WASHINGTON -- The Supreme Court yesterday let stand a lower court decision allowing the U.S. government to confiscate interest that Pennsylvania earned on a federally subsidized self-insurance fund it set up to finance health benefits for its employees.

By declining to hear the case, the justices left intact a decision by the U.S. Court of Appeals for the Third Circuit, which Pennsylvania has warned would affect 26 others states that have federally subsidized self-insurance funds.

The appeals court ruling sets "a far-reaching precedent which will be applicable to half the states in this country and millions of dollars in interest," the state said in a legal brief filed with the Supreme Court.

The federal government routinely reimburses states for costs they incur in helping to administer federal programs. In this case, the U.S. Department of Health and Human Services was contributing to a self-insurance fund set up by Pennsylvania to provide health insurance for state employees who were running department programs in the state.

When it audited those programs in 1989, the health department discovered that Pennsylvania had invested the self-insurance fund's moneys in interest-bearing securities and was pocketing the interest, U.S. Solicitor General Drew S. Days said in a legal brief filed with the high court.

The investments "resulted in increased revenues which [Pennsylvania] neither reinvested in the self-insurance fund nor refunded to the federal government," Days said.

The health department demanded that Pennsylvania turn over the interest it had earned in fiscal years 1988 and 1989.

Pennsylvania challenged the health department's decision in the U.S. District Court for the Middle District of Pennsylvania and won. But the U.S. Court of Appeals for the Third Circuit overturned the ruling, ordering Pennsylvania to relinquish the interest to the health department.

The state based its appeal to the Supreme Court on the language of the Intergovernmental Cooperation Act of 1968. That statute says a state "is not accountable for interest earned on grant money pending its disbursement for program purposes."

But the federal government sided with the appeals court ruling, which "correctly held that funds held indefinitely in reserve accounts that earn interest paid into the state's general treasury did not represent money held ~pending disbursement for program purposes,'" Days said in his brief.

The amount earned by the state is also in dispute. The Department of Health and Human Services said the total amount of interest it is entitled to is about $10 million, but Pennsylvania contends little or no interest was earned, according to Henry F. Siedzikowski, a lawyer representing the state.

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