The Next Health-Care Debate: ERISA

Federalism seems to be making a comeback in Washington. Welfare, nutrition, and crime-prevention responsibilities soon may be shifted from DU [...]

May 1 1995 by Pete Du Pont


Federalism seems to be making a comeback in Washington. Welfare, nutrition, and crime-prevention responsibilities soon may be shifted from DU PONT the national to state governments.

But this trend may backfire in the great health-care debate of 1995, as governors; liberal legislators such as Sen. Paul Wellstone, D-MN, and Rep. Jim McDermott, D-WA; and health-care policy organizations try to accomplish at the state level what President Clinton failed to do at the national level: enact mandates that force employers to provide their employees with health insurance (and kick in a 50 percent co-payment), create standard benefits packages, and impose cost-containment standards on all businesses.

Former Senate Finance Committee Chairman Patrick Moynihan, D-NY, set the agenda last fall: “The failure to enact national reform should not be allowed to prevent states from moving ahead with their own reforms. In fact, in the absence of universal coverage, you must allow state flexibility, fostered by ERISA waivers.” Thus, for employers, waivers of the Employee Retirement Income Security Act may become the most significant health-care issue of the 104th Congress, with most giving a thumbs down to any move to allow them.

Enacted in 1974, ERISA was intended to protect employee pension funds, primarily for the country’s largest employers and unions. But in the fine print, a section permitted large employers who self-funded their insurance plans to avoid the costly burden of state mandated health-insurance benefits laws. These state rules tell insurers what services and providers they must include in their policies to sell health insurance in a state. They force employers either to purchase a Cadillac plan-loaded with extra benefits ranging from in-vitro fertilization in Texas to hair pieces in Minnesota-or remain uninsured. The phenomenal increase in state mandates, from a total of eight in 1965 to more than a thousand today, has compelled many smaller employers to choose between canceling their coverage or escaping the mandates by self-insuring under ERISA.

The good news is that ERISA has worked: More people are insured than if ERISA had not been passed. Today, more than half of all employees and their dependents are covered under selffunded plans. While initially ERISA was aimed at the largest employers-in excess of, say, 1,000 employees-smaller companies now are switching to self-funded plans. By using a “stop loss” policy (which limits total losses due to health-care expenses) to cover them in case of a major illness, companies with 50 and even fewer employees have been able to adopt self-funded plans.

Critics contend that these smaller employers are switching to self-funded plans to avoid providing adequate health-insurance coverage. However, the National Center for Policy Analysis estimates that as many as one in four uninsured people lack health insurance because of the costly burden of state mandates. By avoiding those mandates, companies that might not otherwise have been able to afford health insurance can continue to cover their employees. Moreover, under ERISA, companies with employees in several states can construct one health-insurance policy for all its staff, regardless of location.

Meanwhile, several states have passed comprehensive health-care reform measures in anticipation of national legislation.

Without ERISA reform, however, most of these bills are worthless, because the states have no authority to make self-funding, medium-sized and large businesses participate in their plans.

In response, a coalition called the Reforming States Group advocates expanding the use of ERISA waivers (only Hawaii has one at this time) to allow states to regulate more employer health plans. Less radical reform approaches would exempt the largest companies from state oversight, but let the states intervene in the self-funded plans of medium-sized companies, such as those with fewer than 1,000 employees. But this compromise is unfair: It lets the big guys off the hook simply because they are big, while forcing smaller companies with little money or political power to comply with state mandates.

Because states are clamoring for ERISA waivers, some Congressional leaders perceive this battle as a federalism issue. They claim the solution is to strike down or modify the federal ERISA law and return control of health insurance to the states. But the real issue here is regulation, not federalism. By keeping ERISA intact-or even better, expanding it so smaller employers can voluntarily band together and utilize the program-the federal government would ensure that employers are free to establish affordable health-insurance policies so more employees can be covered.

After all, that was the original goal of the health-care reform effort. Wasn’t it?


Pete du Pont is former governor of Delaware and policy chairman of the National Center for Policy Analysis in Dallas.