o. 


Department of Health and Human 
 Servces 

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 grantee and contractors in 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, civil, and admiistrative 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: 

MANAGEMENT ADVISORY REPORT 

INSURANCE 

Richard P. Kusserow 

INSPECfOR GENERA 

d3a OEI- 12-91-01420
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 

1974 (ERISA) (29 U. c. 9 1001 
 ll) are exempt from state regulation of

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 plans. The Office of General Counsel has 

informed us that State laws regulating insurance wil not apply to employee benefit 

plans which are self-insured. 

The pool of self-iners 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 

legi'llative proposal to require States to prohibit discrimintion in inance plans on the 

basis of place of residence. 
, 

, 

INTRODUCTION


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."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 

document the problems they face in identifying and pursuing medical support. One 

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 

absent parent. This limitation in coverage costs the Federal government at least 

milion annually. We recommended that the Family Support Administration (now 

the Administration for Children and Families (ACF)) and the Health Care Financing 

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 

discrimination in insurance plans on the basis of place of residence. This legislative 

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. c. 9 1001 
 ) are exempt from state regulation of insurance, and could

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


ERISA prevents States from assug that AFDC dependnt chilen are covered uner 

their absent parents' group health inance 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 

health insurance plans. Businesses which provide health insurance to their employees 

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 selfinsure 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 

confusing language, which appears to give with one hand what it takes away with 

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 laws regulating insurance will not apply to employee benefit 

plans which are self-insured. However, since such laws apply to insurance 

companies, these laws wil effectively apply to ERISA plans which purchase outside 

insurance policies to provide benefits to the plan participants. 

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. 

For those businesses, coverage may be legally limited to dependents living with the 

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 

significance of this gap in coverage. 

Th 

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 

deserve furher consideration. 

Th 

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 

actions to avoid payments for (Medicaid) recipients' covered costS."3 ERISA poses 

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 

tax employee benefit plans. The statute has prevented attempts to 

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 

legilative propoal to requie States to prohibit discriintin in inance plans on the 

basis of place of resnce. 

Th 

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.