United States General Accounting Office

GAO Report to Congressional Requesters

July 1995 EMPLOYER-BASED

HEALTH PLANS

Issues, Trends, and

Challenges Posed by

ERISA

GAO/HEHS-95-167

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-259423 

July 25, 1995

Congressional Requesters

As the movement for comprehensive federal health care reform has faded,

the focus of reform has shifted to the states and private market. States

remain concerned about the growing number of individuals lacking health

coverage and about financing health plans for low-income individuals.

Employers have become increasingly aggressive in managing their health

plans and have adopted a wide variety of managed care plans and

innovative funding arrangements. Despite the recent moderation of health

care cost increases, both states and employers continue to seek

approaches that will enable them to more effectively provide health care

coverage to their respective constituencies.

Much of the debate on this subject centers on the Employee Retirement

Income Security Act of 1974 (ERISA). ERISA provides a federal framework

for regulating employer-based1

 pension and welfare benefit plans,

including health plans. Most Americans receive health care coverage

through employment, and most of these health plans are subject to ERISA

requirements. ERISA preemption effectively blocks states from directly

regulating most employer-based health plans, but it permits states to

regulate health insurers. Because the distinction between prohibiting

states from directly regulating employer health coverage and allowing

them to regulate health insurers is sometimes obscure, the courts have had

to determine many of the actual implications of ERISA preemption.

Because employer health plans are generally beyond the scope of state

authority, states consider ERISA a major obstacle to their ability to

effectively manage their health care markets. Although states seek

changes in ERISA to give them more flexibility to increase access to health

care and lower health costs, only Hawaii has received a statutory

exception from ERISA. The business community, however, notes that, by

specifically preventing states from regulating employers’ voluntary

provision of health coverage, ERISA promotes more effective provision of

such coverage. Business leaders maintain that ERISA is the lynchpin of their

efforts to effectively manage the cost and quality of the health care plans

they offer their employees.

1

Such plans may be established or maintained by employers, employee organizations (such as unions),

or both.

Page 1 GAO/HEHS-95-167 ERISA and Health Reform
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To assist the Congress in its decision-making on this issue, you asked us to

provide information on (1) ERISA’s relationship to the current system of

employer-based health coverage, (2) the implications of the trend toward

employer self-funding on the oversight of employees’ health care coverage,

(3) the kinds of state actions preempted by ERISA, and (4) the advantages of

ERISA preemption to employers that offer health care coverage to their

workers.

To develop this information, we interviewed officials representing the

following entities: state associations; the states of Massachusetts, Oregon,

Washington, and North Carolina; large multistate employers; business

associations; and the Department of Labor. To a lesser extent, we also

contacted several insurers, managed care plans, unions, providers,

consumer advocates, and their national representatives. Although

individual members of each of these interest groups have differing views,

in this report we generally use “states” or “employers” to refer to the

predominant perspectives of each group.

We also reviewed the legislative history, court decisions, and research on

ERISA. To analyze the financing and provision of health care coverage, we

examined data from the Bureau of Labor Statistics (BLS) Employee

Benefits Surveys and the Bureau of the Census Current Population Survey

(CPS).

Our review was conducted between November 1994 and May 1995 in

accordance with generally accepted government auditing standards.

We have also begun examining other related issues, including the

implications of small employers’ self-funding on states’ small group

reforms, for a forthcoming report.

Results in Brief Although ERISA preemption effectively blocks states from regulating most

employer-based health plans, it permits states to regulate health insurers.

We estimate that roughly 114 million individuals (44 percent of the U.S.

population) are covered by ERISA health plans. In most of these ERISA plans,

the employer purchases health care coverage from a third-party insurer

that is subject to state insurance regulation and insurance premium

taxation. But for nearly 40 percent of these plans, covering about

Page 2 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

44 million people, the employer chooses to self-fund2 and retain the risk

for its health plan. Because these self-funded plans are not deemed to be

insurance, ERISA preempts them from state regulation and premium

taxation. All ERISA health plans, including self-funded ones, are subject to

federal fiduciary and reporting standards.

Available data suggest that self-funding is increasing, particularly among

smaller firms. For example, one survey indicates that between 1990 and

1992 the percent of participants covered by self-funded plans in private

establishments with fewer than 100 employees increased from 28 percent

to 32 percent. Accurately assessing such trends, however, is difficult given

the dynamic nature of the health market and the increasingly blurred

distinction between self-funded and insured plans. In many cases,

employees do not know whether their employer-based health plan is

self-funded or purchased through an insurer. This results partly because

employers are increasingly adopting funding arrangements that are neither

fully insured nor fully self-funded. These arrangements include increased

use of stop-loss coverage to moderate the employer’s risk and alternative

arrangements with managed care plans that share risk among the plan,

providers, and the employer. Currently available data sources do not

provide sufficient detail to accurately gauge such trends, in part because

ERISA preempts states from requiring health plans to report such data and

federal data collection efforts have been limited.

The growth of self-funding poses concerns for the states because fewer

individuals are insured by health plans that states oversee. States view

ERISA as an impediment to ensuring adequate consumer protections for all

individuals with employer-based health care coverage as well as for

enacting administrative simplification or cost reduction reforms that

would improve the efficiency, equity, and efficacy of their health care

markets. States maintain that they should have the right to uniformly tax

all participants with health coverage without ERISA’s shielding a group of

employers. States also believe that some of the emerging self-funded

health plans with extensive stop-loss coverage closely resemble more

traditional health insurance and are trying to regulate these plans.

2

Although both the terms “self-insured” and “self-funded” are commonly used to describe employer

health plans that are less than fully insured, neither is completely accurate. Insurance is a contractual

arrangement in which financial risk from one party (the “insured”) is transferred to another party (the

“insurer”). In this report, we refer to firms that bear a large portion of the risk for employee health

claims as self-funded rather than self-insured because no insurance arrangement covers this risk. Even

the term “self-funded” may not be entirely accurate because, in most cases, employers do not set aside

separate funds to finance their health plans but pay for incurred health costs through general assets. A

more accurate but too awkward term may be “less than fully insured” because many employers with

self-funded plans purchase stop-loss insurance to mitigate their potential losses or purchase prepaid

health care contracts for some employees.

Page 3 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Employers, on the other hand, believe that, by providing the underlying

framework for voluntary health care coverage, ERISA has been integral to

their efforts to contain health care costs and design plans tailored to their

employees’ needs. They are concerned that any modification to ERISA will

jeopardize their recent cost containment gains and, worse yet, may impose

an additional burden on employers voluntarily providing coverage. They

maintain that if the costs associated with state regulation following an

ERISA amendment are too high, they may have to reevaluate how they

voluntarily offer health benefits.

To date, the courts have played a key role in defining the extent to which

ERISA preempts state attempts to regulate or tax employer health plans.

Earlier decisions appeared to interpret ERISA as restricting a broad range of

state provisions that may relate to employer health plans. But the most

recent Supreme Court decision noted that “nothing in the language of the

Act . . . indicates that Congress chose to displace general health care

regulation.” Evaluating the state response to this ruling is premature, but it

may suggest greater flexibility for states, which will probably lead to

further litigation.

