Order Code RS20315
Updated June 18, 2001
CRS Report for Congress
Received through the CRS Web
ERISA Regulation of Health Plans: Fact Sheet
Hinda Ripps Chaikind
Specialist in Social Legislation
Domestic Social Policy Division
The Employee Retirement Income Security Act of 1974 (ERISA, P.L. 93-406) places
the regulation of employee benefit plans (including health plans) primarily under federal
jurisdiction for about 124 million people. ERISA’s treatment of health plans is both
complicated and confusing. ERISA has been interpreted as dividing health plans into two
groups regulated differently under the law: about 54 million people are covered by self-
insured plans for which the employer, rather than an insurer, assumes the risk for paying
for covered services and about 70 million people are covered by purchased insurance
(according to 2000 information from the Census Bureau and the Department of Labor).
ERISA also distinguishes between the regulation of health plans and the business of
insurance, for purposes of determining federal and state regulatory authority. However,
these distinctions are not as clear cut as they seem and ERISA has been the subject of
many court cases since its enactment.
How does ERISA distinguish between federal and state authority? In
short, only ERISA applies to self-insured health plans, while both ERISA and state
authority (for the business of insurance) apply to insured health plans. Three sections of
ERISA are key in defining the federal and state roles. First, §514(a) states that federal law
“preempts”, or overrides, state laws as they “relate to” employee benefit plans. This
portion of ERISA was designed to ensure that plans would be subject to the same benefit
laws across all states. However, the wording “relates to” is not precise, and as a result,
the courts continue to define this term, case by case. Second, §514(b)(2)(A), the
“savings” clause, retains state authority over the business of insurance. The business of
insurance typically refers to the regulation of plan solvency, marketing, information
disclosure, consumer grievances and may also include mandating benefits, taxing insurance
premiums, and mandating participation in state risk pools and uncompensated care plans.
Finally §514(b)(2)(B), the “deemer” clause, does not allow states to deem an employee
benefit plan to be in the business of insurance. The effect of this clause is that self-insured
plans are not subject to state rules governing the business of insurance.
Why is the distinction between federal and state roles important? The
distinction is important because federal laws governing health plans are different from state
laws in areas such as compensation in courts, access to care, and mandated coverage.
Thus, whether the plan falls under federal or state authority has very different implications
for health plans and their beneficiaries. Generally, individuals wrongfully denied service
under ERISA-covered plans may only sue under federal law exclusively for the cost of the
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benefits they were denied and legal fees. They can’t recover punitive damages, pain and
suffering, or lost income, as these remedies are available only under state law. Also,
federal law has minimal requirements for access or coverage, with few exceptions such as
those included in the Health Insurance Portability and Accountability Act of 1996, and its
amendments. State regulations can also include mandated benefits and review processes
not covered under federal statute.
When does state law apply to ERISA plans? Self-insured plans are
preempted from state law; therefore covered only by ERISA. For all other ERISA health
plans (government and church employee plans are exempt), federal law preempts state law
for issues that “relate to” employee benefit plans, and state law applies for issues involving
the business of insurance. The line between self-insured and insured becomes blurred
when employers buy stop-loss insurance to guard against catastrophic costs (costs above
a certain level). Further, the boundaries for both the business of insurance and issues that
“relate to” health plans have been subject to widespread interpretation. Courts have
traditionally favored preempting state law for most employee benefit situations, although
that is changing. In 1995, in New York Conference of Blue Cross and Blue Shield Plans
v. Travelers Insurance Company, the Supreme Court found that state-wide rate setting
was allowable because it did not specifically relate to the plan; rather it included all
insurance offered within the state. Then in 2000, in Pegram V. Herdrich, the Supreme
Court’s ruling limited the role of ERISA in a claim against an HMO physician. While
some attorneys think this decision provides an opportunity for more state claims, the issue
will continue to be debated in the courts.
What are the most controversial issues? The most controversial issues are
the right to sue under state law, standards for appeals, access to and choice of providers,
and mandated coverage. The right to sue under state law has become increasingly
important with the rise in managed care plans and enrollment. Managed care, because of
pre-authorization requirements, has shifted court battles from who will pay to whether or
not a service will be delivered at all. Treatment delays can result in lost wages, increased
illness, or even death. When managed care organizations are brought to court, they prefer
ERISA for its limited redress. An adjunct issue to the right to sue is internal (within plan)
or external (independent) review. ERISA does not require external review, so that
without this source of redress, the only option for beneficiaries denied coverage is the
court. Guaranteed access to care and mandated coverage of certain services are also
regulated by states and subject to only limited federal statutes.
How is Congress addressing these issues? Comprehensive patient
protection bills have been introduced in the 107th Congress to expand access, establish an
appeals process, and address the limited remedies available under ERISA. S. 6 is
identical to the 106th Congress’ House-passed bill (H.R. 2990). This bill would allow state
law causes of action to proceed, by eliminating the ERISA preemption. S. 1052, similar
to H.R. 526, would distinguish between types of claims, allowing some claims to go
forward in states while expanding federal remedies for individuals wrongfully denied
services. S. 889 would expand federal remedies, but would not amend ERISA’s
preemption language to allow any new causes of action to be brought in state courts. (See
CRS Issue Brief IB98017, Patient Protection and Managed Care: Legislation in the 107th
Congress, for more detail.)

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