For decades, a federal law has obstructed state innovation on private health care coverage. That's finally changing.
As a name, ERISA sounds soft, almost cuddly. And its mission is almost as comforting: The federal Employee Retirement Income Security Act was set up in 1974 to oversee employee pension plans. Over the years, it also has come to include health care as one of the benefits in its domain.
And that has resulted in the emergence of ERISA's harsher side. States that have tried to regulate health care or encourage greater access to health insurance through the private sector have found ERISA to be as forbidding as a reinforced steel wall.
Thanks to recent U.S. Supreme Court rulings, however, chinks are appearing in ERISA's façade. The court has clarified and, in effect, limited ERISA's range of powers; it has also spelled out some of the states' regulatory rights. That leaves some opening--narrow but nonetheless real opportunities--for states to get on with the business of health care reform.
The most significant state victory came in March when the Supreme Court upheld Kentucky's "any willing provider" law that opens membership in insurance networks to any health care provider willing to accept an insurer's rules and payment rates. The case was of particular interest to nearly half the states: In addition to Kentucky, seven other states have similar laws that cover doctors and some 20 states have "any willing provider" laws that cover pharmacists.
The legal issue was whether states are ERISA-free to regulate managed care insurance companies on the question of providers. The insurance industry argued that ERISA prevailed and that Kentucky's law interfered with one of the basic economic calculations underlying managed care: Medical costs can be held down only if participating doctors have a patient volume sufficient to earn a reasonable income despite lower fees.
The Supreme Court did not address the issue of costs. Instead, it ruled that Kentucky's law does, indeed, regulate insurance--which states are permitted to do--and not benefits, which are reserved for the federal government.
But the case's importance goes well beyond the provider and managed- care issue. After dealing with a slew of ERISA cases over the years, the Supreme Court decided to illuminate more clearly the line between state insurance regulation and ERISA's preemptions--with the aim of giving better guidance to the lower courts. It was time, Justice Antonin Scalia wrote, for a simplified test: A state law would be considered a regulation of insurance, exempt from ERISA's preemption, if it was "specifically directed toward entities engaged in insurance," as opposed to a general law that happens to have an impact on the insurance industry. It would also be within a state's purview if it substantially affects the "risk-pooling arrangement between the insurer and the insured." By eliminating the prospect of a closed network of health care providers, the Kentucky law had such an effect on the allocation of risk, he stated.
That wasn't all the Supreme Court did to ERISA. A 1995 decision also chipped away at its preemptions. That case centered on a New York State law that imposed surcharges or mandates on health insurance plans provided by private employers. Although ERISA precludes any state from directly regulating or raising revenue from private employee benefit plans, the Supreme Court ruled that the same does not hold true for indirect regulation. New York State had been tacking surcharges onto hospital bills paid by commercial insurance companies. The money raised was used to finance health care for the poor, boost hospital revenues or close state budget gaps. About 20 other states had similar regulations in place at the time.
In writing the lead opinion, Justice David Souter suggested that ERISA was not, in fact, a formidable barrier to state health care reform. While the extra charges on hospital bills did make private insurance plans more expensive for employers, the charges did not "bind plan administrators to any particular choice." Souter concluded that it would be unsettling to bar "any state regulation of hospital costs on the theory that all laws with indirect economic effects on ERISA plans are preempted."
These decisions are important. States have, after all, become in the most literal sense the laboratories of democracy when it comes to health care. But in a practical sense, the victories may be less than meets the eye. Yes, states now have a chance to ride closer herd over health maintenance organizations and be more responsive to consumer complaints about the health care they receive. But given the role inflationary health care costs play in their budget woes, states may not be willing to capitalize on their power to inhibit managed-care strategies--at least not right now. And none of the cases addressed a more fundamental barrier to health care reform: the leeway for states to chip away at the problem of the uninsured by mandating that all businesses provide a minimum set of health benefits for their employees. Only Hawaii can do that--and it has an exemption from ERISA.