ERISA’s effect on the ability of states and employers to influence the health

care system’s impact on their constituents remains ambiguous and is

subject to further interpretation. Better information on the participants in

self-funded plans and state regulation’s effect on these plans is currently

missing.

Background The current ERISA debate stems primarily from the act’s preemption of

state laws that “relate to” employer- or union-sponsored health plans,

which provide coverage for about 140 million Americans. In general, ERISA

prevents states from regulating employer health plans but allows them to

regulate the terms and conditions of health insurance sold in the state.

Thus, for example, states cannot require employers to provide health care

coverage, but they can require that all health insurance policies sold in the

state include specific benefits (for example, mental health benefits). This

results in a very different regulatory framework depending on whether the

employer purchases its health care coverage from an insurer, which the

state regulates, or self-funds its health plan, avoiding many state

regulations.

Page 4 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Although ERISA prevents states from directly regulating employer health

plans, it does impose certain federal requirements on all health plans.

These include

• reporting requirements providing, for example, that information about

each plan be reported annually to the Department of Labor;

• disclosure requirements ensuring that plan participants and beneficiaries

have access to information about the plan;

• fiduciary obligations prohibiting conflicts of interest and imposing certain

fund management and investment practices; and

• plan claims filing procedures including, for example, a process for

appealing claim denials.3

ERISA does not, however, require employers to provide or maintain a

minimum level of health benefits nor to set aside funds to pay for expected

health claims.

ERISA requirements apply to all private employer-based health plans,

whether fully insured through a third party or self-funded.4

 In a self-funded

health plan, an employer directly holds much of the financial risk

associated with its employees’ health care costs. Often, an employer that

self-funds simplifies its administrative burden by contracting with an

insurance company or other organization to perform administrative

services.5

 In addition, an employer that self-funds often purchases

stop-loss insurance that moderates its risk by capping the amount of

claims it will pay directly for either an individual or the group.

Effect on Health Plans

Changing as Courts

Continue to Interpret

ERISA Preemption

Court decisions on the scope of ERISA preemption continue to affect the

nature and structure of employer-based health plans. ERISA was initially

passed primarily in response to concerns about the solvency and security

of employer-based pension plans, but its preemption clause made it

possible for employers to provide all employee benefits—including health

plans—largely free from state regulation. The impact of ERISA has become

3

In addition, the 1986 Consolidated Omnibus Budget Reconciliation Act amended ERISA to add

provisions requiring group health plans covering over 20 employees to continue health coverage for 18

to 36 months following a termination of employment and certain other conditions (29 U.S.C. 1161 et

seq.).

4

Governmental plans—those offered by local, state, or federal governments—and church plans are

generally excepted from ERISA requirements.

5

These are typically called “administrative services only” contracts and are performed by “third-party

administrators.”

Page 5 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

increasingly significant as the number of self-funded health plans has

grown.

Court Decisions Lead to

Sharp Distinction in

Regulating Self-Funded

and Fully Insured Plans

The original ERISA preemption language was sufficiently ambiguous that

courts have had to elaborate on its scope.6

 Courts have tried to delineate

how closely state laws must relate to employer health plans to be

preempted. In Metropolitan Life Ins. Co. v. Massachusetts,

7

 a unanimous

Supreme Court identified a crucial distinction under ERISA between the

treatment afforded health plans that are self-funded and those that are

fully insured. The Court’s decision permitted states to generally enforce

laws that apply to insurers even though this would impact the employee

health plans that they insure.

In effect, this decision has produced a divided regulatory system: the

federal government retains the sole authority under ERISA to regulate

employer-based health plans but not health policies sold by insurance

companies; states can regulate health insurance companies and their

policies but not the plans provided by employers.8

 Thus, insured health

plans are subject to specific consumer protections, state-mandated benefit

laws, premium taxes, any-willing-provider laws, and participation in

community-rated or high-risk pools; self-funded health plans are not.

The distinction between self-funded and fully insured health plans does

not, however, extend to health care coverage offered by federal, state, and

local governments. For example, health plans offered through the Federal

Employees Health Benefits Program (FEHBP), although not self-funded, are

not subject to many state regulations such as insurance premium taxes

and mandated benefits. Similarly, some state health plans are legally

exempt from compliance with state requirements, although these plans

often do comply or, in some instances, have legal requirements that apply

only to state employee health plans.

6

For example, the Supreme Court noted that ERISA’s preemption clauses “perhaps are not a model of

legislative drafting” (Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 739 (1985)), and they

have been characterized as “a veritable Sargasso Sea of obfuscation” (Travelers Ins. Co. v. Cuomo, 14

F.3d 708, 717 (2d Cir. 1993)).

7

471 U.S. 724 (1985).

8

The McCarran-Ferguson Act, enacted in 1945, provides that federal laws are not to be construed to

apply to the insurance industry unless they explicitly so state (15 U.S.C. 1012(b) (1988)). The result has

been that regulating the insurance industry has been left largely to the states. In addition, both the

federal and state governments share responsibility for regulating health plans that are multiple

employer welfare arrangements (29 U.S.C. 1144(b)(6)).

Page 6 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Table 1 categorizes and summarizes regulatory differences among

employer-based health plans.

Table 1: Regulatory Status of Employer-Based Health Insurance

ERISA plans

ERISA exempta

Type of employer-based

health plan Self-funded Fully insured

Federal Employees

Health Benefits Program

State/local government

employees

Risk bearer Employerb Insurer Insurerc Insurer or government

State premium taxation Exempt Insurer pays Exempt (since 1990) State determines

Regulation Exempt from state

regulation and mandated

benefits

Department of Labor

administers fiduciary,

reporting, and disclosure

requirements

Insurer subject to state

regulation and mandated

benefits

Department of Labor

administers fiduciary,

reporting, and disclosure

requirements

Exempt from state

regulation and mandated

benefits (since 1978)

Administered by Office of

Personnel Management

(OPM) laws

State determines

No significant federal role

Rights and remedies for

denied claims

Appeals reviewed

internally by employer

Employer not subject to

punitive or compensatory

damages

Appeals reviewed

internally by insurer

Employer and insurer not

subject to punitive or

compensatory damages

OPM reviews appeals

Law exempts from

punitive or compensatory

damages

Determined by state law

Damages determined by

state law

aChurch plans are also exempt from ERISA.

bMany employers may pass on some risk to a stop-loss insurance carrier.

cThe FEHBP operates much like a self-funded health plan, however, because the risk to insurers

is minimal. Those insurers with cumulative operational losses adjust premiums upward to recoup

losses. Plans receive a separate negotiated profit regardless of whether they experience

operating losses or gains. See Federal Compensation: Premium Taxes Paid by the Health

Benefits Program (GAO/GGD-89-102, Aug. 8, 1989).

