By Cris M. Currie, RN (ret.)
The ERISA Problem
The Employee Retirement Income Security Act of 1974 (ERISA) was not originally intended to regulate healthcare, but it has still managed to derail state-based healthcare reforms for decades. Essentially it invalidates “any and all” state laws that “relate to” an employee benefit plan, and it arose from the fear that multi-state employers would refuse to provide health benefits if faced with state regulatory variability. Unlike other statutes concerning Medicaid, Medicare, and CHIP, there is no waiver authority with which states might experiment with alternative mechanisms. Plus, employers and third parties can enforce it in court to keep deflecting state regulation. Even though the Affordable Care Act imposed a uniform federal mandate for employer health benefits in 2010, ERISA has yet to be amended to reflect the fact that the original intent is no longer relevant.
According to the authors of Federalism, ERISA, and State Single-Payer Health Care by Erin C. Fuse Brown and Elizabeth Y. McCuskey, as of 2019, employer sponsored health insurance plans covered about 49% of Americans, and the number of employer self-insured plans had grown to about 60% of that number. This represents about 20% of total national health care expenditures, but that percentage continues to grow. ERISA has prevented states from regulating or prohibiting these self-insured plans.
Because of the vague and convoluted “savings” clause, the equally convoluted “deemer” clause, and the “relate to” clause, courts have interpreted ERISA to mean that states can regulate (or save) “fully insured” health insurance plans, but not “self-funded” plans. Employers that buy their insurance from private insurance companies are called fully insured and must abide by the state’s insurance regulations, but those using their own funds to pay benefits are exempt from state insurance laws. Unfortunately, ERISA does not define insurance, but the courts have not deemed self-funding to be the “business of insurance,” thus creating a loophole for companies to avoid state regulation.
In this 2020 article, published in the University of Pennsylvania Law Review, the authors document that between 2010 and 2019, legislators in 21 states have proposed 66 bills attempting to create single-payer universal health care financing systems, and ERISA’s preemption of state regulation over employer health benefits has threatened all of them. However, despite its pervasiveness, the authors propose three major types of mechanisms for capturing employer health benefits expenditures and transitioning them to the state single-payer system. For maximum effect, they recommend incorporating all three in a state’s single-payer bill.
The A,B,C Strategy
The Type A strategy is the most important. It involves adding a payroll tax for employers, an income tax for individuals, or both to fund the system. The payroll tax should be split with the employee, especially in the absence of a state income tax. Since the tax is a percentage of wages paid and not based on the employer’s benefits expenditures, it is technically beyond the reach of ERISA. The authors noted 45 bills in 16 states using a Type A provision. Once the state plan is well established, and assuming it is as good or better than any employer plan, it is also assumed that most employers will decide to drop their own plans in order to be relieved of an unnecessary expense and time-consuming administrative matter that is unrelated to their core business interests. The employees will also likely lose interest in the employer plan and will elect to stop paying for it once they are covered by a better state plan. It is of course critical that the state plan be of high quality and that the overall expenses for both the employer and employee drop significantly.
Here is how the current Washington Health Security Trust (WHST) proposal frames this provision:
Section 16(2) The recommended funding mechanism may contain the following elements:
(a) A health security assessment to be paid by all employers in Washington state; and
(b) a monthly health security premium to be paid by Washington residents with incomes over two hundred percent of the federal poverty level, subject to exemptions such as for Medicare and Medicaid beneficiaries or for persons under the age of eighteen.
(c) A resident shall not be required to pay a copayment, coinsurance, deductible, or any other form of cost sharing at point of care for all covered benefits under the trust.
To further encourage employees to drop their employer coverage, Type B clauses, involving provider restrictions, have been included in 34 bills across 14 states. These provisions tell healthcare providers that if they participate in the state’s single-payer plan, they can only bill the state, and at the state’s rates. This should provide an additional incentive for employers to drop their self-funded plans because it will likely shrink the network of participating providers in those plans. If providers are generally unable to be paid by other sources, they will be unable to see patients with other coverage, and if individuals want to see those providers, they will likely drop their employer plan in favor of the state system. Since provider regulation is beyond the scope of ERISA, its state preemption should not apply.
Here is how the current WHST proposal frames this provision: Section 10(9) A participating provider shall not charge a rate in excess of the payment established through the trust for a health care item or service furnished under the trust and shall not solicit or accept payment from any member or third party for a health care item or service furnished under the trust, except as provided under a federal program.
