Fight Over ERISA Preemption Moves to Courts, Regulators
By Andrew Jensen Alaska Journal of Commerce
As debate raged over death panels and doctors’ fixes during the last year, a quiet battle was fought behind the scenes to preserve the ability of employers to continue paying their own health care costs.
Known as self-insurance but more accurately as self-funded plans, a substantial number of companies choose to pay their employee health care expenses directly out of their own general funds rather than buy a group plan from a private insurance company.
In Alaska, approximately 60 percent of privately covered employees have a self-funded company plan and make up 32 percent – the largest share – of the overall workforce, according to state officials.
Some 10 percent of the population is uninsured, 8 percent have access to health care through Indian Health Services, 27 percent are covered through government programs Medicare, Medicaid and the Veterans Affairs and 23 percent are covered through traditional private group or individual plans.
A coalition of self-funding advocacy groups worked closely with Congress over the last year, successfully beating back numerous efforts to dismantle the federal law allowing them to operate.
“We’re fairly proud of the position we held in Washington,” said Steve Rasnick, CEO of Self-Funded Plans LLC of Naples, Fla., and a founder of the Self-Insured Institute of America. “We are disappointed in the legislation, though. We still have some problems that need to be fixed.”
While the battle may have been won on the Congressional front, the war is far from over as court and regulatory challenges to self-funded plans continue.
The Employee Retirement Income Security Act of 1974 allows companies to operate their pension and health care benefit plans across and within state and municipal borders under the protection of federal law known as the ERISA preemption.
Between 75 million and 80 million Americans receive health benefits through self-funded company plans, representing 42 percent to 45 percent of the 176.3 million who have private health care plans.
Self-funding has grown increasingly popular as a means to control costs, promote wellness initiatives, get better access to claims utilization data and create customized, flexible plans for employees. Because self-funding companies are not insurance providers, state insurance commissioners cannot regulate them.
Naturally, that rankles the National Association of Insurance Commissioners, which, with representatives from every state and U.S. territory, has long sought to repeal or reform the ERISA preemption to give commissioners more control.
“Most state insurance departments are little fiefdoms,” Rasnick said. “I don’t mean that pejoratively. That’s just the nature of it. The NAIC is interested in seeing the self-funding disappear.”
Limited control for states
The Alaska Division of Insurance has regulatory control over just the 23 percent of the workforce covered by private group insurance, a fact most legislators are surprised to learn when proposals are put forward in the industry arena.
Linda Hall, the Alaska insurance division director, sits on the executive committee of NAIC and is the chair of the western region. She said the NAIC doesn’t have an official position on the ERISA preemption as much as a desire to bring self-funded plans into state reform efforts.
“There has been a request at times for waivers or exemptions to allow states to put in place some innovations, some programs where states were trying to find ways to provide coverages to a larger group of people,” Hall said. “But now we have the federal health reform. Most of (those requests) preceded this.”
The division of insurance serves as a consumer protection agency and cannot aid an employee if it has a complaint with a self-funding employer. ERISA mandates an appeals process for employees in self-funded plans and complaints are routed to the U.S. Department of Labor’s regional office in Seattle.
“It’s not as satisfactory when that’s all we can do for them,” Hall said.
One of her counterparts, Montana Insurance Commissioner John Morrison, laid out the case against ERISA during May 2007 testimony before the House Health, Employment, Labor and Pension subcommittee.
In his prepared remarks, Morrison said, “ERISA preemption of state regulation has been an obstacle to state-based health reforms and will continue to be an obstacle to some future reforms now being contemplated by many states.”
Morrison noted that the ERISA preemption keeps the state from collecting data from self-funded plans, frees self-funders from mandates such as increasing the age of dependent coverage and robs the state of an additional income stream because it cannot assess premium taxes on ERISA preempted plans.
With more employees covered by self-funded companies, Morrison said, the slice of the private market subject to state mandates and taxes grows smaller and narrows the risk pool with the net effect of higher cost for government subsidies and premiums for those under private plans.
