Myth Busters #18: ERISA, Part II
I think I gave ERISA short shrift in the last post. Let’s expand on it a bit before getting into other topics. As we said, ERISA’s application to health benefits was not thought through very well because Congress expected to pass a universal federal health system any day. Still, it would seem a tad more thought should have gone into writing the law.
Sadly, Congress and the rest of the federal government didn’t know very much about insurance then (and now), so it had little idea what it was doing. Back in 1946, Congress had enacted McCarran/Ferguson to restore the states as the sole regulators of the insurance industry.
This is a story in itself. Insurance had never been considered “commerce” and so was exempt from federal involvement until 1945 when the Supreme Court decided suddenly that it was indeed commerce in the United States v. South-Eastern Underwriters decision. Here was yet another example of judicial activism. What had changed in 150 years to make something that never was “commerce” suddenly become commerce? Stari decisis seems to apply only to conservative judges.
In any case, Congress quickly decided it wanted to have nothing to do with insurance regulation, so it enacted McCarran/Ferguson to kick that responsibility back to the states.So, Congress and the federal government generally have never been involved in insurance regulation and have no expertise in the area. And it shows.
There are three elements involved in ERISA:
The Preemption from State Law. This applies to all employers large and small (except church and government plans). All are exempt from any and all state laws and regulations that “relate to” employee benefit welfare plans.
The Savings Clause. This “saves” from preemption those laws that regulate the business of insurance — even when the insurance buyer is an employer.
The Deemer Provision. This “deems” that employers who provide benefits are not in the business of insurance.
Why was ERISA so hard to understand? Because it makes an irrational distinction between two virtually identical forms of health care financing: A. Health insurance that is bought from insurance companies and: B. Health insurance that is simply administered by those same insurance companies. There is no visible difference between the two. A consumer cannot know whether she has A or B; neither can a provider. Both plans provide the same identification card, both use the same process for filing claims, both cover pretty much the same services, both have the same appeals processes and the same customer services.
Even the distinction between employer-based coverage and other forms of coverage is opaque. Some employers self-fund their benefits, while others buy it from regulated insurance companies. ERISA assumes the former are exempt from state law while the latter are not, but only because the insurers are not exempt. But in practice there are a host of arrangements that fall in between — partial self-funding, self-funding with a stop loss, self-funding with reinsurance.
Do you have a headache yet?
The rationale for ERISA was to allow multi-state employers to provide the same benefits to the employees in all states. But this is not what the law actually says. It does not confine itself to multi-state employers. Companies in just one state are also exempt from state law.
Besides, multi-state employers are subject to all kinds of varying state regulations — wage and hour laws, permitting requirements, building codes, environmental restrictions, taxes — and they seem to be able to cope with them. Why should health benefits be any different?
The fact that employers were exempt from state laws made them indifferent to the growing mountain of new laws and regulations the states enacted during the 1980s. This tilted the balance of power in state legislatures and left only insurance companies and small employers to object to these proposals. Insurance companies are easy to revile and small employers don’t have much political influence, so it was “Katy bar the door” and costs soared, leaving more and more people without coverage.
Naturally the insurance companies got blamed for rising prices and the politicians got off scot-free. What a way to run a country — or a health system.
I agree, ERISA has been very hard to understand.
Is the best alternative to return to states as the sole regulators?
I understand that the application of ERISA was a mess.
Did the authors of the legislation bungle a good idea in response to a flawed court ruling or is federal involvement simply undesirable?
The employers got a sweetheart deal.
Another great explanation from Greg Scandlen. I would add that ERISA was passed when health benefits were a much smaller proportion of total compensation than they are today. ERISA really was not focused on them, but had the goal of protecting retirees’ pensions in the wake of bankruptcy. (It was passed after a railroad bankruptcy in which the pensioners were pretty much zeroed out.)
Employers that self-insure via ERISA claim that the ability to offer one plan across the whole country is beneficial to them. Well, I suppose so, but it’s not really “one plan” because the TPA or carrier who offers the ASO (administrative services only) contract still has to arrange access to networks in different parts of the country. Plus, big employers have operations in many countries and they seem to be able to manage health benefits ok.
I understand that the real benefits are that the employer dodges the state premium tax and that because the benefits are not “insurance” per se, the employer has no liability to process claims in good faith (The “ERISA shield”).
I heard one story of a woman in a high-risk pregnancy who rushed to the ER but when the hospital called the carrier to get permission to admit her, the carrier denied it. They got a second opinion (from a doctor chosen by the carrier) and still refused to admit her. She went home and died. During the trial, they learned that the second opinion was that she should have been admitted. The carrier was found liable for millions of dollars.