The courts continue to delineate what state actions are allowed or

preempted under ERISA. Recently, the Supreme Court issued its decision in

New York State Conference of Blue Cross & Blue Shield Plans v. Travelers

Ins. Co.9 This decision did not delineate fully between state actions that

are preempted and those that are not but indicated that courts may

approve state actions that do not conflict with ERISA’s underlying

objectives or impact too greatly on employee benefit plans. In the wake of

the Court’s ruling in Travelers, states are likely to perceive that they have

more options and greater flexibility than previously recognized. In

particular, the decision permits New York and other states to adopt

hospital rate setting systems and may permit states to tax providers. The

9

115 S. Ct. 1671 (1995).

Page 7 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

case suggests that state laws affecting employee health plans will have to

be judged individually on the facts and circumstances in each case. The

nature and magnitude of the impact on employee benefit plans of each

state law at issue will determine the outcome. In cases in which the state

law does not conflict with ERISA’s objectives, it should survive legal

challenge. The Travelers case leaves substantial questions unresolved

about ERISA preemption that may need to be resolved through further

litigation.10

Employers Adopt Funding

Methods That Blur

Distinction Between

Self-Funded and Fully

Insured

Although ERISA and court decisions have produced a sharp distinction in

the regulatory status of self-funded and insured health plans, most

employer plans can be categorized as ranging from full insurance to

complete self-funding. Clearly distinguishing between self-funded and fully

insured plans is growing more difficult as the health market changes.

Among factors contributing to the confusion are more extensive use of

stop-loss coverage and innovative risk-sharing arrangements between

employers and managed care organizations.

The level of stop-loss coverage that a self-funded employer purchases is

one factor that influences where an employer’s plan fits within this range:

A plan with a low stop-loss threshold self-funds a smaller share of its risk

than a plan with a high stop-loss threshold. Particularly among smaller

employers, some health plans have stop-loss coverage beginning at a

relatively low level of health claims. In addition, many employers that offer

self-funded health plans also provide insured coverage to some employees.

For instance, many employers that provide a self-funded plan also offer

their employees a choice of one or more health maintenance organizations

(HMO) that may not be self-funded. Some employers, however, are

beginning to adopt alternative financing arrangements with managed care

plans that place some financial risk with the employer as well as the plan

and its providers. Some employers may also provide coverage for specific

conditions, such as cancer or mental health care, through a separate plan

that may be either insured or self-funded. In many cases, employees will

not know whether their employer-based health plan is self-funded or

purchased through an insurer, especially since commercial insurers often

provide administrative services for self-funded health plans.

10In appendix I, we further discuss ERISA’s provisions relating to health plans and the courts’ major

decisions on ERISA preemption.

Page 8 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Data Are Limited but

Indicate That

Employers Are

Increasingly

Self-Funding

Data on the number and characteristics of self-funded ERISA plans are

scant largely because efforts to collect this information on the federal level

have been limited. The incomplete data that do exist, however, indicate

that self-funding has increased recently, both among small and large firms.

Employers have increasingly self-funded to better manage their costs,

through greater control over their health benefits and plan assets, as well

as to maintain uniformity in health plans that cross state borders.

The federal government is the only entity that can collect complete data on

the number and characteristics of self-funded plans because ERISA

preempts state efforts to require employers to provide health plan data.

Because (1) the current federal reporting requirements focus on pension

plans rather than health plans, (2) health plans with fewer than 100

participants are generally exempt from reporting, and (3) inconsistencies

exist among the data reported for health plans, the current data are of little

value in assessing the number or characteristics of employers that

self-fund their health plans. Furthermore, the Department of Labor is

currently considering revisions, but whether this would enhance or reduce

the information available on self-funded health plans is unclear.11

The lack of a clear distinction between self-funded and insured health

plans also contributes to the difficulty in estimating the number of

individuals enrolled in self-funded plans. Particularly as the distinction

between self-funded and fully insured plans has blurred due to the

increased use of stop-loss coverage and alternative funding arrangements

with HMOs, surveys and employers inconsistently report whether a plan is

self-funded or fully insured.12

Despite incomplete data, our analysis of employer benefits surveys shows

that in 1993 approximately 44 million individuals, or 17 percent of the U.S.

population, were enrolled in self-funded ERISA health plans (see fig. 1).13 An

additional 27 percent of the population, or about 69 million individuals,

11See appendix II for a discussion of the Department of Labor’s regulation of ERISA plans.

12For example, several recent surveys we examined (including those conducted by Foster Higgins,

Peat Marwick, and BLS) did not determine whether HMO plans offered by an employer were partially

self-funded. However, although perhaps still infrequent, several large employers we contacted have

established alternative funding arrangements with HMOs that include the employer’s retaining some

risk. A 1989 survey by Foster Higgins reported that about 4 percent of employers’ HMO plans were

self-funded, but more recent Foster Higgins surveys have not discussed self-funding among HMOs.

13This may understate the percentage of the U.S. population enrolled in self-funded plans and thus fully

exempt from state regulation. A BLS survey found that 27 percent of participants covered by state and

local governments were enrolled in self-funded plans. However, as previously stated, it is unclear how

many employer health plans sponsored by governments, either self-funded or fully insured, would have

to comply with the state requirements that would apply if they were ERISA fully insured plans.

Page 9 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

were enrolled in insured plans that are also subject to ERISA. Thus, a total

of nearly 114 million Americans were enrolled in ERISA plans. The

remainder of the population either had coverage from a government or

church employer (27 million), Medicare (31 million),14 Medicaid

(24 million),15 individual insurance (20 million), or Department of Veterans

Affairs (VA) or Civilian Health and Medical Program of the Uniformed

Services (CHAMPUS) health plans (5 million);16 40 million individuals were

uninsured.17

14To avoid double counting, this number does not include individuals who also received

employer-based coverage and who were working (1.7 million individuals). For these individuals,

Medicare would be a secondary payer to the primary employer-based coverage. This number does

include 8.3 million individuals who received employer-based coverage but did not indicate that they

were working. In these cases, we assumed that Medicare was the primary payer and that the

employer-based plan was Medicare supplemental (Medigap) coverage. The Health Care Financing

Administration (HCFA) reported that 35.6 million individuals were enrolled in Medicare in 1992.

15To avoid double counting, this number includes only those individuals who did not also have either

Medicare or employer-based coverage during 1993. If these individuals were included, Medicaid

enrollment would total 32 million individuals. HCFA reports that 31.2 million individuals were enrolled

in Medicaid in 1992.

16To avoid double counting, this number does not include 5 million individuals who also received

employer-based coverage, Medicare, or Medicaid during 1993.

17Appendix III further describes our approach for estimating the number of individuals in self-funded

plans.

Page 10 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Figure 1: Health Coverage by Source,

1993

15.3% •

Uninsured

1.7%

CHAMPUS/VA/IHS

12.1%•

Medicare

•

9.2%

Medicaid

•

7.8%

Individual

26.6%•

ERISA—Insured

•17.0%

ERISA—Self-Funded

•

10.2%

ERISA-Exempt Employer Plans

Self-Funded ERISA Plans

Notes: ERISA-exempt includes employer health plans sponsored by governments and churches.

IHS stands for Indian Health Service.

