o. 

Servces 
Department of Health and Human 

OFFICE OF

INSPECTOR GENERA

EFFECT OF ERISA ON STATE

INSURANCE LAWS:

MANAGEMENT ADVISORY REPORT

VlcrO 
Richard Po Kusserow 
INSPECfOR GENERA 
AUGUST  ,.  ,...  . ".
OFFICE OF INSPECfOR GENRA 
The mission of the Offce of Inspector General (OIG), as mandated by Public Law 95-452 
as amended, is to protect the integrty of the Department of Health and Human Servce
(RRS) programs as well as the health and welfare of 
beneficiaries served by those programs. 
This statutory mission is carried out through a nationwide network of audits
, investigations
and inspections conducted by three OIG operating 
components: the Offce of Audit
Servce
, the Offce of Investigations, and the Offce of 
Evaluation and Inpections. The
OIG also informs the Secretary of HHS of program
, and management problems, and
recommends courses to correct them. 
OFFCE OF AUDIT SERVICE 
The OIG's Offce of Audit Servces (OAS) provides all auditing servce for HHS, either by
conducting audits with its own audit resource 
or by overseeing audit work done by others.
Audits examine the performance of RRS 
programs and/or its 
contractors in
grantee and 
carrying out their respective 
responsibilities and are intended to provide independent
assessments of RRS programs and operations in order to reduce waste
, abuse, and
mismanagement and to promote economy and effciency throughout the 
Department. 
OFFICE OF INTIGATIONS 
The OIG's Offce of Investigations (01) conducts criminal , and admiistrative
, civil
investigations of allegations of wrongdoing in RRS 
programs or to HHS beneficiaries and of
unjust enrichment by providers. The investigative effort of 01 lead to 
criminal convictions 
administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 
control units which investigate and prosecute fraud and patient abuse in the Medicaid 
program. 
OFFICE OF EVALUATION AN 
INSPECTONS 
The OIG's Office of Evaluation and Inspections (OEI) 
conducts short-term management and
program evaluations (called inspections) that focus on issues of concern to the Department 
the Congress, and the public. The findings and recommendations contained in these 
inspection reports generate rapid, accurate, and up-to-date information on the effciency,
vulnerability, and effectiveness of departmental 
programs.  Department of Health and Human Servces

OFFICE 
INSPECTOR GENERAL

EFFECT OF ERISA ON STATE 
LAWS: 
INSURANCE 
MANAGEMENT ADVISORY REPORT 
Richard P. Kusserow 
INSPECfOR GENERA 
OEI-12-91-01420
d3a  TABLE OF CONTENTS 
EXECUTIVE SUMMARY 
INTRODUCTION 
FINDINGS 
RECOMMENDATIONS  , "
EXECUTIVE  SUMMARY

PUROSE 
This Management Advisory Report (MA) describes the effect of the Employee 
Retirement Income Security Act (ERISA) on State laws prohibiting discrimination in 
insurance plan coverage on the basis of place of residence.

BACKGROUN 
In 1990, the Office of Inspector General (OIG) released the report  Coordination of 
Third Party Liability Information between Child Support Enforcement and Medicaid. 
As part of this study, the OIG conducted intervews with CSE agency staff to 
document the problems they face in identifying and pursuing medical support. One 
problem identified is that some private insurers limit coverage of a policyholder 
dependents to those currently residing in the policyholder s residence. This has the 
effect of denying medical support for AFDC children who no longer live with their 
absent parent. We recommended that the Family Support Administration (now the 
Administration for Children and Families (ACF)) and the Health Care Financing 
Administration (HCF A) require States to implement legislation to prohibit 
discrimination in insurance plans on the basis of place of residence. This legislative 
proposal is currently being drafted. 
A potential loophole to such a strategy was brought to our attention in interviews 
with State CSE directors during a subsequent study. Some directors indicated that 
insurance plans covered under the Employee Retirement Income Security Act of 
ll) 
1974 (ERISA) (29 U.  are exempt from state regulation of
c. 9 1001 

insurance. This MAR presents the results of our research into this issue. 
FININGS 
ERISA prevents States from assung that AFDC dependnt chilren are covered uner 
their absent parents' group health insance  The Office of General Counsel has 
plans. 
informed us that State  not apply to employee benefit 
laws regulating insurance wil 
plans which are self-insured. 
iners 
The pool of self- have grown considerably since passage of ERISA, increasing the 
signifcance of this gap in coverage. 
RECOMMNDATION 
The HCFA and ACF shoul address ERISA preemption problems when drafting a 
inance 
legi'llative proposal to require States to prohibit discrimintion in  plans on the 
basis of place of residence.  , " , "
INTRODUCTION

