ERISA Pre-emption: The Flight to Self Insured Plans ACA's Special Report on Managed Care

By Rick Miller, ACA consultant
There has been no single event which has more adversely affected the reimbursement of chiropractic services than the enactment of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a comprehensive federal law which regulates all aspects of most employee welfare benefit plans. The law was a product of years of study and compromise between labor, business, and government. The creation of an overall federal regulatory scheme made it possible for certain benefit plans to escape requirements of state law which had previously assured equal access to chiropractic services.

To prevent conflicting state laws, Congress pre-empted state laws that affected employee benefit plans.1 Congress also realized that the states had traditionally regulated the fields of insurance, banking, and securities, so it exempted from the very broad ERISA pre-emption these types of state laws.2

Under this legislative scenario state insurance equality laws could have been construed to apply to the health benefits provided under employee benefit plans since these laws "regulate insurance." However, Congress further complicated an already complicated situation. It provided that while state insurance is not pre-empted, employee benefit plans are not to be deemed to be "an insurance company of other insurer" or to be engaged in the business of insurance for the purpose of state regulation.3

In 1985, the U.S. Supreme Court attempted to sort out the ERISA pre-emption provisions. At issue was a Massachusetts statute which mandated certain minimum mental health care benefits for Massachusetts residents participating in an employee benefit plan and insured under a group health policy. The state's attorney general brought suit requesting a state court to compel the insurance company to comply with the state statute. The insurance company declined to do so claiming that the state statute was pre-empted by ERISA.

The U.S. Supreme Court in Metropolitan Life Insurance Co. v. Massachusetts,4 ruled that the Massachusetts statute was a law which regulated the "business of insurance" and cannot be pre-empted by ERISA as it applies to insurance contracts purchased for plans subject to ERISA. However, since the plan itself could not be deemed to be an insurance plan, state regulation could not apply to the plan. By limiting the law's effect to only the insurance contracts and not to the plan, the Court, by implication, permitted a plan to fund its health benefits by means other than insurance contracts (such as through a self-funding mechanism) and escape the requirements of state law. This was permitted despite the fact that services and benefits may be supplied to the employee in almost an identical manner. The U.S. Supreme Court recognized this distinction by stating:

We are aware that our decision results in a distinction between insured and uninsured plans, leaving the former open to indirect regulation while the latter are not. By doing so, we merely give life to a distinction created by Congress in the "deemer clause," a distinction Congress is aware of and one it has chosen not to alter.5

This distinction means that if an employee benefit plan purchases a policy of insurance to fund benefits, then the policy will be subjected to the requirements of state insurance law. If, on the other hand, the plan benefits are funded directly by the employer, the plan does not have to comply with these requirements.

The U.S. Supreme Court has also extended the reach of the ERISA pre-emption to affect an employee's rights under insured plans as well as self-insured plans in certain circumstances relating to unfair claims practices. Section 502(a) of ERISA provides an exclusive remedy for employee benefit plan participants in benefit claims cases. In Pilot Life Insurance Co. v. DeDeaux,6 the Supreme Court held that ERISA pre-empted state common law claims in unfair benefit claims cases. ERISA remains the exclusive avenue for such claims as they may relate to all types of plans. Subsequent Circuit Court decisions have extended this rationale to pre-empt state statutory remedies as well.7

State regulation, state remedies, and state control over employee benefit plans are rapidly losing ground to federal standards of enforcement. This point was hammered home in the most recent decision of the Supreme Court in FMC v. Holliday in which the Court stated: "The pre-emption clause (of ERISA) is conspicuous for its breadth. It establishes as an area of exclusive federal concern, the subject of every state law that relate(s) to an employee benefit plan governed by ERISA."8 The trend established by the U.S. Supreme Court fosters the flight of employers to self-insured and other forms of non-regulated plans while at the same time diminishing the authority of the state to regulate any type of employee benefit plan. This trend is eroding the effectiveness and applicability of state law which would mandate chiropractic inclusion or prohibit discrimination against chiropractic providers.

