Heleni Smith

 

While the Employee Retirement Income Security Act (ERISA) was enacted in order to protect employee benefits, it has unwittingly hindered patient rights by restricting the legislation states can enact in relation to employer sponsored health plans. This becomes an even more critical side effect with the enactment of the Patient Protection and Affordable Care Act. Should Congress amend ERISA in order to allow for states to freely experiment with health care reform?

 

Introduction

ERISA was enacted in 1974 in order to protect pension plans and create a national set of standards for the administration of employee benefit plans. The uniformity of pension plans would eliminate the legislative variation between states, thus protecting employers and employees. ERISA’s authority over health benefits has been ambiguous, mostly because of Section 514 which includes the preemption clause and the deemer clause.

Due to this ambiguity, many state initiatives have been either stalled or completely derailed because of an ERISA challenge. Examples of this include Maryland’s “Fair Share Act” and California’s “Health Care Security and Cost Reduction Act”.  With the Patient Protection and Affordable Care Act enactment, addressing the ERISA preemption problem becomes an even more critical issue in order to allow states to experiment with new programs. Steps need to be taken to either amend ERISA or have the Courts produce a comprehensive ruling.

 

Background

ERISA was enacted in 1974 in order to regulate pension plans and address the problem of conflicting regulations across the nation. According to Jennifer Staman and Edward C. Liu, Congress’s main goal in enacting ERISA was to allow the federal government to establish uniform employee benefit plan guidelines, thus protecting employees from varying state and local regulations.[1]

Its scope came to included health care provided as part of an employee’s benefit package. According to Peter Jacobson, while ERISA does not force employers to provide health insurance, it provides them with a national structure should they choose to do so. Traditionally, health care delivery has been regulated by the states. [2] While ERISA does not interfere with a state’s attempts to regulate the underlying insurance carrier, it does have authority over health insurance provided under self-insured employee benefit plans due to section 514.

Congress included Section 514 – which allows ERISA to preempt any state regulation of employment benefits – in order to facilitate the uniformity needed to keep national administrative costs down and variation out. [3] While the language may be vague when it comes to health benefits, the U.S. Supreme Court has interpreted it as pertaining to any state law that interferes with ERISA’s main purpose of uniformity.[4]

The two incremental parts of the ERISA 514 section are section 514(b)(2)(A)  and section 514(b)(2)(B). Section 514(b)(2)(A) , also known as the “saving clause”, states that state laws are not preempted by ERISA if they involve regulations over insurance, banking, and securities. This allows states to regulate health insurance and create regulations that are more descriptive than the guidelines that ERISA has provided.[5] The legislation though also provides a loophole through which certain types of health coverage do fall under ERISA’s jurisdiction; Section 514(b)(2)(B), also referred to as the “deemer clause”, distinguishes between traditional individual health insurance and certain health benefits provided through an employer. In relation to these sections, the Supreme Court has found that self-insured health plans do not fall into the insurance category, and are thus preempted by ERISA. [6]

Section 514 of ERISA is often seen as an obstacle for states trying to enact laws that affect employer-based health benefits[7]. While this section’s purpose was to provide preemption from state laws in order to achieve uniform benefits at a national level, it has actually allowed certain plans to be exempt from state laws while other plans are not, thus perpetuating an non-uniform state. This is exemplified in Shaw v. Delta Airlines, where a New York law mandating pregnancy-related benefits was found preempted by ERISA.[8]

Due to the ambiguous language in ERISA, the U.S. Supreme Court has taken various stances around the preemption issue. Traditionally, it has sided with a broad interpretation of the preemption clause arguing that this is aligned with Congress’s original intentions of fostering a nationally uniform plan that would lower employee benefit plans’ administrative costs, thus encouraging more employers to offer them.[9] According to Mary Chibra-Martin, during the 1980’s and the early 1990’s, Congress preempted almost every law that interfered with employee health benefit plans. During the mid- 1990’s, it became more strict when applying the preemption clause. Recent years show a trend of the courts going back to a more broad application of the preemption clause in relation to health benefits.[10]