PUROSE 
(MA) describes the effect of the Employee 
This Management Advisory Report 
Retirement Income Security Act (ERISA) on State laws prohibiting discrimination in 
insurance plan coverage on the basis of place of residence.

BACKGROUN 
, the Office of Inspector General (OIG) released the report  Coordination of 
In 1990
Third Party Liability Information between Child Support Enforcement and 
Medicaid."l This study assessed whether child support enforcement (CSE) agencies 
were indentifying absent parents with children on Aid to Families with Dependent 
Children (AFDC) who had group health insurance available to them, whether their 
AFDC-supported children were enrolled in the plan, and whether this information 
was transmitted to Medicaid in order to avoid payment for claims that should have 
been covered by private insurance. The OIG report documents that the Medicaid 
program would save $32 million annually if CSE agencies adequately detect and 
pursue available group health insurance. 
As part of this study, the OIG conducted interviews with CSE agency staff to 
pursuing medical support. One 
document the problems they face in identifying and 
problem identified by a number of these respondents concerned limitations in private 
insurance coverage. Some private insurers limit coverage of a policyholder 
dependents to those currently residing in the policyholder s residence. This has the 
effect of denying medical support for AFDC children who no longer live with their 
limitation in coverage costs the Federal government at least 
absent parent. This 
milion annually. We recommended that the Family Support Administration (now 
(ACF)) and the Health Care Financing 
the Administration for Children and Families 
Administration (HCF A) pursue a legislative remedy to require States, as a condition 
of receiving matching funds under title IV, to implement legislation to prohibit 
legislative 
residence. This 
discrimination in insurance plans on the basis of place of 
proposal is currently being drafted. 
A potential loophole to such a legislative strategy was subsequently brought to our 
attention through interviews with State CSE directors during our study, "State Child 
Support Enforcement Criteria for Targeting Medical Support " which was released in 
IOffice of Inspector General  Coordination of Third Party Liability Information between Child Support

Enforcement and Medicaid " OEI-07-88-00860, January 199.
 , "
draft to HCF A and ACF on May 20, 1991.  Some directors indicated that insurance 
plans covered under the Employee Retirement Income Security Act of 1974 (ERISA) 
(29 U.  ) are exempt from state regulation of insurance, and could
c. 9 1001 

therefore continue to discriminate against dependents on the basis of place 
residence despite state legislation generally prohibiting this practice. This 
presents the results of our research into this issue. 
20ffce of 
Inspector General  State Child Support Enforcement Criteria for Targeting Medical Support 
(draft), OEI-07-90-O120, May 1991.  FINDINGS