The Self-Insurance Institute of America (SIIA) issued a special bulletin to its members on July 20, 1990, to inform its membership that it had obtained a major victory for the self-insurance community. It announced that the Eleventh Circuit Court of Appeals affirmed the U.S. District Court, Northern District of Florida's favorable ruling in SIIA's suit against Florida's commissioner of insurance.9 The suit challenged the state's authority to regulate third-party administrators who provide services to single employer/employee benefit plans. The suit contended that state laws are pre-empted by ERISA. SIIA Executive Vice President James A. Kinder said:

We have always believed ERISA is the governing law for employee benefit plans and state laws are pre-empted even if they try to regulate an employee benefit plan indirectly as the state of Florida attempted to do under their third-party administrators' statute.

The practical effect is that more and more companies are seeking the self-insured route. For example, Bethlehem Steel Corporation notified its pensioners and surviving spouses that:

Effective January 1, 1991, the Optional Major Medical Program, which is currently fully insured by Blue Cross of Western, PA., will now become self-insured by Bethlehem. ...

Prior to January 1, Blue Cross has paid for claims not listed as covered under your Optional Major Medical Program such as services performed by chiropractors and psychologists. This was due to state mandated benefit issues which required insurance companies to pay certain services.

As of January 1, 1991, the Optional Major Medical Program, now self-insure by Bethlehem, will cover all services listed as covered under the program, but no state mandated benefits. This self-insured arrangement is not subject to state mandated benefits since the Employee Retirement Income Security Act (ERISA), under the pre-emption clause, does not consider self-insured employers as insurance companies.

Bethlehem could not have made its intention more clear.

The Minnesota Department of Employee Relations has contracted with Blue Cross/Blue Shield, Minnesota to provide a state self-insured health insurance program for state employees. Because the plan is self-insured, the state is exempt from following the insurance equality laws that are mandated for indemnity plans. Consequently, the plan offers a network of chiropractic physicians that is less accessible than the medical doctor network. The plan also offers enrollees the option to visit a medical doctor outside the network with the addition of co-payments. If an enrollee wishes to see an out of network chiropractic physician, there is no reimbursement.

In addition to the above there are numerous other examples which could be cited. In the interest of brevity, we have not attempted to do so in this report. It is not the number of examples we cite, or the anecdotal information contained in this report that are important. The important issue is to realize that these examples are illustrative of the continuing trend towards self-insurance under ERISA. Not only is the trend expected to continue unabated, but new federal mechanisms, beyond ERISA, may lead to new and greater pre-emptions. This particular threat will be dealt with in an upcoming report.

Footnotes:

  1. 29 U.S.C. 1144(a) provides "Except as provided in susection(b) of this section, the provisions of this subchapter and subchapter III of this chapter shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) this title and not exempt under section 1003(b) of this title. This section shall take effect on January 1, 1975.

     

  2. 29 U.S.C. 1144(b)(2)(A) provides "Except as provided in subparagraph (B), nothing in this subchapter shall be construed to exempt or relieve any person from any law of any state which regulates insurance, banking or securities.

     

  3. 29 U.S.C. 1144(B) provides: "Neither an employee benefit plan described in section 1003(a) of this title, which is not exempt under section 1003(b) of this title (other than a plan established primarily for the purpose of providing death benefits), nor any trust established under such a plan shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company or to be negated in the business of insurance or banking for purposes of any law of any state purporting to regulate insurance companies, insurance contracts, banks, trust companies or investment companies.

     

  4. 471 U.S. 724, (1985).

     

  5. 471 U.S. 724, 747, (1985).

     

  6. 107 S. Ct. 15349 (1987).

     

  7. Kanne v. Conn. General Life Ins. Co., 867 F.2d 489 (9th Cir. 1988), cert. denied. 109 S. Ct. 3216 (1989); In re Life Ins. Co. 857 F.2d 1190 (8th Cir. 1988); Anschultz v. Conn. General Life Ins. Co., 850 F.2d 1467 (11th Cir. 1988); Commercial Life Ins. Co. v. Superior Court, 764 P.2d 1059 (Cal. 1988), cert. denied, 57 U.S.L.W. 3753 (1989).

     

  8. FMC v. Holliday, 59 U.S.L.W. 4009, 4011 (1990).

     

  9. Self-Insurance Institute of America, Inc. v. Thomas Gallagher, Cmsr. of the Florida Dept. of Insurance, 909 F.2d 1491 (11th cir. 1990).

Richard Miller
ACA Director of Government Relations


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