Type C uses subrogation, assignment of benefits, and secondary payer clauses to pay for services and seek reimbursement from other payers during the transition to a full single-payer system when other payers, such as self-insured employers, might still be operating. In asserting a subrogation claim, the single-payer could pay an individual’s medical expenses and then seek reimbursement from the third-party still ultimately responsible for those expenses. Under the assignment of benefits, individuals can transfer their right to reimbursement from another party (the employer) to the single-payer. And secondary payer provisions allow the single-payer to pay for any expenses not covered by the primary/employer payer.
For example, a self-insured employer plan will pay up to $1000 for radiology services, and an MRI provider bills the plan $800 for imaging. Through the subrogation and assignment provisions, the single-payer could pay the $800 to the provider and then bill the employer for an $800 reimbursement. Or, if the employer plan had a $500 deductible, the employer could pay the $300 and the single-payer could pay the deductible under the secondary payer clause. This arrangement would save the single-payer money, which could reduce the amount needed for the payroll tax. While circuitous and inefficient, Type C does allow for the possibility of establishing a single-payer plan in the presence of employers who want to continue their self-insured plans, possibly preempting a litigation challenge. These are the kind of crazy scenarios that the ERISA preemption forces on states. It would be much easier if the state could just mandate that employers supply coverage under the state’s program to eliminate the possibility of dual coverage, but employer mandates are not popular. Type C might also be useful for capturing expenditures from out of state employers who are not subject to the state’s payroll taxes.
Here is how the current WHST bill frames this provision: Section 10(2) If a resident has health insurance coverage for any health services provided in the state, the benefits provided in this act are temporarily secondary to that insurance. During the transition to full implementation of the trust, a resident may transfer their right to reimbursement from a secondary payer to the trust, and the trust may then pay for the resident’s healthcare expenses and receive reimbursement from the secondary payer. Nonresidents are covered for emergency services and emergency transportation only.
The Non-duplication Provision
Many states also add a fourth strategy called a non-duplication provision. These prohibit private insurers from offering plans that duplicate the single-payer benefits. Private insurers can therefore only offer supplemental plans (complementary coverage). Kip Sullivan (attorney member of HCFA-MN and One Payer States) has advised that a non-duplication clause makes it explicitly clear that private health insurance companies are to be cut out on a certain date. He believes that if a court thinks that the legislature was not absolutely clear about its intentions, it could rule for the insurance industry. Sullivan also fears that in the absence of a non-duplication provision, insurance companies might continue to sell policies, asserting the defense that they didn’t understand the new law (personal email).
Here is how the current WHST proposal frames this provision: Section 1(4) On and after the day the WHST becomes operational, a health plan, as defined in RCW 48.41.080(11), may not be sold in Washington for services provided by the WHST.
However, according to Fuse Brown and McCuskey, non-duplication clauses, while they directly target insurers rather than employers and thus should avoid the ERISA preemption, can only ban the fully insured employer plans, leaving self-funded plans untouched, since those plans are not deemed insurance policies. And while the non-duplication clause is seemingly efficient and certainly unambiguous, it also might illicit a strong litigation response from the targeted insurance companies, which are much more likely than employers to sue. This clause is closer to using a hammer than the more subtle A,B,C approach designed to nudge employers, with either type of health benefit plan, toward choosing the single-payer program. The A,B,C strategy should allow the state to prevail in an ERISA challenge since it preserves a meaningful choice of three employer options: a) continued self-funded dual coverage, b) purchasing or self-funding complementary coverage, and c) offering no employer coverage and relying on the state’s coverage.
According to the authors, the A,B,C system is somewhat redundant and should survive an ERISA challenge even if parts are shot down. “But the muddle of ERISA jurisprudence renders actual outcomes uncertain. The only certainty in ERISA preemption is that there will be litigation” (p. 440). If, however, a court “erroneously invalidated a payroll tax, an additional severability provision in the state statute might permit conversion of the state’s mandatory single-payer payroll tax into a play or pay option” (p. 442, 423). This option requires employers to contribute to a public program that would cover their employees if the employers did not offer coverage, and it has received favorable treatment by the 9th Circuit Court in both a San Francisco and a Seattle case. However, the B and C strategies could still be the key to the state eventually coming out on top.
For additional detail, see the authors’ 6 page memorandum to the Oregon Joint Task Force on Universal Health Care dated July 2022 here pages 59-65.
For the full 77 page Fuse Brown and McCuskey law review article go here.
For the chapter in the ERISA that is causing all the problems, go here and then to sections (a) [the relate to clause] and (b)(2) (A) [the savings clause] and (b)(2)(B) [the deemer clause].