform national rules and administration. The court found that the inconsistent local spending mandates caused by "fair share" laws would force large national employers to segregate the funds they spend on health care into different geographic pools of money. For this reason, the court found that the Fair Share Act directly conflicted with ERISA's core goal of uniformity (and also rejected comparisons to ERISA cases that had less-direct conflicts). Based on its finding of a clear conflict between the two laws, the court concluded that ERISA must preempt the Fair Share Act.

While the immediate result of the Maryland District Court's ruling would only be that Wal-Mart is not subject to the Fair Share Act, the parties have agreed to expedited handling to get the appeal of the decision to the Fourth Circuit before the Act's scheduled January 1, 2007 effective date. Thus, the ultimate outcome remains uncertain. What is certain is that other states considering enactment of similar "fair share" laws are watching this case with interest.