Outdated Employee Benefits Law Needs Revision, Not Further Judicial Interpretation

Published May 1, 2008

The recent decision of a three-judge panel of the Ninth U.S. Circuit Court of Appeals, which overturned a federal judge’s ruling on San Francisco’s “play or pay” employer health insurance mandate, highlights one important fact: The 1974 federal Employee Retirement Income Security Act, known as ERISA, is a mess.

It was bad law when it was enacted, and it hasn’t gotten better with time. It is because of ERISA that the states have gone crazy with mandated benefits and other regulations.

Only small employers who buy coverage from insurance companies are affected by these state laws. Large employers who can self-fund their benefits are exempt, so they don’t care what laws the states pass. Without the help of the large companies, small employers aren’t politically powerful enough to prevent such bills from passing.

Courts Should Follow Law

The exemption for large companies never made sense in the first place. There is no particular reason national employers can’t comply with varying state regulation of benefits. They manage to comply with varying state laws on everything else, such as wages, working conditions, licensing, environmental issues, zoning, building codes, and so on.

It also makes little sense that ERISA applies to all employers, instead of only those operating in multiple states. Only those companies that have to buy coverage from an insurance company are affected, because the insurance company itself continues to be state-regulated. If Congress was so concerned about national consistency, why didn’t it create a national insurance regulatory system at the same time?

But the law is the law, and the courts should follow it and not create new law by judicial fiat. Congress may change ERISA, and it has done so from time to time. The Health Insurance Portability and Accountability Act (HIPAA) is an ERISA amendment, and Congress exempted Hawaii’s employer mandate from ERISA. But Congress has not seen fit to change the fundamental law.

States Have Plenty of Power

In the meantime, the states have many powers, but they may not pass laws that “relate to” employee benefit plans. They may license and regulate hospitals, physicians, nurses, and every other provider. They control the malpractice system. They set wage and safety standards for employers.

The states have control over insurance companies and may (and frequently do) enact and enforce any harebrained idea a legislator may come up with. They control the Medicaid program and state employee benefits. They may require individuals to purchase health insurance. They may tax employers, providers, insurance companies, and individuals to pay for state programs.

The only thing they can’t do is dictate an employer’s benefit program, including not only the specific benefits but also whether an employer provides benefits and how much it pays. San Francisco is perfectly free to impose a payroll tax on employers to pay for a city health plan. It gets in trouble only once it allows employers who provide coverage to offset their taxes.

People have asked why the Massachusetts law that imposes a tax of $295 per employee on employers of 11 or more workers who do not provide coverage isn’t a violation of ERISA. It is. And it, too, would be thrown out if Massachusetts employers challenged the law.

But it is expensive to bring an ERISA lawsuit, and right now the cost of compliance in the Bay State doesn’t justify paying the cost of litigation. Plus, employers in Massachusetts are trying to score political points by cooperating with the law.

If Massachusetts raised the assessment to $2,400 per employee per year as San Francisco has done, you can bet the business community would change its mind about challenging the law.

‘Rethink and Revise’

ERISA needs to be rethought and revised, but the Ninth Circuit ruling will prevent that from happening.

Now advocates of greater state power will be looking for the magic formula, just the right words, that will survive an ERISA challenge. Maybe if we call the fine for noncompliance a “tax” or a “fee” or a “contribution,” the Supreme Court will allow it. Maybe if we don’t require a certain benefit but instead just require a certain amount of money. Maybe if we don’t call it a “requirement” but just an “expectation” or an “obligation.”

They’ll all assume there must be some way of phrasing this mandate so it will fool the Supreme Court into thinking it is not really a mandate. After all, it worked with the Ninth Circuit, didn’t it?

That kind of thinking will be great for attorneys, and it will tie up the federal judiciary for a decade. But it won’t do a thing to solve our health care problems.

Greg Scandlen ([email protected]) is president of Consumers for Health Care Choices.