I regret I cannot back this story up with the source. I heard it from a lawyer who was critical of ERISA. He pointed out that if the woman had been covered by an employer with self-insured, ERISA-covered, benefits, she (or her estate) would not have had any claim.
Mr. Scandlen also points out that, because large employers are not lobbying state capitols on health benefits, the private sector is at a disadvantage against those forces that wish to over-regulate health insurance. I think if big employers like GE, IBM, et cetera, had to lobby state legislatures, we might see health benefits approach a reasonable national standard without federal interference.
ERISA is pretty confusing so we free-market health reformers don’t discuss it much to the lay audience, but if we do succeed in reforming the tax treatment of health insurance such that the individual, and not the employer, owns the benefit, we will have to tangle with ERISA.
I have a headache. 🙂
I wrote about the commerce clause ruling by the extreme court, and the history that lead up to is, and the implications of that in my book medicrats. http://www.MediCrats.com
ERISA plans are regulated by the DOL, and may utilize Health Escrow Accounts. HRA’s fall under the same legislation. Fully insured plans are regulated at the state level by the DOI. McCarran Ferguson enacted in March of 1945 has not been repealed, and it is the once piece of legislation whcih can stop the unauthorized federal exchanges dead in their tracks.
I’m going to have a webinar next week to show how all of the pieces tie together, anyone who wants to attend, please email me.
Greg, no worry, I have had a headache for decades because of all this. Perhaps I wandered off the reservation at some point and (in the words of Stanley Kubrick “learned to Stop Worrying and Love the Bomb”), but my view from early on regarding ERISA (as it pertains to healthcare financing)is that it was and is a welcome sanctuary from the hordes of incomprehensible and unworkable state regulations (at least from the standpoint of us benefit consultant wretches out in the trenches).
I am trying to focus in on your point regarding the distinction being made of the difference (or non difference) between healthcare financed “directly” by employers and healthcare financed “directly” by insurance companies. You note there is no visible difference between the two to the consumer or the healthcare provider. I concur, but I don’t see the relevance.
I think the point of contention is the actual “funding mechanism”. You note there are a host of arrangements that seem to blur the definition of “fully insured” or ( state regulated) vs. “self funded” or (not state regulated). In my world these arrangements are not opaque, at least in their legal contract. Technically there is no such thing as “partial self insured program”. The plan is either self-funded or fully insured. Either the employer sets up a plan document under ERISA rules or he does not. If he does the employer takes 100% of the responsibility of funding the plan (as the named plan administrator). He (employer) can shift some of that personal risk to an insurance company (stop loss carrier) via a contract between the employer and the insurance company, but that contract is strictly between the employer and insurance company and does not in any way mitigate or alter the employer’s obligation to the employees (beneficiaries). The insurance company issues no policy of insurance to the employees because there is none. That is the operational difference between the fully insured and self funded program, and there is nothing in between.
I will grant you it gets murky when the subject of healthcare co-ops and multiple employer plans under ERISA is broached. There has always seemed to be a vacuum of regulatory authority which has resulted in nothing positive happening with this method of providing coverage.
Perhaps your point is (if I perceive it correctly) that ERISA has created a dual caste system in which those not participating in ERISA exemptions are getting the short end of the stick by having to absorb stupid new regulations and higher costs (and inevitable less participation). If this is the case I once again concur.
But one way to view this is to assume that the employers taking advantage of the cost savings with self funded programs are examples of the free markets at work – finding more cost effective mechanisms to provide a service. Do we want to disqualify that ability in order to level the playing field by making all suffer the same misery of over regulation?
I wonder if we shouldn’t be finding ways to make it easier for more companies (and individuals) to qualify under ERISA. HSAs are an example of this very thing. The insurance companies can make the adjustments just fine. In fact, the carriers who provide stop loss insurance are actually acting as true “insurance” companies rather than inefficient cash flow administrators.
Who knows, I might be missing your point entirely, but this is my logic of it anyway.
@John R. Graham
John, I really can’t agree with some of your assumptions.
While it is true the employer “dodges” most of the premium taxes in a self funded arrangement (isn’t that the American way?), it is grossly inaccurate to say that the employer “has no liability to process claims in good faith”. That is unless one considers a federal judge less consequential than a local judge. There are serious implications for non compliance with ERISA regs, and that certainly includes paying claims correctly and on time.
Knowing you I am a bit surprised that you would be impressed by an anecdote such as the high risk pregnancy story. It sounds like this attorney has a personal ax to grind (you can be sure that the trial bar hates ERISA plans with a psssion). If we translate what the attorney said he was not so concerned as to the failure of the system to work (carrier denying claim), but he was concerned that the relative not be able to get lord knows how much punitive award for the error (with a tidy percentage to the lawyer).