 

 

Issues

ERISA plays a major role in health care reform for two reasons. First, it affects a large part of the current insured population due it its preemption clauses. Second, it inadvertently affects the large number of uninsured individuals by stalling many major health reform initiatives. The first reason’s importance can be seen by looking at the number of individuals covered by ERISA’s preemption clauses. In the United States, approximately 170 million individuals, or 67% of the non-elderly population, get their health insurance through their employer. It is approximated that 55% of these individuals receive it through self-insured plans.[11] Accordingly, the second reason’s importance is illustrated by the high percentage of uninsured individuals. The Congressional Budget Office projected that in 2009, one in six nonelderly individuals in the United States was without health insurance.[12]

Due to the large number of uninsured individuals and the decrease in the number of employers offering health insurance, many states have tried to enact laws that will ameliorate the situation. These efforts usually materialize in the form of “fair share laws.” These laws require employers to pay a specific amount of their employees’ health insurance or to contribute to a fund designated for the medical expenses of uninsured individuals.[13] These laws intentions are two fold; they address the issue of reducing the number of uninsured while simultaneously addressing the issue of financing their care.[14]

According to Chirba-Martin, 14 states have already tried to – or contemplated – passing such laws, with only Massachusetts and Vermont being able to successfully do so. Chirba-Martin also argues that the complexity of the 514 clause has created a “chilling effect” across states that are contemplating such reforms. She claims that often the costs of fighting a possible ERISA challenge halts states from ever trying to implement such laws. Examples of this include New Mexico’s “Health Solutions for New Mexico” and California’s “Health Care Security and Cost Reduction Act”. Oregon recently passed various health reforms, but postponed any employer mandates while pushing for Congress to take action that will allow states to more comfortably experiment in this area. Other states currently pursuing reform involving employers include New York with “Partnership for Coverage Initiative” and Pennsylvania with “Prescription for Pennsylvania”. [15]

In addition to the chilling effects described above, other state initiatives have been faced with an ERISA challenge. These include Maryland and San Francisco; two “fair share laws” that had very different outcomes when brought to court against preemption allegations. Massachusetts has successfully passed a “fair share law,” but there are concerns that an ERISA challenge might eventually be brought up against it.

Maryland: According to Frank Vedor in the article “The Conflict between ERISA and Local Healthcare Reform”, Maryland was the subject of the first ERISA preemption case brought to the Courts of Appeal. [16]. In January of 2006, Maryland passed the Fair Share Act requiring employers with more than 10,000 employees to spend 8% of their payroll costs towards health benefits or to pay an approximate amount to the state. This was partly a response to the increasing costs of Medicaid. Wal-Mart was the only employer in Maryland to qualify as having more than 10,000 employees, and thus was the only company subject to the act.[17] The Fair Share Act was challenged by the Retail Industry Leaders Association on the grounds that it was not a law of general applicability. The Fourth Circuit sided with the RILA on the grounds that the new law disproportionally affected Wal-Mart while excluding non-profit organizations of the same size and smaller for-profit companies.[18]Fedor also mentions that the courts argued that the act did not present Wal-Mart with a rational choice, because no employer would opt to give money to the state instead of giving it to its employees. The majority opinion argued that if this was allowed, it would lead to Wal-Mart having to tailor its benefits for every state, a consequence that Congress had tried to prevent with the enactment of ERISA. The dissenting view argued that the increasing cost of Medicaid had to be addressed, and that the federal government actually counted on states to take such experimental initiatives to see whether they work. [19]

