Myth Busters #17: ERISA, Part I

We are almost up to 1992 in our Myth Busters series. So far we have dealt with:

• The fallacy of “Roemer’s Law,” which has driven most of these policy initiatives.
• How Roemer’s Law often leads people to misunderstand events, such as by Jack Wennberg (Dartmouth Health Atlas) in his look at hysterectomies in Maine.
• The rise and fall of national health planning, also based on Roemer’s Law.
• The rise and fall of hospital rate setting.
• The advent of Certificate of Need regulations, which are still on the books in most states.
• The formation of business coalitions on health.
• The discovery of uncompensated care.
• The hysteria over the uninsured.
• The misunderstanding of risk pooling.
• The growth of mandated benefits.
• The failed state efforts to create universal health insurance schemes.
• The efforts by the states to “reform” their small group markets.
• The misunderstanding of adverse selection.
• Insurance reform goes crazy.
• The idea of an individual mandate.

All of this in just 20 years (1972‒1992). But we aren’t quite done yet. There were a couple of other things that happened in this period that had a profound effect on health care delivery and financing. One was ERISA and the other was the federal HMO Act. We’ll start with ERISA.The Employee Retirement Income Security Act (ERISA) was enacted in 1974, mostly because some recent corporate bankruptcies had left retirees with no income and no recourse. Among other things, it created the Pension Benefit Guaranty Corporation (PBGC), which was modeled after the state guaranty funds for insolvent insurance companies. (Note: Because insurance companies are state regulated, federal bankruptcy laws do not apply to them. The states have developed other methods for dealing with insolvent insurance companies. I would argue these state remedies are far more effective and beneficial to policyholders than anything the federal government has done.)

That part of the law has worked reasonably well, it is ERISA’s application to health coverage that has created far more problems than it ever solved.

One example would be that any plan governed by ERISA is exempt from all state taxes and regulations and all legal challenges to employee benefit plans have to be filed in the federal courts. Congress wanted to ensure that the assets of such plans would not be diminished by legal judgments and state revenue demands. This might be appropriate for pension programs that rely on accumulated reserves to pay benefits decades in the future, but not for health benefits that are funded on a year-to-year basis.

Similarly, although ERISA provides a federal remedy for contract disputes, it confines judgments to the cost of the denied claim plus attorney’s fees. Again, this may be fine for pension programs that merely provide income to a beneficiary, but in health care the failure to pay a claim can mean the worsening of a medical condition or even the death of a patient. There is no remedy for these situations because punitive damages or pain and suffering damages are not allowed.

Some people have looked at these provisions and concluded that Congress must not have really meant to include health benefits in the scope of ERISA, but that isn’t true. The law is very clear in defining an “employee welfare benefits plan” —

(A)ny plan, fund or program… established or maintained by an employer… for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, medical, surgical, , or hospital care or benefits, or benefits in the event of sickness, accident, disability, death, or unemployment. (29 U.S.C. Sect. 3(1))

What was really going on was that Congress expected that a federal program would shortly take over all health care financing, so it was not as diligent about the implications on health care of this law as it should have been. It is worth noting that the famous RAND Health Insurance Experiment was done about the same time for the same reason. As a recent (2006) research brief from RAND said:

In the early 1970s, financing and the impact of cost sharing took center stage in the national health care debate. At the time, the debate focused on free, universal health care and whether the benefits would justify the costs. To inform this debate, an interdisciplinary team of RAND researchers designed and carried out the HIE, one of the largest and most comprehensive social science experiments ever performed in the United States.

Obviously that did not happen, so we have been stuck with ERISA ever since.

It is doubtful there has ever been a law as widely misunderstood or as frequently litigated as ERISA. Few people at the time — or since — have appreciated the implications. In 1982 Paul Starr wrote a Pulitzer Prize winning book, The Social Transformation of American Medicine, that failed to even mention ERISA in any of it’s 514 pages. The U.S. Supreme Court issued almost annual decisions on ERISA through the 1980s, the most prominent being Union Labor Life v. Pireno (1982), Shaw v. Delta Airlines (1983), Metropolitan v. Massachusetts (1985), and Pilot Life v. Dedeaux (1987).

I won’t go into a detailed analysis of the law or the judicial rulings here, but the effects have been profound. It enormously advantaged employer-sponsored plans over individual coverage, and it virtually created the idea of employers’ self-funding of benefits to escape state regulations. Because many employers were able to escape these regulations, they were no longer concerned about what the states did on issues such as mandated benefits, so the political opposition to these ideas was enfeebled. This set the stage for the states to pile on regulation after regulation.

It also enraged citizens who found they could no longer seek reasonable compensation for damages caused by their health plans. This problem became especially acute when Managed Care began to take over the health benefits market. And this, too, was fomented by federal interference in the benefits market in the form of the Federal HMO Act, which we will get into next time.

But, once again, we have an example of Washington’s policy elite screwing things up and escaping any responsibility for their actions. The damage is done by Washington and the market gets the blame.

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