The Supreme Court decision could spawn settlements along with legislation to address unresolved issues, according to attorneys.

June 14—A recent U.S. Supreme Court decision in favor of pension-law appeals by three religiously affiliated hospital systems was deemed a credit positive for such entities. However, further litigation is likely.

On June 5, the court unanimously reversed appeals court decisions in the three consolidated cases referred to as Advocate Health Care Network v. Stapleton. The court held that employee benefit plans maintained by religiously affiliated hospital systems are exempt from the Employee Retirement Income Security Act of 1976 (ERISA) as “church plans,” regardless of whether a church established the plan.

The consolidated class-action lawsuits involved pension challenges filed against Advocate Health Care, St. Peter’s Healthcare, and Dignity Health. District courts around the country were split in their decisions. The decision echoed IRS rulings since the early 1980s that pension plans established by employers of religiously affiliated organizations—including hospitals, schools, nursing homes, and social services organizations—also may qualify as church plans.

Subsequently, Moody’s Investor Service described the ruling as a credit positive (registration required) for hospitals with church plans “because it maintains their pension funding flexibility and allows them to avoid large payments to bring plan funding up to ERISA guidelines. It also removes the risk of large monetary settlements with hospital employees litigating the funding levels of their pensions without ERISA protections.”

An attorney for the health systems had warned during arguments that such entities could face up to $66 billion in estimated costs if the court decided against them.

“It could have been a big financial hit to these organizations if the decision had gone the other way,” said Mark Chopko, an attorney at Stradley Ronon Stevens & Young and outside counsel for the Catholic Health Association.

More than two-dozen similar lawsuits against hospitals and health systems are pending the Supreme Court decision. Moody’s noted that the ruling benefited not just the three health systems that appealed the case to the Supreme Court but also “dozens of other hospitals whose church plan status has been questioned or subject to lawsuit.”

“If the Supreme Court had said, ‘The circuit courts got it right,’ there would be hundreds, if not thousands, of church plans out there where the plaintiffs would just win automatically,” said David Godofsky, an attorney at Alston & Bird.

The ruling also came at an opportune time for hospitals that operate church plans, Moody’s noted, because the Pension Benefit Guaranty Corporation (PBGC) recently began raising the interest rate it charges to insure plans that are not funded above a certain threshold. If the Supreme Court had sided with the employees, the hospitals would have been required to follow ERISA law, pay insurance to PBGC, and fully fund their plans according to federal regulations.

“Because church plans are not subject to ERISA, they are not subject to PBGC oversight and are therefore exempt from paying the interest rates, which are set to rise to at least 4.1 percent by 2019, from 3.4 percent in 2017 and as low as 0.9 percent in 2013,” the Moody’s report stated.

Unresolved Issues

The High Court left several unresolved issues. The decision did not address whether the hospitals or their benefits committees qualified as “principal-purpose organizations” that would be eligible for the exemption. The court also did not define being “controlled by or associated with” a church or a convention or association of churches. Both issues left open the possibility of future litigation, according to those on both sides.

“This is where there is almost certain to be ongoing litigation,” Godofsky said.

Joellen Leavelle, a spokeswoman for the Pension Rights Center, said the two outstanding legal issues eventually could be appealed back to the Supreme Court.

“We’re in the middle of a very long process,” Leavelle said in an interview.

Leavelle said many of the outstanding related cases in lower courts were “paused” pending the Supreme Court decision. But that pause may continue until the remaining legal questions are resolved.

A related issue over which plaintiffs plan legal action is whether the church plan exemption is constitutional, according to G. Daniel Miller, an attorney with Conner & Winters,  an architect of the 1980 amendment to ERISA that expanded the church plan exemption, and a church benefits specialist.

“That’s another issue they have indicated they plan to pursue,” Miller said in an interview.

More Settlements?

The cases stem from a series of high-profile class-action lawsuits that were filed beginning in 2013 by groups of hospitals and employees who claimed their employer health systems underfunded their pension plans. The plaintiffs have said some hospital employees are fearful that amid hospital consolidations, pensions not backed by ERISA may not protect employees.

Leavelle noted that some health systems settled the lawsuits in anticipation of the Supreme Court decision. Some settlements ranged from $100 million to $300 million.

The court’s decision could produce more such settlements as health systems see a strengthened negotiating position.

“It wouldn’t surprise me if a number of these cases that are still pending settle now that this one issue has been resolved, and the healthcare systems decide that rather than go on with protracted litigation they will enter a settlement agreement,” said Miller, who does not represent hospitals in such cases.

Legislation Possible

Another likely possibility is that the recent decision will spawn legislation to resolve the matter, according to Miller.

A concurring opinion by Justice Sonya Sotomayor specifically questioned whether such large health systems should be exempt from ERISA and opined that Congress likely would look at them differently today than in 1980.

“She raised a point that no doubt others will think about on the plaintiffs’ side, which is to go to Congress,” Miller said.

Godofsky, who sees a “significant” chance for legislation, said not-for-profit hospitals are influential with many members of Congress as impactful organizations in their local communities. But plaintiff’s attorneys are likely to rally legislative support from their traditional allies in the Democratic Party.

“The tricky part with that legislation is: Will it be prospective or will it cut off litigation with respect to prior conduct?” Godofsky said. 

Others see legislation on the issue as less likely.

“In this case, the court says that the Congress is reading it the same way that the U.S. government is reading it, so everybody agrees that’s what the statute means,” Chopko said in an interview.

More likely, next developments will occur in the lower courts to which the Supreme Court has sent the case to address the unresolved issues, Chopko said.

“The action will now shift to the parties to say, ‘Well, is the case over or isn’t it?’’’ Chopko said.

Rich Daly is a senior writer/editor in HFMA’s Washington, D.C., office. Follow Rich on Twitter: @rdalyhealthcare

Publication Date: Wednesday, June 14, 2017