assug  chilen  uner 
ERISA prevents States from  that AFDC dependnt  are covered 
inance 
their absent parents' group health  plans. 
ERISA establishes Federal requirements for employee benefit plans, including 
health insurance plans. 
ERISA is a comprehensive Federal law which sets uniform standards for employee 
benefit plans. Employee benefit plans are pension plans and welfare plans, including 
to their employees 
health insurance plans. Businesses which provide health insurance 
are subject to ERISA requirements, regardless of whether they contract with a 
second party to provide the coverage and assume the risk or whether they self-
insure and assume the risk themselves. 
ERISA establishes requirements for the disclosure of certain information and the 
operation and management of such plans. ERISA concerns itself solely with 
administrative matters; it does not prescribe the content of plans and the nature of 
benefits that must be provided. 
Certain ERISA plans are exempt from state laws regulating insurance. 
Generally, the provisions of ERISA supercede state law. However, ERISA provides 
that it should not be construed to exempt anyone "from any law of any State which 
regulates insurance. . ." while at the same time stating that no employee benefit plan 
should be considered an insurance company for the purposes of any State law which 
regulates insurance companies or insurance contracts. As a result of this rather 
, which appears to give with one hand what it takes away with 
confusing language
another, much litigation has taken place over the breadth of ERISA's preemptive 
power. 
In response to our inquiry about the effect of ERISA on State laws such as those 
supported by the OIG in our 1990 report, the Office of General Counsel (OGC) has 
informed us that State  not apply to employee benefit 
laws regulating insurance will 
plans which are self-insured. However, since such laws apply to insurance 
companies, these laws wil effectively apply to ERISA plans which purchase outside 
participants. 
insurance policies to provide benefits to the plan 
As a result, State laws which prohibit insurers from limiting dependent coverage on 
the basis of place of residence would have no force for employers who self-insure. 
, coverage may be legally limited to dependents living with the 
For those businesses
covered employee, and State law generally prohibiting this practice would have no 
effect.  ...
, "
pol of self-iners have grown considerably sice pasage of ERISA, inreasng the 
Th 
significance of this gap in coverage. 
Self-insurers constitute a large and growing segment of the business community. The 
large majority of Fortune 500 companies are self-insured. In 1985, almost half of 
firms with 100 employees or more were self-insured, doubling the figure from four 
years earlier. Since, as discussed above, State law prohibiting discrimination in 
coverage on the basis of place of residence would not reach ERISA plans which are 
self-insured, a large part of the coverage problem identified in the 1990 OIG report 
unresolved. 
problems posed by ERISA for the Federal and State governments are serius and 
Th 
deserve furher consideration. 
A recent report by the U.S. General Accounting Office found that "States' limited 
authority over ERISA plans does not allow them to prohibit these plans from certain 
"3 ERISA poses 
actions to avoid payments for (Medicaid) recipients' covered costS.
serious problems for States trying to mandate employer benefits or undertake other 
initiatives to improve health care access: 
ERISA preempts state attempts to apply minimum benefit laws to 
self-insured plans. Self-insured plans may thus offer less 
comprehensive, and less expensive, health benefit plans. ERISA also 
relieves self-insured plans of the financial burden of contributing to 
state risk pools along with other insurers, and from the regulatory 
burden of other state insurance requirements. Finally, self-insured 
companies are not subject to state insurance premium taxes.... 
Indirect state regulation cannot be effective in this mixed market. 
Benefit mandates are realistically limited: the greater the state 
mandates, the greater the incentive for employers to self-insure. 
Attempts to raise funds for access initiatives from the health insurance 
market are also frustrated. ERISA preempts state attempts to directly 
statute has prevented attempts to 
tax employee benefit plans. The 
broaden the funding of state high-risk pools--self-insured employers 
have remained free of liability for loss assessment. Similarly, proposals 
to provide risk pools for small employers at the state level have been 
hampered by the inability of states to spread potential losses from such 
3U.S. General Accounting Offce  Medicaid: Legislation Needed to Improve Collections from Private

Insurers " GAOIHRD-91- , November, 1990.
 programs across the entire insurance market, including self-insured 
employers. 
Staff of HCF A and ACF have previously indicated that they are aware of the 
problems posed by ERISA and Federal preemption of State laws mandating health 
care coverage for children supported by absent parents. As more and more 
businesses self-insure, in part to insulate themselves from state laws regulating 
insurance, the exposure for the Medicaid program in financing health care for 
employees and their children grows. This topic has also been explored in various 
forums addressing obstacles to medical support for children of absent parents. 
-IMary Anne Bobinski, "Unhealthy Federalism: Barriers to Increasing Health Care Access for the Uninsured 
c. Davis Law Review (Volume 24, Number 2, Wimer 1990).  RECOMMENDATIONS

HCFA and ACF shoul addres ERISA preemptin problems when draftg a 
Th 
legilative propoal to requie States to prohibit discriintin in inance plans on the 
basis of place of resnce. 
In 1986, Congress amended ERISA to provide that certain State laws regulating 
insurance are not preempted by ERISA. These State laws prohibit employee benefit 
plans trom including any provision which limits coverage for an individual who would 
otherwise be covered by the plan, simply because that individual is eligible for 
Medicaid. Such State laws ensure that Medicaid is the payor of last resort. Thus 
precedent exists for a legislative remedy to avoid ERISA preemption problems. The 
HCFA and ACF may wish to consider this approach as they draft proposed 
legislative language.