Source: GAO calculations based on Bureau of the Census and BLS data.

Page 11 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

The number of individuals enrolled in self-funded plans appears to be

growing. On the basis of calculations we made from existing data sources,

the total number of individuals enrolled in self-funded plans increased by

nearly 6 million from 1989 to 1993. This growth is occurring in firms of all

sizes.18 As shown in figure 2, the percentage of plan participants enrolled

in self-funded health plans has increased from about 28 percent in 1986 to

about 46 percent in 1993 in medium sized and large private establishments

(those with at least 100 employees).

18Self-funding is most prevalent among large firms. A survey by Foster Higgins found that 78 percent of

firms with 1,000 or more employees and 89 percent of firms with 20,000 or more employees were

self-funded in 1993.

Page 12 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Figure 2: Growth in Self-Funding in Medium and Large Private Establishments, 1988 to 1993

1988 1989 1990 1991 1992 1993

0

5

10

15

20

25

30

35

40

45

50

Year

Percent

Self-funded plans

Note: Includes establishments with 100 or more employees only.

Source: BLS Employee Benefits Surveys, 1988-1993.

Page 13 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Growth in self-funding appears to be occurring in small firms as well. In

1992, 32 percent of plan participants covered by private establishments

with fewer than 100 employees were in self-funded plans;19 in 1990,

28 percent of plan participants in such firms were in self-funded plans.

Limited evidence shows that even smaller firms—those with fewer than 50

employees—are beginning to self-fund. For example, a trade association

representing self-funded plan interests provided examples of employers

with as few as 13 employees that chose to self-fund. One third-party

administrator we contacted has rapidly expanded its business among

small self-funded employers. By 1994, this firm had contracts with more

than 2,300 self-funded firms with 50 or fewer employees, including 132

firms with fewer than 10 employees.

The growth in self-funding in small and large firms reflects employers’

recognition that self-funding employee health benefits offers several

advantages. Employers believe that self-funding allows them to directly

gain from their cost-containment efforts by having plan design flexibility,

control of premium assets, and reduced administrative costs. In addition,

employers’ self-funding allows them to avoid potentially costly state

regulation, including premium taxes, reserved funding requirements,

benefit mandates, any-willing-provider laws, and participation in

community-rated or high-risk pools. Employers also indicate that the

ability to maintain national uniformity in plan design and benefits through

self-funding enhances employee relations.

States Claim ERISA

Limits Their Ability to

Reform Their Health

Care Systems

As self-funding has grown, states have lost regulatory oversight over a

growing portion of the health market. Between 1989 and 1993, we estimate

that the number of self-funded plan enrollees increased by about 6 million

individuals, and the number of privately insured individuals that state

insurance commissioners regulate declined even further as more

individuals became uninsured or enrolled in Medicaid or Medicare. With

these changes, states are concerned that they cannot provide consumer

protections to self-funded health plan participants and that their ability to

tax and collect data on health plans is eroding.

19This number may overstate the actual percentage of participants enrolled in self-funded health plans

in small firms. The number of participants in firms with fewer than 100 employees may be lower

because the data are collected by establishment rather than by firm; that is, many establishments are

part of a larger firm that enrolls its employees in a self-funded health plan. It is also noteworthy that

many small employers do not offer health coverage.

Page 14 GAO/HEHS-95-167 ERISA and Health Reform
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More broadly, states view ERISA preemption as an obstacle to their

adopting a wide range of health care reform strategies.20 Given the

improbability of federal reforms to achieve universal coverage in the near

future, many state governors and legislators are seeking an active role in

expanding the number of individuals covered and in controlling health

care costs. The response to the 1994 national health care reform debate

and the views of recently elected governors and state legislators may have

increased opposition to comprehensive reform in some states, but the

impetus for incremental changes remains strong.

States Concerned That

Consumers in Self-Funded

Plans Have Inadequate

Protection

States believe that ensuring adequate consumer protections will become

increasingly difficult as more firms self-fund, exempting them from state

insurance regulation. Our analysis of CPS data indicates that the number of

individuals under state insurance commission oversight (that is, those with

insured health plans offered through employers or purchased individually)

declined by nearly 8 million between 1989 and 1993. Much of this decline

was attributable to growth in the uninsured population and Medicare and

Medicaid enrollment. However, enrollment in self-funded health plans

increased by nearly 6 million during this time, also contributing to the

decline in the number of insured health plan participants under state

oversight.21 Although little evidence exists to substantiate self-funding’s

adverse effect on plan participants, state regulators are concerned that

federal fiduciary standards and their enforcement may not provide

sufficient consumer protections for these participants.22

State regulators are particularly troubled that firms that they believe

cannot adequately absorb the costs of self-funding will nonetheless choose

this option. Although only anecdotal evidence exists of the difficulties

facing small firms if they self-fund, in part because states do not have

access to this information, some regulators contend that firms with fewer

than 500 employees should not be completely self-funded. However, the

20For a more thorough discussion of the state perspective on ERISA, see Patricia A. Butler, Roadblock

to Reform: ERISA Implications for State Health Care Initiatives, National Governors’ Association

(Washington, D.C.: 1994).

21While the number of individuals in fully insured ERISA plans decreased by 9.2 million between 1989

and 1993, the number of enrollees with individual coverage increased by 1.7 million. The net effect is

that the states lost regulatory authority over 7.5 million enrollees in the private market. In addition to

the growth of enrollment in self-funded plans (5.7 million individuals), Medicare grew by nearly

2 million individuals, Medicaid increased by more than 8 million individuals, and more than 6 million

more individuals were uninsured.

22For further discussion of states’ concerns about the need for stronger consumer protections for

beneficiaries of self-funded plans, see ERISA: A Call for Reform: Recommendations of the NAIC ERISA

Working Group, National Association of Insurance Commissioners (Washington, D.C.: 1994).

Page 15 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

size of firm that can adequately bear risk is subject to debate, especially

since small firms can purchase stop-loss coverage to moderate their

exposure to large, unexpected losses.23 In addition, disagreement exists

about whether a firm’s size should be the measure of its ability to self-fund

rather than its wage structure or financial condition. For example, some

believe that even very small firms with relatively large assets can self-fund

safely with adequate stop-loss coverage.

Of more concern to state regulators than small firms’ purchase of

traditional stop-loss coverage, however, are new stop-loss insurance

products that more closely resemble traditional health insurance products

with a high deductible. These products allow small firms to self-fund,

avoiding state regulation, while only bearing a small portion of the risk. To

address this issue, the National Association of Insurance Commissioners

(NAIC) is developing a model act that would define minimum stop-loss

coverage levels, preventing the sale of products that are merely a

subterfuge for traditional health insurance.24 New York, Oregon, and North

Carolina have already tried to address this issue by prohibiting or limiting

the sale of stop-loss coverage to small firms.25

ERISA Restricts State

Efforts Regarding

Employer Health Plans

In addition to states’ concerns about the loss of regulatory oversight due to

the increase in self-funded plans, states view ERISA as an obstacle to

enacting comprehensive reforms and to adopting the more modest

administrative simplification and insurance regulation proposals on which

many states are focusing. ERISA clearly preempts state laws that mandate

employers to offer or contribute to coverage. In addition, according to a

report of the National Governors’ Association (NGA), the following are

potential state actions prohibited due to judicial interpretations of ERISA:

26

• “establishing minimum guaranteed benefits packages for all employers;

23Even with stop-loss coverage, some believe that small firms, for example, those with fewer than 50

employees, cannot safely self-fund.