The fact is that had this been an ERISA plan (and the administrator made the same miscalculation), a federal suit under ERISA could be filed for fiduciary non compliance, and compensation be awarded (just not the McDonald’s coffee in the lap type of compensation).
I realize that most of the time our ilk wants power to regulate seeded to the states, and I am down with that. But I really believe the wheels come off realistically when we start talking about health insurance regulation. I just don’t see how we can allow states to manage their own healthcare financing fiefdoms with all the self serving political implications when we have the 800 lb. federal program gorillas in the room. It needs to be one or the other.
ERISA has helped block state plans to impose government run health systems simply. In states with enough ERISA firms, state regulators can’t get their hands on enough of the market. A fraction of the government run enthusiasts I know want ERISA repealed for that reason.
Wow, great comments!
Davie, In my opinion the best alternative is to remove the employer from the equation. Then health insurance would be regulated like every other form of insurance — all of which seem to work pretty well. The other needed change is a Supreme Court that respects the Constitution.
Linda, I’m not so sure. ERISA was no impediment to Vermont’s single payer, or to Massachusetts’ RomneyCare (partly because the “business community” decided not to bring a challenge), or to any of the laundry list of “universal health” programs passed by Oregon, Tennessee, etc.
Though I am no great fan of the trial lawyers, consumers do need a remedy beyond mere eventual payment of the claim. ERISA fails to provide that.
Frank, you wrote —
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I think the point of contention is the actual “funding mechanism”. You note there are a host of arrangements that seem to blur the definition of “fully insured” or ( state regulated) vs. “self funded” or (not state regulated). In my world these arrangements are not opaque, at least in their legal contract. Technically there is no such thing as “partial self insured program”. The plan is either self-funded or fully insured. Either the employer sets up a plan document under ERISA rules or he does not. If he does the employer takes 100% of the responsibility of funding the plan (as the named plan administrator). He (employer) can shift some of that personal risk to an insurance company (stop loss carrier) via a contract between the employer and the insurance company, but that contract is strictly between the employer and insurance company and does not in any way mitigate or alter the employer’s obligation to the employees (beneficiaries). The insurance company issues no policy of insurance to the employees because there is none. That is the operational difference between the fully insured and self funded program, and there is nothing in between.
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I don’t agree. Regulators in Maryland found that some employers were trying to bypass the state small group laws by using a “reinsurance” plan with a very low individual attachment point, and banned these. For instance, an employer might “self-insure” but buy “reinsurance” with a $1,000 per person stop-loss and thereby escape the state mandates, rating restrictions, and so on. Maryland wasn’t the only state to ban this but it was the first and most prominent. The states still regulate the stop-loss carriers and can do anything they want with them. ERISA protects only the portion that is below the attachment point.
The primary problem ERISA presents, IMO, is that it very significantly compromises the ability of aggrieved claimants to pursue and obtain judicial relief against insurers, who were not among the intended beneficiaries of ERISA — a function of the ERISA shield referenced by Mr. Graham and, it seems to me, soft-peddled by Mr. Timmons.
Plans subject to ERISA face no meaningful consequences for wrongful or even fraudulent denial of benefit claims (pending evolution of the effect of CIGNA Corp. v. Amara). As things stand claimants cannot getbtheirmclaims in front of a jury, their ability to conduct discovery is significantly compromised, they face an absurd abuse-of-discretion burden of proof, and he remedies they can secure even if they overcome all that are limited to the wrongfully denied benefit (I.e. the money the insurer owed all along) and possibly something on account of attorney fees. It is a profoundly unjust law which encourages rather than discourages wrongful insurer conduct. I vent more about this at ProblemIsErisa.blogspot.com. In any case this immunity from meaningful liability is one of the biggest malignant effects of ERISA.
Greg writes,
“I don’t agree. Regulators in Maryland found that some employers were trying to bypass the state small group laws by using a “reinsurance” plan with a very low individual attachment point, and banned these.”
I am sure that has been tried more than once. In fact that is how the self funded mechanism was able to expand to smaller employers back in the eighties. Certain carriers began to offer stop loss products with $1000 deductibles (Of course, a $1000 deductible in 1982 would be the same as a $10,000 deductible today). But in any case this allowed smaller employers with as few as 25 employees to have more efficient benefit programs. The state insurance boards and major carriers didn’t like it then either.
But again, I could not care less about the concerns of the insurance companies or the state regulators who are looking for someone to tax and control. Obviously the case you describe in Maryland is an overt attempt to get out from under regulation more than it is to have more creativity to design a better plan. But now that I think about it, what’s wrong with that?
