February 20, 2006

How the Most Boring Law Ever Determines the Shape of American Healthcare, Part 1

Carroll Andrew Morse

Rhode Island is one of several states where a bill pending in the state legislature would, if passed, impose penalties on large companies that do not spend a specified amount on employee health insurance (House bill 6917). In Maryland, such a requirement has already been passed into law, but is being challenged on the grounds that the Federal government prohibits any state regulation of employer-sponsored healthcare plans. OpinionJournal summarized the case last week...

The Maryland statute required employers with more than 10,000 employees to spend at least 8% of its payroll on health care. Only one company fit the bill: Wal-Mart....

The good news is that the judiciary isn't likely to let such legal gerrymandering stand. The [Retail Industry Leaders Association] argues that both laws run afoul of the Employee Retirement Income Security Act of 1974, widely known as Erisa. One of Erisa's goals was to create a system in which nationwide employers could offer workers uniform benefits, free of conflicting state mandates...

The legal term is that ERISA "preempts" any state regulation of employer-sponsored benefit plans. In the case of District of Columbia v. Greater Washington Board of Trade (1992), a case involving a law similar to the Maryland and Rhode Island laws (and cited in a letter prepared for the Maryland Chamber of Commerce explaining how ERISA limits the regulation options available to state legislatures), the United States Supreme Court explained how very broad the scope of ERISA preemption is...
ERISA sets out a comprehensive system for the federal regulation of private employee benefit plans, including both pension plans and welfare plans. A "welfare plan" is defined in 3 of ERISA to include, inter alia, any "plan, fund, or program" maintained for the purpose of providing medical or other health benefits for employees or their beneficiaries "through the purchase of insurance or otherwise."...

ERISA's pre-emption provision assures that federal regulation of covered plans will be exclusive. Section 514(a) provides that ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" covered by ERISA.

The original focus of ERISA was not on health insurance, but on pension plans. The bankruptcy of the Studebaker automobile manufacturing company, which left thousands of employees unable to collect pension benefits they had earned, motivated legislative action on benefit regulation. The primary goal of ERISA was to apply strengthened reporting and funding rules to employer-sponsored benefit plans, reducing the likelihood that such plans would go bankrupt in the future.

To encourage businesses to continue to offer their employees benefit plans under the tougher regulations, ERISA gave employers two major breaks (in addition to tax-breaks) in the regulatory regime that it created. One was this idea of preempting any state laws. Large multi-state companies would not have to worry about operating under different regulations in different states. Secondly, ERISA reduced the risk involved in offering a benefit plan by limiting damages in benefit-related lawsuits to the exact amount of a benefit owed. If a company failed to pay out $1,000 it owed to an employee, the employee could sue for that $1,000, but not for any additional harm caused by the failure to recieve the $1,000 at the proper time.

Health insurers saw in ERISA a giant loophole that could be exploited to their advantage....