24An NAIC draft model act would define stop-loss plans as those exceeding an established threshold of

claims, whereas plans that have a lower threshold are regulated by the states as traditional health

insurance. For example, this model act would set thresholds of $20,000 per individual or 120 percent of

expected claims for stop-loss coverage.

25In Oregon, this law applies to firms with 3 to 25 employees, while New York’s law applies to firms

with 3 to 50 employees and North Carolina’s law applies to firms with 1 to 49 employees. Whether

these laws are shielded from ERISA challenge because they regulate stop-loss insurers rather than

health plans is not fully resolved.

26See NGA Policy: Health Care Reform, National Governors’ Association (Washington, D.C.: 1995).

Page 16 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

• developing standard data collection systems applicable to all . . . health

plans;

• developing uniform administrative processes, including standardized claim

forms;

• establishing all-payer rate-setting systems;27

• establishing a statewide employer mandate;

• imposing a level playing field through premium taxes on self-[funded]

plans; and

• imposing a level playing field through provider taxes where the tax is

interpreted as having an impermissible direct or indirect impact on

self-[funded] plans.”

The Supreme Court’s recent decision in Travelers, however, may have

provided states more flexibility in some areas, particularly rate setting and

provider taxes, than reflected in the NGA list.

Because several states have passed comprehensive reform legislation that

would likely be preempted by ERISA, some states have petitioned their

congressional delegations to propose legislation granting broad

exemptions from ERISA.

28 Only Hawaii has succeeded in obtaining a

statutory exemption from ERISA, enabling the state to mandate employers

to provide health care coverage. Other states that have not tackled

comprehensive reform have sought more limited ERISA exemptions for

specific regulatory or tax initiatives. For example, before the Supreme

Court ruling earlier this year, New York sought to amend ERISA to allow the

state to continue taxing hospital services. Finally, to balance state desires

for additional regulatory authority over self-funded health plans with

business concerns, some state representatives have proposed establishing

additional federal standards to apply to all health plans.29

27For example, Maryland sets hospital rates for all payers, including Medicare, Medicaid, and both

self-funded and fully insured health plans. Other states, such as New York, also set hospital rates for

some payers but not for Medicare.

28Current law provides for states to request and be granted a Medicaid waiver, which essentially

permits them to disregard selected Medicaid requirements that would otherwise apply. Some states

would like ERISA amended to establish a similar mechanism for granting so-called ERISA waivers.

29For example, the federal government could establish a minimum benefits package and data

collection requirements. States may or may not be allowed to go beyond these national requirements.

Page 17 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

State Support for

Employer Mandates Is

Fading

Several states have passed comprehensive health care reform legislation,

including employer-mandated coverage or play-or-pay30 systems, that

would likely be preempted without an exemption from ERISA. Although

several states continue to seek waivers, these states’ commitment to their

enacted reforms is fading. Indeed, implementation has been delayed in

most states in part because of concerns about an ERISA challenge but also

because of several other key factors. These factors include changes in

governors and state legislative representatives, constrained state budgets,

difficulty in passing necessary financing measures, and the opposition of

small businesses.

For example, Massachusetts has delayed the implementation of a

play-or-pay system several times since its enactment in 1988, and the

current governor seeks its repeal. In 1995 Washington repealed the

employer-mandated health care coverage passed in 1994 because the

newly elected legislature opposed it. Opponents of the employer mandate

in Oregon anticipate that a sunset clause in the legislation will obviate the

need for an outright repeal.31

States Believe That ERISA

Preemption Also

Undermines Incremental

Initiatives

Although several states have retreated from comprehensive health care

reforms, many continue to seek narrower reforms, including taxing

authority and data collection, that ERISA may also preempt. States maintain

that they should have the right to apply taxes uniformly to all participants

in the health care market without ERISA’s shielding a group of employers.

Because self-funded plans are shielded from premium and other taxes, as

well as participation in high-risk pools, a disproportionate share of the

cost of state programs to improve access or expand coverage could fall on

insured plan participants.32

States would also like to collect data to adequately assess characteristics

of their health care market and the effectiveness of their small group

reforms.33 States would like data partly because they fear that increased

self-funding in small firms will lead to only the high-risk and high-cost

30This approach would require employers to either provide health care coverage to their employees or

pay a tax to subsidize state-sponsored health care coverage.

31The sunset clause requires Oregon to receive necessary ERISA waivers by January 1996, or relevant

sections of the reform act become invalid.

32Further information on the taxes that states assess on health plans appears in appendix IV.

33For information on the types of small group reforms that states have enacted, see Health Insurance

Regulation: Variation in Recent State Small Employer Health Insurance Reforms

(GAO/HEHS-95-161FS, June 12, 1995).

Page 18 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

groups remaining in the small group insurance market.34 For example,

although Massachusetts officials no longer seek an ERISA waiver to

implement their play-or-pay provision, they would like some narrower

changes to ERISA to allow them to collect information on self-funded health

plans to measure the success of their small group reforms.

Employers View

ERISA as Critical to

Their Ability to

Efficiently Provide

Health Care Coverage

Many employers, particularly larger self-funded firms, view ERISA

preemption of state regulation of employer health plans very differently

from the states: they view it as a fundamental strength of a voluntary

employer-based health care system.35 They note that preemption was

designed to provide uniform rules for all employers and to prevent states

from imposing 50 different regulatory approaches to health care. In

general, they view private market decisions as a more effective tool in

managing the nation’s health care system than a government-sponsored

system or state regulation.

Although employers focus on different aspects of the ERISA debate, they

are generally opposed to granting the states greater flexibility. They

believe that any change in ERISA may lead to state requirements that would

hinder their ability to manage the cost and quality of their employees’

health care. Also, employers are concerned that greater state flexibility

will mean higher costs for them, either through additional administrative

burden, taxes, or increased litigation resulting from changes in the ERISA

appeals process. They have expressed concerns that if changes to ERISA

significantly raise their costs, they may have to reevaluate their voluntary

provision of health benefits.36

Employers Concerned

That ERISA Changes May

Reduce Their

Cost-Containment Ability

Employers maintain that ERISA preemption provides the framework for

them to manage the cost of their employees’ health care coverage. They

cite several recent studies and reports, as well as their own experience, as

evidence of their initiatives’ effectiveness. For example, employer surveys

by Foster Higgins, an employer benefits consulting firm, indicate that

average costs for employer-based health coverage decreased 1.1 percent

34This may be particularly the case in states that have passed laws providing for tight rating

restrictions, narrowing the range in premiums that health plans are allowed to charge, and for

guaranteed issue, requiring health plans to offer coverage to any individual.

