ERISA, Health Benefit Plans, State Laws and the Health System Transformation

The CDC’s Public Health Law Program (PHLP) issued a report summarizing its responses to technical assistance requests it had received regarding the Employee Retirement Income Security Act of 1974 (ERISA) and its relationship to health benefit plans and state laws that address health system transformation. ERISA was passed to protect employees by providing minimum standards for employee benefits and granting access to courts to enforce the terms of the employee benefit programs. ERISA was also intended to unify the standards and rules for employee benefit programs in order to encourage employers to offer benefits. While ERISA regulates retirement benefits and pensions, the PHLP report addresses only its relationship to health benefit plans and state laws that address health system transformation.


The Employee Retirement Income Security Act broadly defines health benefit plans subject to ERISA’s provisions as any fund intended to provide “medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment.” A health benefit plan is covered by ERISA only if it is “established or maintained by an employer or by an employee organization.” Public health insurance programs, which are programs administered by or through public agencies, are not within ERISA’s scope because they are not provided or administered by an employer. Additionally, health benefit plans provided by the government as an employer are not subject to ERISA. ERISA does not preclude additional federal regulation of health benefit plans that fall under its scope or federal coverage mandates for such plans.


When a health benefit plan falls under ERISA’s scope (an ERISA plan), the plan may be immune from state regulation. A state law may be preempted under the Supremacy Clause of the Constitution, which states that federal law is enforceable over inconsistent state law. ERISA preempts any state laws related to an ERISA plan and may preempt a state law if it has a connection with or reference to an ERISA plan. Further, ERISA preempts state laws that are consistent with the ERISA requirements because ERISA is meant to be the sole comprehensive regulation of employee benefits.


ERISA preemption is limited by an exception permitting states to enforce general insurance, banking, or securities regulation against employee benefit plans. A regulation is considered an insurance regulation if it is specifically directed towards entities engaged in insurance and if it substantially affects the risk pooling arrangement between the insurer and the insured. This test generally allows states to mandate certain procedures or minimum standards for health benefit plans. States do not have the power to enforce laws regulating insurance against self-insured health benefit plans, a subset of ERISA plans where the employer bears the risk of higher costs. This exception provides a safe harbor from state insurance regulation to encourage self-insurance by corporations.


Lastly, the Supreme Court has held that ERISA’s provisions on remedies create a comprehensive set of remedies that preempt any state remedies against an ERISA plan. ERISA gives a right of action to an insured against an insurer, but generally limits recovery to the value of benefits provided in the plan or a ruling specifying what is actually covered under the plan.


The relationship between ERISA and state laws that address health system transformation will depend on the specific state initiative. Many new health system transformation models focus on public health insurance and public health programs which are not subject to ERISA because it applies only to employer-provided benefit programs. Additionally, many state regulations, such as “any willing provider” laws, which require an insurance company to cover any provider who will acquiesce to the insurance’s terms, are considered insurance regulations that are not subject to ERISA preemption.


However, some ERISA issues have arisen from health system transformation initiatives. One increasingly common conflict between ERISA and state laws is related to the requirement that certain employers either offer health insurance to employees or be subject to a fine or tax. This type of law potentially violates ERISA if it requires employers to offer a unique benefit program in the subject state and thus prevents uniform administration of benefit programs in all fifty states.


Courts have interpreted these requirements differently. For example, a 2006 Maryland law required all employers with more than 10,000 employees to pay eight percent of their payroll toward employee health insurance or pay a penalty to the state fund equal to the difference between eight percent of employee payroll and actual money spent on employee health insurance. The Fourth Circuit Court of Appeals found that the Maryland law was preempted by ERISA because it would require companies to structure benefit plans differently in Maryland than in other states. The state argued that companies could uniformly administer ERISA plans by providing other health benefits to employees or by paying the state. The court rejected this argument because the statute still directly mandated employers to provide certain coverage and the alternative spending would place a large burden on corporations to keep up with differences in state laws on health benefits.


The Ninth Circuit Court of Appeals, however, found that a similar employer mandate in San Francisco was not preempted by ERISA. The 2006 Healthy San Francisco program enrolled participants for a medical home, a primary care provider, and access to specialty care, urgent and emergency care, mental health care, substance abuse services, laboratory, inpatient hospitalization, radiology, and pharmaceuticals. San Francisco funded part of the program by requiring employers with more than twenty employees to pay a fee if they did not provide health insurance to their employees and meet minimum spending requirements. The Ninth Circuit distinguished the San Francisco law from the Maryland law in three ways. First, the Ninth Circuit found that the San Francisco law, in contrast to the Maryland law, was designed to provide health care to low-income residents, traditionally a state function. Second, payments to the city to run Healthy San Francisco did not constitute a plan provided by an employer, because the employer makes a payment only to a government program that administers the health program rather than running a health program themselves. Third, the Ninth Circuit disagreed with the Fourth Circuit that penalty payments made in lieu of providing ERISA coverage are connected to an ERISA plan because these payments require no administration.


The split between the Ninth Circuit and the Fourth Circuit suggests that courts will distinguish between states that create public health programs while mandating that employers provide an alternate plan or contribute to the program, and states that mandate that employers provide certain coverage or pay a penalty for failing to provide that coverage.


See the CDC Report