Advocates for self-funded plans counter that arguments by Morrison and the NAIC are the evidence for why their model should have been the basis for reform. While Morrison asserted in his testimony that self-funded plans aren’t subject to state mandates, using examples such as mammograms, immunization or diabetic supplies, Rasnick noted that the majority of his 150 self-funding clients in Florida replicate most state mandates.
“People believe that cost savings come from rationing state mandated benefits,” he said. “It’s not from rationing, but other cost-saving techniques, mostly promotion of wellness and seeing that all participants receive the right treatment at the right time from the right physician.”
Rasnick pointed out that if an employee with back problem responds to acupuncture or some other holistic treatment, a self-funded plan has the flexibility to fund it while a private insurance company operating under state mandates may not, or may only cover a more-costly back surgery.
“If you think it’s a valuable protocol, you can build it into your plan,” he said.
Phil Healy of RT Consulting Inc., which offers third-party administrative services to self-funded plans, had another idea for immediately reducing costs.
“Get rid of the 50 departments of insurance,” he said.
Two-front war
With the fight over the ERISA preemption decided in Congress for now, self-funding groups must turn their concern to the U.S. Supreme Court and the federal Department of Labor as battlegrounds.
DOL plans to put forward revised regulations that would change the definition of an employee welfare plan under ERISA, possibly subjecting benefits to increased state control, and the Supreme Court could consider a case this fall with far-reaching implications for the ERISA preemption.
According to the DOL’s most recent regulatory agenda, it plans to put forward a revision to the definition of employee “welfare benefit plan” by September, stating, “The department believes it is important to clarify the type of health care arrangements and employer mandates that state and local governments can undertake without creating ERISA-covered employee welfare benefit plans to ensure that these health care reform initiatives can proceed with a clearer knowledge of ERISA implications.”
In the case of Golden Gate Restaurant Association v. San Francisco, the 9th Circuit Court of Appeals stayed an injunction against the city leveled in U.S. District Court that stopped it from charging employers a per-hour worked fee (up to $1.76 per hour for full-time employees) to either provide health insurance benefits or pay the city to administer a health insurance plan.
The District Court ruled that the San Francisco ordinance set up an ERISA covered benefit plan, which it held is not allowed under the ERISA preemption.
The 9th Circuit disagreed and held the San Francisco city ordinance did not violate the ERISA preemption, contradicting several previous decisions, most notably a decision by the 4th Circuit, which overturned the so-called Wal-Mart Act passed in Maryland targeting the world’s largest retailer.
The Maryland ordinance demanded companies either provide a minimum benefit or make contribution to the Maryland Fair Share Health Care Fund.
Although the case has not yet been added to the fall docket, the 9th Circuit decision should ensure a hearing before the court because it typically takes up cases where there is a split opinion among circuit courts and the 9th Circuit decision is also the first judicial ruling to declare states may mandate health care expenditures by employers.
The DOL under the Bush Administration filed an amicus brief in support of the Golden Gate Restaurant Association, citing long-held precedent regarding the ERISA preemption. That fact and the “profound change” in the revised regulation was noted in a letter from the National Coalition on Benefits sent March 15 to Office of Management and Budget Director Peter Orszag requesting a meeting to discuss the change.
“From our perspective, with respect to ERISA, the Senate-passed bill reflects the shared view of policy makers that ERISA should remain intact and preserve the protection against a patchwork of different and conflicting municipal and state benefit plan requirements,” the letter states. “A proposed regulatory change in the definition of ‘welfare benefit plan’ appears to move in exactly the opposite direction and negate the intent of Congress and the Administration as well as 35 years of judicial, legislative, and stakeholder understanding of the employer provisions of health care reform.”
Gloria Della of the DOL public relations office in Washington, D.C., said no revisions to the regulation have yet been put forward for comment.
From his perspective in Boston in the only state in America with universal health care, Healy is skeptical of the new federal legislation after seeing costs in Massachusetts rise to the most expensive in the country.
“Unfortunately, I don’t see anything that will focus on reduction in cost or on outcomes,” he said. “ERISA handles everyone. If we’d started with that, we’d have had real reform.”
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