San Francisco: In July of 2006, San Francisco enacted the “San Francisco Health Access Program”, also known as “Healthy San Francisco”. The act required for-profit businesses with 20 or more employees and non-profit organizations with 50 or more employees to either provide health coverage for their employees, make health related payments on behalf of their employees, or pay a fee to the city. This was met with much disdain from the business community, and soon the Golden Gate Restaurant Association sued claiming the act was preempted by ERISA. The Ninth Circuit held that since it applied to various types of employers (in contrast to Maryland and Wal-Mart) and since it provided employers with various choices and did not force them to create ERISA plans, it was not preempted.[20]

Massachusetts: In April of 2006, Massachusetts passed a law mandating that all residents have health insurance. In order to fund this law, Massachusetts also enacted an employer spending mandate. Employers that have eleven or more employees must either provide them with health insurance or pay an annual fine of $259 per uninsured employee. This law has not been faced with an ERISA challenge yet.[21] This may be attributed to either the strong support from business groups for the initiative or the small penalty imposed when opting out of the mandate. However, it is still uncertain whether an ERISA challenge will be brought up against the law and whether the law would be able to survive such a challenge.[22]

As illustrated by the above cases, ERISA places dire constraints on the initiatives states can take in respect to health coverage. While some argue that states can expand care through venues that don’t involve employers, this disregards the issue of financing such projects. Especially during the current economic climate, states are going to be much less capable of financing said proposals independently. As Christopher J. Frankenfield states in the Journal of Health Care Law & Policy, “the enactment of federal health care legislation does not reduce the necessity and urgency for the Supreme Court to intervene (…).”[23]

ERISA’s warped effect over healthcare reform manifests through the preemption clause. The confusion regarding the preemption’s scope is going to deepen with the passage of the Patient Protection and Affordable Care Act because, according to Chirba-Martin, the new law includes a state “fair share law” incentive without addressing the previous and existing debates over the viability of these programs under ERISA.[24] According to Chirba-Martin, even though ERISA’s preemption clause was ranked among the top 8 significant issues that needed to be addressed by the new health care reform, Congress chose not to address it in the Patient Protection and Affordable Care Act.[25]

While the Patient Protection and Affordable Care act also requires states to provide some minimum level of health benefits, it is still unclear how this will be implemented in relation to employer based coverage. [26]As described by Christopher J. Frankenfield in the article “The Relationship Between ERISA, State and Local Health Care Experimentation, and the Passage of National Health Care Reform”, ERISA acts as a ceiling in respect to the initiatives state and local governments are able to take in order to ameliorate the health care problem because any state-level initiative to experiment with reform must consider the ERISA preemption.[27]

 

According to Peter D. Jacobson, the ERISA preemption problems are ironic because while the law was enacted to make health and welfare benefits more easily administered, it is now blocking states’ initiatives to better administer health insurance.[28] What furthers the irony is the fact that ERISA was intended to protect employees and their benefits. As stated by Paul M. Secunda in the article “Sorry, No Remedy: Intersectionality and the Grand Irony of ERISA”, ERISA has become the “Employers’ Protection Act” .[29]

 

Possible Solutions

According to Fedor, initiatives to redesign healthcare financing face not only financial disputes, but also ideological ones. By addressing the legal side of the issue, states will have an easier time moving forward with the remaining disputes. The Courts need to realize this and pass a clear ruling in relation to ERISA. If not, then Congress needs to step in and properly amend the legislation.[30]

The Supreme Court holds the belief that any steps to changing ERISA should be taken by Congress.[31] It has argued that social policy should be made be elected representatives.[32]Congress can put in place waivers that allow states to experiment with health reform, without being challenged by ERISA. Another option would be to actually amend ERISA. Since many aspects of the Patient Protection and Affordable Care act won’t be realized for years, it is important for states to experiment with various health initiatives in order to improve the health coverage problem in the short term. Accordingly, in the long term, amending ERISA will allow states to expand on provisions of the national health care law.[33]

 

Analysis

While the opposition argues that “fair share laws” are a bad idea because they may lead to businesses leaving the states where these are enacted, or worse, they might lead to employers dropping health coverage and opting to pay the monetary fine, the example of Massachusetts shows that this is not the case.[34]