35See G. Lawrence Atkins and Kristin Bass, ERISA Preemption: The Key to Market Innovation in Health

Care, Corporate Health Care Coalition (Washington, D.C.: 1995).

36In fact, many employers have already dropped retiree health benefits, though not because of any

ERISA modifications. See Retiree Health Plans: Health Benefits Not Secure Under Employer-Based

System (GAO/HRD-93-125, July 9, 1993).

Page 19 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

between 1993 and 1994. They are concerned that changes to ERISA that

either grant greater state flexibility or impose federal standards may

severely hamper their cost-containment efforts. Employers point to

current state-mandated benefits, any-willing-provider laws, and risk

pooling in the insured market as examples of state actions that would

undermine their recent cost-containment and quality enhancement strides.

Employers argue that benefit mandates, if applied to self-funded plans,

may limit their ability to alter benefits offerings to control costs. For

example, employers cite that their ability to change mental health benefits

from a limited number of inpatient and outpatient days to a more flexible

case management system has saved money and improved quality of care.

They believe that a mandated mental health benefit as adopted in some

states for insured plans would restrict benefit design and not allow this

innovation.37

Employers are also concerned that states’ any-willing-provider laws may

severely impact employers’ cost-containment efforts.38 They believe that

their increased reliance on managed care has been integral to lowering

their health care costs.39 Because the basic tenets of managed care are to

limit choice of provider to control utilization and ensure adequate patient

volume and provider quality, employers argue that if the law requires

managed care plans to accept all providers meeting certain criteria,

managed care will lose its ability to control health costs. Although the

courts are deciding the scope and extent of any-willing-provider laws,

these laws have not been applied to arrangements between self-funded

plans and managed care providers. Employers oppose any amendments to

ERISA that would extend the reach of these laws.

In addition, employers generally oppose amendments to ERISA that would

allow states to include self-funded plans in community-rated pools. In

community-rated pools, health costs are spread more evenly among the

participants in the pool without reflecting the employer’s actual claims

experience. Thus, an employer with previously higher than average health

37See appendix V for a list of state-mandated benefits and a discussion of their potential costs.

38Any-willing-provider laws require a health plan to include in its managed care network any provider

that meets the plan’s terms. According to the Group Health Association of America, of the states with

any-willing-provider laws, 10 have laws that apply to all providers, 14 have laws that apply to

pharmacists, 3 have laws that apply to physicians, and 4 have laws that apply to nonphysician

providers. However, in most states the laws are limited because they do not apply to HMOs or apply

only to particular types of managed care plans.

39A survey by KPMG Peat Marwick indicates that in 1994 nearly two-thirds of individuals with

employer-based insurance were enrolled in network-based managed care.

Page 20 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

care costs would see those costs reduced, and one with lower than

average costs would see them increased. Employers argue that community

rating removes nearly all incentives for them to innovate to control costs

because the savings do not accrue to the employer but to the whole

community.

Employers Contend That

ERISA Changes Could

Increase Their Costs

Employers are concerned that amendments to ERISA that increase state

flexibility will result in higher administrative costs and higher taxes, either

directly or through an employer mandate. Also, they believe that ERISA

changes may cause them to lose other advantages of self-funding, such as

control over plan assets, and expose them to expensive lawsuits arising

from health care claim denials.

Employers oppose ERISA amendments that would grant states regulatory

authority over self-funded plans. Large and small firms with workers in

many states view the prospect of different state reform initiatives and

regulatory systems as cumbersome, costly, and unnecessary. The

administrative burden may be especially acute in the 41 U.S. metropolitan

areas that cross state boundaries.40 However, measuring the potential cost

of compliance with differing state administrative requirements would

depend largely upon the variance in regulations that states adopt as well

as how employers design and administer their plans.

Multistate employers maintain that compliance with multiple systems or

requirements will hinder their ability to preserve nationwide uniformity in

their health plans, harming employee relations and weakening cost-control

initiatives. By maintaining a uniform benefits plan, employers can provide

equitable benefits to employees in different geographic locations, transfer

employees without disrupting benefit coverage, and collectively bargain

on a nationwide basis.41 For these reasons, to the extent that employers

support health care reforms, they prefer uniform national standards to

varying state standards.

40See Health Care Alliances: Issues Relating to Geographic Boundaries (GAO/HEHS-94-139, Apr. 8,

1994).

41Despite the value to employers of a nationally uniform plan, employers also often contract with

managed care plans that vary substantially in benefit structure and operation in different geographic

regions. In this case, the lower costs of managed care plans may compensate for reduced uniformity.

Page 21 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Employers are concerned that ERISA may be modified to permit states to

directly or indirectly tax employer health plans.42 Employers contend that

many states that are experiencing severe financial constraints, in part due

to rapidly increasing Medicaid costs, may seek the authority to tax

employers who already provide health coverage. Employer groups

maintain that they do not necessarily oppose state programs to improve

access but believe that states should fund their initiatives through

generally applicable taxes clearly within the scope of their authority, even

if politically unpopular. This would more fairly distribute the burden of

providing health care coverage to the uninsured rather than create an

incentive for employers to not offer coverage.

To illustrate their point, employers point to state taxes, even typical ones

like premium taxes of 2 to 3 percent, that may create significant costs as

health care costs become an increasing share of total employee

compensation. For example, these taxes would cost between $10 million

to $15 million if applied to some Fortune 100 firms that spend more than

$500 million on their employees’ health coverage. Moreover, employers

note that states may more easily increase these taxes if states are not

restrained by firms’ ability to easily exit the insured market. Furthermore,

the costs that employers incur from state taxation may increase as more

states turn to provider taxes as a financing source, especially after the

Supreme Court’s recent ruling upholding states’ ability to impose

comprehensive rate-setting schemes that essentially function like provider

taxes.

Employers have also expressed concerns that state solvency standards

requiring the establishment of reserves will force them to restrict a portion

of their plan assets that could be used for other purposes. This loss of

control could amount to an increase in their overall costs, particularly

when interest rates are high. Moreover, employers believe that solvency

standards for self-funded plans are unnecessary because few plan failures

have occurred, even in smaller firms with stop-loss coverage.

Finally, employers—whether they self-fund or purchase insurance—fear

that they may lose ERISA protections from potentially exorbitant damages

stemming from disputes over denied health claims. Employers believe that

ERISA’s requirement for an internal appeal adequately ensures that

employees’ grievances are fairly represented, although some maintain that

42The recent U.S. Supreme Court ruling in the Travelers case may have implications for states’ ability

to levy provider taxes, which may relieve state pressure for ERISA amendments granting them more

explicit taxing authority over ERISA plans. However, it is likely that additional litigation will be needed

to further clarify the issue.

Page 22 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

it is burdensome. In return for establishing an appeals system, employers

receive immunity from what they perceive as tort system excesses.43 In

particular, employers are not subject to punitive or compensatory

damages resulting from inappropriately denied claims. Employers view

liability for denied claims as a potentially expensive issue that could force

them to discontinue their health plans if ERISA is amended.

