Order Code RS20315
Updated March 6, 2003
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 131 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 67 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 64 million people are covered by purchased
insurance (according to 2001 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.
As these distinctions are not clear cut, ERISA has been the subject of many court cases.
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 and state laws governing health plans are different
in areas such as compensation in courts, access to care, and mandated coverage. Whether
a plan falls under federal or state authority has very different implications for health plans
and beneficiaries. Generally, individuals wrongfully denied service under ERISA-covered
plans may only sue under federal law exclusively for the cost of the denied benefits and
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legal fees. They can’t recover punitive damages, pain and suffering, or lost income;
remedies only available 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, even when provided by employers. 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. 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 provided an
opportunity for more state claims, the issue continues to be debated in the courts.
What are the most controversial issues? The most controversial issues are
the right to sue health plans under state law, standards for appeals, access to and choice
of providers, and mandated coverage. The right to sue under state law has become more
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, or even when or where, a service will be provided. 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.
What are the current state activities? As of 2002, most states had legislation
and/or regulation in place providing for independent review of health plan benefit denials.
The courts are providing a critical role in determining whether or not ERISA preemptions
apply. In Rush Prudential HMO Inc. v. Moran, the Supreme Court determined that
ERISA did not preempt the Illinois HMO external review law (requiring physician review
for disagreements about medical necessity of covered services). Following that decision,
on remand from the Supreme Court, the Fifth Circuit U.S. Court of Appeals ruled that
ERISA did not preempt a similar Texas HMO external review law.
How is Congress addressing these issues? Comprehensive patient
protection bills were introduced in the 106th and 107th Congress. Given other federal
health priorities and state activities, it is uncertain whether or not the 108th Congress will
resume debate on federal approaches to remedying some of these ERISA issues.

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