While the courts found that San Francisco’s “Healthy San Francisco” was not preempted by ERISA, the opposition argues that the courts neglected ERISA’s original purpose of regulatory uniformity in an attempt to preserve state autonomy.[35] According to Landon Wade Magnusson, the Ninth Circuit attempt to protect the state’s sovereignty came at the price of neglecting ERISA’s fundamental purpose. He argues that the ruling may be dangerous in that it will set precedent for future cases.[36] While national uniformity does have its benefits, allowing states to have more power in creating healthcare reform programs will be beneficial because the states will be able – and better equipped – to tailor said initiatives to their own demographics and idiosyncrasies.

The opposition to amending ERISA also argues that states have other venues of experimentation that do not conflict with ERISA. For example, any type of individual mandate will not interfere with ERISA.[37] Accordingly, any state laws of general applicability, for example a law mandating hospital bill surcharges on carriers, will not face an ERISA challenge because of their indirect effect on employee benefit plans[38]. While these initiatives are also beneficial and should be explored through various experimental programs, they are not exhaustive. The sheer number of individuals whose health plans are covered by ERISA is indicative of the dire need to address the aforementioned issues.

While having the Supreme Court pass a ruling that clearly defines ERISA’s jurisdiction is the easiest solution, it is neither the most concrete nor the most comprehensive. Such action would be beneficial, but insufficient if done in isolation. It still leaves the proverbial door open to future rulings contradicting their findings due to the idiosyncrasies of each case that is brought to the courts.

I believe that Congress has the appropriate tools trough which to clearly define ERISA’s preemption scope in the long run. By amending ERISA and allowing states to experiment with employer based healthcare reform, it will allow the Patient Protection and Affordable Care Act to flourish by allowing states to tailor reform to their own needs and demographics.

 

 

Conclusion

ERISA has been the vehicle through which many healthcare reform initiatives have been brought to court on preemption allegations. While Congress enacted ERISA with employees’ best interests in mind, it has unintentionally created the means through which many entities opposing reform are able to halt it. Attacks on fair share laws exemplify this trend, with very few exceptions such as Massachusetts.

Due to the recent healthcare reform, ERISA needs to be amended in order to facilitate all the impending changes and allow states to expand of successful provisions of the act. Congress has the appropriate tools and power to successfully implement the needed changes so that a long term solution is finally reached.

 

 

 

 

 

 

 

 

Works Cited

Chirba-Martin, Mary. “ERISA Preemption of State “Play Or Pay” Mandates: How PRACA Clouds and Already Confusing Picture.” The journal of health care law & policy 13.2 (2010): 393-421. Print.

Fedor, Frank. “The Conflict between ERISA and Local Healthcare Reform.”Healthcare Financial Management (2008): 38-41. Print.

Frankenfield, Christopher. “The Relationship between ERISA, State and Local Health Care Experimentation, and the Passage of National Health Care Reform.” The Journal of Health Care Law & Policy 13.2 (2010): 423-57. Print.

Jacobson, Peter. “The Role of ERISA Preemption in Health Reform: Opportunities and Limits.” The Journal of law, medicine & ethics (2009): 86-100. Print.

Magnusson, Landon. “Golden Gate and the Ninth Circuit’s Threat to ERISA’s Uniformity and Jurisprudence.” Brigham Young University law review2010.1 (2010): 67-181. Print.

Secunda, Paul M. “Sorry, no Remedy: Intersectionality and the Grand Irony of ERISA.” The Hastings law journal 61.1 (2009): 131-74. Print.

Staman, Jennifer, Liu, Edward C. Employment-Based Health Coverage and Health Reform: Selected Legal Considerations. http://assets.opencrs.com/rpts/R40635_20090612.pdf ed. 2010 Vol. Congressional Research Service, 2009. Web.