Conclusion ERISA’s role in health care is poorly understood. In large part, confusion

over ERISA stems from a lack of well-developed data and information to

assess conflicting contentions about the potential costs and benefits of

ERISA as it relates to health care. Indeed, both states and employers argue

that they must play a more active role in managing the quality and costs of

health care, yet their beliefs are largely based on strongly held

philosophical arguments. Key elements of these arguments include the

appropriate role for government, the appropriate distribution of health

care costs, the primacy of the private market, and the division of

responsibilities between federal and state governments. Due to these

arguments, ERISA reform promises to be a challenging issue for the

Congress.

Agency Comments Department of Labor officials provided us with comments on a draft of

this report. (See app. VI.) They pointed out that the perspectives of

participants and beneficiaries were addressed only to a limited extent and

that more information would be useful. However, our primary focus, as

agreed to with our requesters, was the perspectives of states and

employers on ERISA preemption. We acknowledge that the perspectives of

participants and beneficiaries are also important, but they are more diffuse

and difficult to categorize.

Labor officials also stated that the Pension and Welfare Benefits

Administration provides more technical assistance to participants,

beneficiaries, and the general public, and we changed the report to include

that information. Labor officials also provided technical comments, which

we incorporated where appropriate.

43Employers often cite Fox v. Health Net of California, in which a woman’s estate was awarded

$89 million in damages after being denied coverage for an autologous bone marrow transplant on the

grounds that it was considered an experimental treatment for her condition. Ultimately, the two

parties settled the case for a undisclosed sum. In this case, ERISA did not limit the remedies available

because the woman received health care coverage from her husband’s employer, which was exempted

from ERISA because it was a county government.

Page 23 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

Please call me on (202) 512-7119 if you or your staffs have any questions

about this report. This report was prepared under the direction of Mark V.

Nadel, Associate Director of National and Public Health Issues. Other

major contributors are listed in appendix VII.

Sarah F. Jaggar

Director, Health Financing and

 Public Health Issues

Page 24 GAO/HEHS-95-167 ERISA and Health Reform
B-259423 

List of Requesters

The Honorable James M. Jeffords

The Honorable Paul Wellstone

The Honorable John H. Chafee

The Honorable William S. Cohen

The Honorable Kent Conrad

The Honorable Christopher J. Dodd

The Honorable Russell D. Feingold

The Honorable Dianne Feinstein

The Honorable Bob Graham

The Honorable Mark O. Hatfield

The Honorable J. Robert Kerrey

The Honorable Patrick J. Leahy

The Honorable Joseph I. Lieberman

The Honorable Carol Moseley-Braun

The Honorable Paul Simon

The Honorable Olympia J. Snowe

The Honorable Arlen Specter

United States Senate

The Honorable Benjamin L. Cardin

The Honorable Major R. Owens

The Honorable Nydia Velasquez

The Honorable Pat Williams

House of Representatives

Page 25 GAO/HEHS-95-167 ERISA and Health Reform
Contents

Letter 1

Appendix I 

ERISA History and

Court Interpretations

30

Initial ERISA Legislation Focused on Pension Plans 30

ERISA Requirements Relating to Health Plans 30

ERISA Preemption of State Regulation Relating to Employer

Benefits

32

Courts Have Played a Key Role in Defining the Scope and Extent

of ERISA

33

Appendix II 

Administration and

Enforcement of

ERISA

37

PWBA’s Enforcement Strategy 37

How Do Labor’s ERISA Enforcement Activities Compare With

Those Performed by State Insurance Departments?

40

Appendix III 

Estimation of

Enrollment in

Self-Funded Health

Plans

44

Number of Individuals With EmployerBased Health Coverage44

Number of Individuals Enrolled in ERISA Health Plans 45

Number of Individuals Enrolled in Self-Funded Health Plans 47

Other Sources of Data on Prevalence of Self-Funding 48

Number of Individuals in Self-Funded Health Plans 50

Appendix IV 

State Taxes Assessed

on Health Plans

51

Appendix V 

State-Mandated

Benefits

56

States Usually Mandate Benefits for Select Types of Coverage 56

Mandates Increase Cost of Health Insurance Premiums, but

Overall Cost Effect Is Unclear

59

Appendix VI 

Comments From the

Department of Labor

62

Page 26 GAO/HEHS-95-167 ERISA and Health Reform
Contents

Appendix VII 

GAO Contacts and

Acknowledgments

64

Tables Table 1: Regulatory Status of Employer-Based Health Insurance 7

Table III.1: CPS Estimates of Health Care Coverage Source, 1993 45

Table III.2: Distribution of Individuals With Employer-Based

Health Care Coverage

46

Table III.3: Participants With Employer-Based Health Care

Coverage Overseen by ERISA

47

Table III.4: BLS Estimates of the Number of Full-Time

Participants in Self-Funded Health Plans in 1992 and 1993

48

Table III.5: BLS Estimates of the Number of Full-Time

Participants in Self-Funded Health Plans in 1989 and 1990

48

Table IV.1: State Health Insurance Premium Tax Rates 51

Table V.1: Number of States With Specific Mandates 57

 Table V.2: Costs of Mandated Treatment Benefits, Selected

States

59

Figures Figure 1: Health Coverage by Source, 1993 11

Figure 2: Growth in Self-Funding in Medium and Large Private

Establishments, 1988 to 1993

13

Page 27 GAO/HEHS-95-167 ERISA and Health Reform
Contents

Abbreviations

BLS Bureau of Labor Statistics

CHAMPUS Civilian Health and Medical Program of the Uniformed

Services

CPS Current Population Survey

ERISA Employee Retirement Income Security Act of 1974

FEHBP Federal Employees Health Benefits Plan

HCFA Health Care Financing Administration

HMO health maintenance organization

IRS U.S. Internal Revenue Service

MEWA multiple-employer welfare association

NAIC National Association of Insurance Commissioners

NGA National Governors’ Association

OPM Office of Personnel Management

PPO preferred provider organization

PWBA Pension and Welfare Benefits Administration

SPD summary plan document

VA Department of Veterans Affairs

WPPDA Welfare and Pension Plans Disclosure Act

Page 28 GAO/HEHS-95-167 ERISA and Health Reform
Page 29 GAO/HEHS-95-167 ERISA and Health Reform
Appendix I 

ERISA History and Court Interpretations

The Employee Retirement Income Security Act of 1974 (ERISA)44 and its

implications for health plans are often misunderstood. Much of this

confusion results from the act’s focus on pension plans rather than health

plans and the ambiguity of some of the legislative language, which has

been interpreted in a variety of lower federal and Supreme Court

decisions.

Initial ERISA

Legislation Focused

on Pension Plans

ERISA was passed primarily in response to concerns about the solvency and

security of employer-based pension plans.45 These concerns arose because

many retirees did not receive anticipated retirement benefits in several

well-publicized cases.46 ERISA imposed minimum vesting requirements on

employer pension plans to guarantee that employees receive a right to

such benefits within a reasonable time after beginning their employment.

