Health Reform and ERISA Preemption

Questions have been asked about what effect the health reform bills would have on ERISA and preemption. At the outset, not very much. But under both bills, employer health plan sponsors will have to comply with myriad costly new federal requirements including state-based exchanges, mandated and expanded plan coverages, as well as numerous taxes fines and fees. This will be required under the new federal health reform structure that would be superimposed over current laws because ERISA does nor preempt other federal laws (it preempts state laws). In other words, many new federal standards in the health reform bills designed to reform insurance practices would also apply to self-insured plans as well. thus eroding the important distinction between insurance and self-insurance as health plan funding methods. With respect to ERISA and preemption, both the Senate and House health reform bills generally provide that ERISA law and preemption shall be preserved for employer sponsored health plans. But, the House bill (HR 3962) provides that for insured plans offered thru the exchanges, ERISA preemption is rolled back and state tort law and remedies would apply even if the plan is employer sponsored. Additionally, it should be noted, that after a five- year grace period, DOL and the new “Health Choices Commissioner” will set federal standards for all health plans, including self-insured plans. Let’s take a closer look at the House bill, particularly as it relates to state tort law and ERISA preemption. ERISA tort liability preemption currently is based primarily on section 502 of ERISA. While Section 502 does not explicitly preempt state tort law, the Supreme Court in Pilot Life and again in Davila concluded that Congress intended to preempt state law by enacting section 502’s comprehensive remedial scheme. Section 502(a)(1) applies to claims for benefits or to clarify rights against a “plan,” which is defined by ERISA Section 3 to include an “employee welfare benefits plan,” i.e. an ERISA health plan. As you know, ERISA section 514 preempts state laws that “relate to” employee benefit plans, except for state laws regulating insurance, which are saved from preemption, except state laws are not saved from preemption that regulate self-insured plans. Nowhere in HR 3962 is ERISA section 502(a)(1) explicitly repealed or amended, so if 502 preemption is changed by HR 3962, it must be indirectly. Section 251 of HR 3962, “Relationship to Other Requirements,” requires the creation of internal and external grievance and appeal procedures for qualified health benefit plans. Section 251 has two sections, the first dealing with coverage not offered through exchanges and the second dealing with coverage offered through the exchanges. Section 251(a)(1) provides that in the case of health insurance not offered through the Exchange ,” the requirements of Title II of HR 3962 (dealing with protections and standards for qualified health plans), do not supersede ERISA or State law, except insofar as those provisions conflict with the requirements of the insurance reform provisions of HR 3962, as determined by the Health Choices Commissioner. Note, however, that Section 251(a)(2) further provides that “Nothing in paragraphs (1) or (2) shall be construed as affecting the application of section ERISA section 514 (the preemption provision). Employment-based plans (which HR 3962 defines to include ERISA plans, government plans, and church plans) remain subject to existing law, including state law insofar as ERISA section 514 saves the state law from preemption, unless the existing law conflicts with HR 3962. Section 251(b) applies to “Coverage Offered through Exchange.” This provision states that “in the case of coverage offered through the Health Insurance Exchange,” the requirements of Title II do not supersede any requirements of title XXVII of the Public Health Services Act (basically the HIPAA provisions) or of state law, except insofar as those requirements prevent the application of the insurance reforms as determined by the Health Choices Commissioner. The first sentence of section 251(b)(2), states again that in the case of health insurance offered through the exchange, State law rights and remedies apply to health insurance issuers. The second sentence, however, states “The previous sentence shall not be construed as providing for the applicability of rights and remedies under State laws with respect to requirements applicable to employers or other plan sponsors in connection with arrangements that are treated as group health plans under section 802(a)(1)” of ERISA. Section 802(a)(1) is a new section in the House bill added to ERISA under the employer mandate provisions of HR 3962. It provides that if an employer makes an election to offer health benefits under section 801, that election shall be treated as the establishment and maintenance of a group health plan under section 733(a) of ERISA. Section 801 refers to an election by an employer “to be subject to the health coverage participation requirements,” which are defined by section 803 to be the requirements of the employer mandate. Sections 411 and 412 allow an employer to 1) offer a group health plan; 2) offer coverage through an Exchange-participating health benefits plan, if the employer is Exchange-eligible; or 3) to make a contribution in lieu of coverage. Thus, under new section 802(a)(1), coverage offered by an employer, either directly or through an exchange, is group health plan coverage. But, the language of 251(b)(2) says that state law rights and remedies apply against health insurance issuers, but not against “employers or other plan sponsors” who offer a group health plan under 802(a)(1). ERISA defines “plan sponsors” to mean the employer or employee organization that establishes a plan. Section 251(b), therefore, says quite plainly that state law remedies (including tort remedies) apply against health insurers who participate in the exchange, the employer if the employer provides coverage through the exchange. In other words, under the House bill, ERISA Section 502 would no longer preempt state tort remedies against insurers that offer coverage through an exchange. To recap, Section 251(a) preserves ERISA section 514. But section 251(b), on its face, applies to all coverage offered through the exchange, including coverage funded by an employer, and expressly applies state law remedies against health insurance issuers. Thus, ERISA section 514 would continue to preempt state insurance law with respect to self-insured plans, at least for the time being. In sum, the most likely interpretation of section 251 is that it applies state tort liability against insurers marketing policies through the exchange. Subject to any changes by the conference committee, this would seem to create at least a temporary distinction favorable to self-insured employment based plans not sold thru the exchanges. Allowing state tort suits and remedies against insurers when coverage is sold through the exchanges is likely to make policies sold through the exchanges more expensive. I hasten to add, however, that pressures to roll back ERISA preemption for self insured plans not sold thru the exchanges can be expected to develop and mount over time. Closing thoughts: The federal proposal for pay or play call for employers with certain minimum payrolls ($400,00 in the House bill) to offer qualifying coverage or pay an 8% payroll tax.This new federal provision is likely to trump ERISA preemption arguments not offered by self-insured employers in pay or play lawsuits. Also, eventually, all employers would be allowed to transition into the government-supervised exchanges (employees of existing plans can migrate at any time thus heralding a potential longer term decline in self-insurance (There is some hope, however, that a future Congress could repeal some of the more onerous provisions)