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November 12, 1991


The opinion of the court was delivered by: Haight, District Judge:


Plaintiffs Medical Society of the State of New York et al. ("Plaintiffs") move for summary judgment pursuant to F.R.C.P. 56. Plaintiffs contend that Chapter 572 of the Laws of New York (codified at N.Y. Public Health Law § 19) is (1) preempted by the Health Insurance for the Aged Act ("Medicare Act;" the "Act"), 42 U.S.C. § 1395 et seq. and (2) violative of the Due Process Clause of the Fourteenth Amendment to the United States Constitution. Defendants Mario M. Cuomo and David M. Axelrod, M.D., respectively the Governor of New York and at the pertinent times its Commissioner of Health, contest plaintiffs' assertions, and cross-move for summary judgment. For the reasons stated below, this Court finds that Chapter 572 is not preempted by the federal statute, nor does it violate the Fourteenth Amendment.


The federal Medicare program was established in 1965 with the enactment of the Medicare Act. Persons 65 years and older are eligible under the provisions of the Act, as well as certain disabled individuals, regardless of ability to pay. § 1395c.

Part B of the Medicare Act ("Supplementary Medical Insurance Benefits for the Aged and Disabled"), § 1395j-1395w, provides an insurance plan under which medical services for eligible persons are paid by the Federal Supplementary Medical Insurance Trust Fund via a local carrier. In most instances, the program covers 80% of the "reasonable charge"*fn1 for services rendered, with the beneficiary paying the remainder.

Two billing methods were devised for payment of benefits. § 1395u(b)(3)(B). The first method provides for payment "on the basis of an itemized bill." This method, commonly known as "balance billing," is the source of the controversy at bar. Balance billing allows a physician to bill a Medicare beneficiary an amount in excess of the reasonable charge, with the local carrier reimbursing the beneficiary for 80% of the reasonable charge. The second method, "assignment," restricts a physician's fee to the reasonable charge, with the physician being reimbursed by the local carrier for 80% of the fee and the remaining 20% being paid by the beneficiary.

Under both payment plans, Medicare pays for 80% of the reasonable charge. The difference lies in the actual fee. Balance billing "provides a `safety valve' for physicians who believe that the fee schedule does not adequately reflect the quality of services they provide." Physician Payment Review Commission ("PPRC"), 1989 Annual Report to Congress at 137. Supporters of balance billing argue that it gives beneficiaries access to quality medical services. Although the total cost of medical services is higher than the reasonable charge level, they say that Medicare pays a large enough portion of the physician's fee to justify the excess cost.

Not surprisingly, opponents of balance billing assert that "extra bills become out-of-pocket liabilities." PPRC, 1988 Annual Report to Congress at 130. They also note that many beneficiaries are unaware of their insurance options and so may not learn that their physicians balance bill until after the medical services are performed. The beneficiaries only learn of their personal liability after the fact — when it is too late to make other arrangements.

Recognizing the growing concern over balance billing, Congress, in the mid to late 1980's, adopted several plans to remedy the situation. In 1984, Congress initiated the "Participating Physician's Program." This program required physicians to either accept assignment for all billings in the coming year (a "participating physician"), or decide whether to balance bill on a case-by-case basis (a "non-participating physician"). To encourage physicians to participate and agree to assignment of all claims, several incentives were created: (1) participating physicians were listed in a special directory distributed to beneficiaries; (2) a higher reasonable charge was allowed for participating physicians, § 1395u(b)(4)(A)(iv); and (3) a freeze was placed on the amount physicians could balance bill § 1395u(j)(1).

In 1986, the freeze was lifted and replaced with a "maximum allowable actual charge" ("MAAC"), which capped the yearly increase allowed for physicians who balance bill. § 1395u(j)(1). In addition, the PPRC was established to "make recommendations to Congress . . . regarding adjustments to the reasonable charge levels for physicians' services . . . and changes in the methodology for determining the rates of payments, and for making payment, for physicians' services . . ." § 1395w-1(b)(1).

Finally, in 1989, balance billing was capped at a "limiting charge." Under the new provisions, a cap of 25% (or in some instances 40%) above the "recognized payment amount"*fn2 was imposed for 1991. The cap was lowered to 20% for 1992 and 15% beginning in 1993. § 1395w-4(g)(2).

In 1990, New York passed Chapter 572. Under that Chapter, the limiting charge for physicians who balance bill federal Medicare beneficiaries was capped at 15% above the federal reasonable charge for 1991. In 1993 the cap will be reduced to 10%, and 5% if claims billed at or below the reasonable charge do not increase in 1992 by 5% from their 1989 level. Physicians who violate this provision are subject to fines following a hearing. First-time violators may be fined a maximum of $1,000, while subsequent violations within five years trigger a maximum fine of $5,000. In addition, the physician must refund to the beneficiary the excess money collected. Chapter 572, unlike the federal statute, has no requirement of willfulness or knowledge on the part of the violator. Compare with 42 U.S.C. § 1395w-4(g)(1).

At the same time that Congress was considering changes in the balance billing program, various states considered, and in several cases adopted, their own restrictions on balance billing. Massachusetts prohibited the practice altogether in 1985. Physicians who failed to comply with the new state law could not obtain or renew their Massachusetts medical license. 243 C.M.R. 2.07(15); Mass. G.L.c. 112, § 2. In addition, disciplinary action could be taken against violators. 243 C.M.R. 103(8), 1.05(5); Mass. G.L.c. 112, § 5 (1986 Supp.). The legislation prompted a legal challenge, but in Massachusetts Medical Society v. Dukakis, 815 F.2d 790 (1st Cir. 1987), cert. denied 484 U.S. 896, 108 S.Ct. 229, 98 L.Ed.2d 188 (1987), the First Circuit upheld the state statute, ruling that it was not preempted by the Medicare Act.

In the years that followed, Congress enacted the amendments discussed above. After passage of the 1989 Amendments, Pennsylvania enacted its own law prohibiting balance billing. In Pennsylvania Medical Society v. Marconis, 755 F. Supp. 1305 (W.D.Pa. 1991), the district court upheld the state statute against a challenge, on preemption grounds, by the Pennsylvania Medical Society. The Third Circuit affirmed. 942 F.2d 842 (3d. Cir. 1991).


I. Preemption

The Supremacy Clause of the United States Constitution, Article IV, Cl. 2, lies at the heart of this case. It provides:

  This Constitution, and the Laws of the United
  States which shall be made in pursuance thereof;
  and all Treaties made, or which shall be made,
  under the Authority of the United States, shall
  be the supreme Law of the Land; and the Judges in
  every State shall be bound thereby, any Thing in
  the Constitution or Laws of any State to the
  Contrary notwithstanding.

The case at bar involves a law — the Medicare Act — that has been promulgated by the United States Congress. As its constitutionality has not been challenged, it is presumptively made "in pursuance" of the Constitution and is thus the "Supreme Law of the Land." What remains to be decided is whether ...

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