ERISA and What It Preempts

One 1974 statute decides which rules reach a self-funded employer plan. It creates both the freedom to innovate and the limits on state reform.

The Employee Retirement Income Security Act of 1974 “is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.” Almost every structural feature of the employer market traces back to it.

What ERISA requires

ERISA “requires plans to provide participants with plan information including important information about plan features and funding; provides fiduciary responsibilities for those who manage and control plan assets; requires plans to establish a grievance and appeals process for participants to get benefits from their plans; and gives participants the right to sue for benefits and breaches of fiduciary duty.”

The fiduciary language is the part that has become consequential recently, and Module 4 returns to it.

What ERISA preempts

ERISA “specifically ‘[preempts]’ or prevents state law from applying to most self-insured group health plans.” Nearly fifty years of litigation has settled three conclusions:

“Most state insurance laws, including state benefit mandates, don’t apply to self-insured ERISA plans, resulting in fewer regulatory requirements on these plans than on fully-insured plans.”
“State insurance laws generally do apply to fully-insured ERISA plans.”
“ERISA provides exclusive, yet limited, civil remedies for enrollees in ERISA plans who are harmed due to a violation of the law.”

Regulatory authority follows the same split. “The U.S. Department of Labor (DOL) almost exclusively regulates private self-insured employer-sponsored plans.”

Why this cuts both ways

For employers, preemption is what makes national plan design possible. A firm operating in twenty states administers one plan under one set of federal rules rather than twenty sets of state mandates. It also creates room to innovate, since a self-funded employer designing a direct contract or a tiered network is not constrained by state insurance law.

For state policymakers, preemption is the wall every commercial cost-control effort runs into. A state that enacts a rate cap, an all-payer arrangement, or a benefit mandate reaches its fully insured market and its public programs, but generally not the self-funded plans that cover most of its commercially insured residents.

Worth remembering: this is why global budget and all-payer experiments in the United States have concentrated in Medicare and Medicaid rather than spanning every payer, and why the Maryland model covered in the introductory course required a federal agreement rather than a state law alone. A state cannot unilaterally bring the majority of its commercial market into a payment reform, because ERISA stands in the way. Any proposal that assumes otherwise has a legal problem before it has a policy problem.

What ERISA does not cover

ERISA “does not cover group health plans established or maintained by governmental entities, churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment, or disability laws.” State and local government employee plans are therefore governed differently, which is why some of the more aggressive purchaser experiments have come from state employee health plans rather than from private firms.

Key takeaways

ERISA sets minimum standards for private employer health plans and creates fiduciary duties for those managing plan assets.
It preempts most state insurance law as applied to self-insured plans, which the Department of Labor regulates instead.
State insurance laws generally do apply to fully insured plans.
Preemption enables uniform national plan design and simultaneously blocks most state commercial cost control.

Sources

Check your understanding

Why can a state health care cost-control law often not reach a self-funded employer plan?