As far as whether or not a plan should be deemed an ERISA plan or not – should the determining factors not be based upon the contract wording rather than the amount of the stop loss level? Nothing in ERISA law addresses the subject of the kinds or amounts of deductibles for a reimbursement insurance policy that an ERISA Plan Sponsor can purchase for his own (employer) indemnification. Therefore would it not follow that any court rulings favoring the state position should be characterized as “judicial activism” by us good guys?
You are right in that the ultimate hammer remains with the state regulators who can put the heavy hand on insurance carriers who support a plan that you describe (as long as they can regulate them). It seems that what this all boils down to is the issue of protectionism for state regulators and traditional insurance carriers – good or bad?
@Richard Johnston
Again, I disagree Mr. Johnson. I am not familiar with the Cigna v. Amara case, but I think it involved pension funds rather than healthcare benefits. I do know there are serious consequences for “fraudulent” and or “wrongful” denial of healthcare claims. I know this because my company was an administrator for these plans for many years, and we lived in fear of getting called out by the DOL for improper (that’s “improper” much less “fraudulent”) discharge of fiduciary responsibilities. Consequently it never happened, not even once. If you have some time you might want to check with the Texas state board of insurance and see how many ongoing complaints they have for claim payments of the fully insured plans.
Further, I don’t believe that there is anything close to “an absurd abuse of discretion burden of proof” on ERISA plan plaintiffs. In fact, if the state courts used the same burden of proof in its courts we would not have these outrageous awards that increase the cost of insurance for everyone.
Once again, it boils down to whose ox is being gored. As long as the beneficiaries are receiving what they are legally obligated to receive justice is being done. I have never seen an instance where this was not the case. If there are issues with the Pension side of ERISA, so be it, but that is not the subject I was addressing.
ERISA doesn’t absolve the employer of fiduciary responsibility. The whole point of ERISA is to increase employers’ fiduciary responsibility to their employees. However, there is a big difference between fiduciary responsibiility, which is a contractual obligation, and bad-faith malpractice, which results in damages.
I havve read some law articles that assert the fiduciary angle is the best way to go under ERISA, but it is still inadequate. (See, e.g., http://tinyurl.com/6vdn6ne.)
Frank writes
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“I do know there are serious consequences for “fraudulent” and or “wrongful” denial of healthcare claims. I know this because my company was an administrator for these plans for many years, and we lived in fear of getting called out by the DOL for improper (that’s “improper” much less “fraudulent”) discharge of fiduciary responsibilities.”
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Right. But look at who is getting hosed here — the consumer/patient/employee. The plan administrator has a fiduciary responsibility solely to the employER, not to the employEE. The administrator may well be punished by DoL, but it is the patient whose claim was denied, and whose health is at risk. It is the patient who should benefit from any award, not the Dol, and not the employer.
Greg, it was always our understanding that the DOL, in its enforcement of ERISA, was/is concerned only with the welfare of the participants (employees and dependents) rather than the Plan Sponsor (Plan Administrator) or the claims administrator. In our experience of dealing with the DOL, it was clear DOL’s main focus was how the Plan assets were being managed by the Plan Administrator and that benefits were being paid according the document without discrimination.
I don’t know, maybe things have changed in the past ten years but we never had a case of a Plan participant having any legitimate claim of impropriety in the administration of benefits on a self funded plan. Perhaps it is because the documents were written with very specific benefit allowables and little if any discretionary wiggle room.
No doubt elements of “managed care” have unfortunately now made their way into the Plan documents, complicating the administration and clouding the benefit determination process. I’m not sure that the offset should be turning the arbitration process over to state courts and the trial bar with all problems that go along with that. We have already been through that nightmare in the Workers Comp arena.
I’m with Frank. Not once in my dozen years administering plans has a sponsoring employer implied, even indirectly, that we deny a claim which should’ve been paid.
The biggest opponents of self-funded plans are state regulators and special interests. If one can judge the merit of something by its enemies, viva ERISA pre-emption.
Indeed, I think conservatives seeking a realistic path forward on healthcare finance should consider why self-funded plans work reasonably well. We’re told by “healthcare economists” that you can’t have guaranteed issue without a mandate. Yet that’s exactly how self-funded plans have worked since ERISA. We’re told that market forces have no place in healthcare, yet in the large group (mostly self-funded) space coverage rates remain near 100% and cost inflation is consistently below the fully-insured or government segments.
(On a side note, little known fact about the McDonalds hot coffee case: the company settled similar suits for years and was aware that many injuries went unreported. Based on cost-benefit analysis, it judged the risk of a large award worth the extra profit from extra hot coffee. McDonalds knew the odds, gambled with tort law, and lost.)
Jon is exactly right about the opponents if self funding. It works, and it’s competition. Uisng a Health Escrow account just makes sense