It also established funding requirements, providing that employers reserve

funds to ensure that they are available to pay those benefits when the

employee retires, and established a system of plan termination insurance

to provide for benefit payments even if an employer terminates a

defined-benefit plan.

ERISA Requirements

Relating to Health

Plans

In addition to pension plans, ERISA regulates “employee welfare benefit

plans,” which include employer health plans.47 Therefore, although only a

limited discussion occurred during the Congress’ initial consideration of

ERISA regarding its impact on employee health plans, all health plans

established and maintained by an employer are covered by ERISA.

48

Because the Congress was principally concerned with pension plan reform

when ERISA was enacted, ERISA established stricter requirements for

44Public Law 93-406, 88 Stat. 829 (classified as amended at 29 U.S.C. 1161 et seq.) (1988).

45ERISA’s predecessor was the Welfare and Pension Plans Disclosure Act (WPPDA), passed in 1958

(P.L. 85-836, 72 Stat. 997) (previously classified as amended at 29 U.S.C. 301 et seq.) (1970). The

WPPDA established a federal role in protecting interstate commerce and the interests of participants

in employee benefit plans through the imposition of disclosure and reporting requirements for such

plans. Each plan was required to provide the Department of Labor and plan participants with a plan

summary and an annual report. In contrast to ERISA, the WPPDA expressly provided that state laws

affecting the operation or administration of such plans were not preempted. In response to cases of

malfeasance on the part of pension administrators, the WPPDA was amended in 1962 to make federal

crimes of certain improper actions taken in connection with an employee benefit plan.

46In the early sixties, for example, Studebaker, which had been a major automobile manufacturer,

closed its Fort Wayne, Indiana, assembly plant; thousands of employees and former employees were

left with greatly reduced pension benefits.

47As described in ERISA, a welfare benefit plan generally provides for hospital, medical, surgical,

sickness, accident, disability, death, unemployment, severance, or similar benefits.

48Governmental and church plans are generally exempted from ERISA requirements.

Page 30 GAO/HEHS-95-167 ERISA and Health Reform
Appendix I 

ERISA History and Court Interpretations

pension plans than for welfare benefit plans. For example, health plans are

not subject to the participation, vesting, and funding requirements that

pensions are. However, health and other welfare benefit plans must

comply with ERISA’s reporting and disclosure procedures, fiduciary

standards, and claims appeal requirements.

Reporting and Disclosure ERISA requires all covered employer-based health plans to file Forms 5500

(Annual Return/Report of Employee Benefit Plan) for the Department of

Labor. These reports provide periodic information on plan participants

and finances. ERISA also requires plans to give plan participants and

beneficiaries a summary plan description (SPD). The SPD is the basic

document that gives the plan beneficiary the plan’s details and describes,

in understandable terms, their rights, benefits, and responsibilities under

the plan. A copy of the SPD and a statement of ERISA rights must be

furnished to participants and beneficiaries within 90 days after

participation begins; and, generally, within 120 days after the plan is

subject to the act, it must be filed with the Department.

Fiduciary Standards ERISA established fiduciary standards to protect employee benefit plan

participants and beneficiaries from plan mismanagement. The act defines

a fiduciary as anyone who exercises discretionary control or authority

over the management of a plan or renders investment advice to a plan.

Generally, these standards require fiduciaries to act with care, skill,

prudence, and diligence in investing plan assets and to manage plan assets

solely in the interest of plan participants and beneficiaries. Although

health plans are not required to reserve sufficient funds to pay benefits as

prescribed by ERISA’s funding standards for pension plans, and self-funded

plans are not directly impacted by funding requirements states impose on

insurers, plan fiduciaries are required to manage plan assets, including

employee contributions, in the best interest of the participants and

beneficiaries.

Claims Procedures ERISA’s administration and enforcement provisions describe the remedies

available to participants and beneficiaries for violations of the act’s

requirements. Welfare benefit plans covered under the law must have

established written procedures for filing a claim, and the beneficiary must

be informed of these procedures. When a claim is denied, employee

benefit plans are required to provide participants and beneficiaries written

notice setting forth the specific reason for the denial and to afford them a

Page 31 GAO/HEHS-95-167 ERISA and Health Reform
Appendix I 

ERISA History and Court Interpretations

reasonable opportunity for a full and fair review by the fiduciary of the

decision denying the claim. If the beneficiary disagrees with the final

decision, ERISA allows him or her to sue in the federal courts.

ERISA Preemption of

State Regulation

Relating to Employer

Benefits

The current debate concerning ERISA and health benefit plans stems

primarily from ERISA’s preemption clause. This provision makes it possible

for employers to provide employee benefits largely free from potentially

burdensome and conflicting state regulation. Because ERISA left regulating

the insurance industry to the states, however, its impact achieved great

significance only as the result of the growth of self-funded health plans.

The relevant ERISA language has been recognized as among the most

complex and confusing in the federal code.49 It includes three significant

clauses: the preemption clause, the saving clause, and the deemer clause.

The preemption clause provides that ERISA supersedes any and all state

laws that “relate to” any employee benefit plan. The saving clause,

consistent with long-standing national policy,50 provides nonetheless that

ERISA will not be construed to exempt or relieve any person from any state

law regulating insurance. Therefore, a state insurance law may relate to

employee benefit plans but nonetheless not be preempted by ERISA.

Finally, the deemer clause narrows the possible scope of the saving clause

by providing that no employee benefit plan will be deemed an insurer or in

the insurance business for the purpose of any state law purporting to

regulate insurance. The result is to restrict the extent to which state

insurance regulation can affect, or serve as a pretext for regulating,

employee benefit plans.

As discussed more fully below, the phrase “relate to” has been the source

of much legal dispute in part because of the lack of a clear legislative

record on congressional intent. Original versions of the legislation passed

by the House and the Senate did not include this sweeping preemption

language. Instead, both the House and Senate versions had preemption

language that would have limited state regulation related only to the

specific provisions of the respective bills.51 The conference report

49See, for example, Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 424, 740 n. 16 (1985).

50Passed in 1945, the McCarran-Ferguson Act (P.L. 79-15, 59 Stat. 33) provides that federal laws are not

to be construed to apply to the insurance industry unless they explicitly so state (15 U.S.C. 1012

(1988)). The result is that regulating the insurance industry has been left largely to the states. See

Health Insurance Regulation: Wide Variation in States’ Authority, Oversight, and Resources

(GAO/HRD-94-26, Dec. 27, 1993).

51Shaw v. Delta Air Lines, Inc., 463 U.S. 84, 96 (1983).

Page 32 GAO/HEHS-95-167 ERISA and Health Reform
Appendix I 

ERISA History and Court Interpretations

provides little guidance on interpreting the final language.52 Given the

sparse discussion in the conference report, particularly with the evolution

of employee benefits plans since ERISA’s passage, courts have played a

major role in defining the scope and extent of ERISA preemption.

Although many states have tried to narrow the scope of ERISA preemption

to gain more flexibility in regulating employer health plans, Hawaii is the

only state that has received an exemption from ERISA. This exemption,

enacted in 1983, has allowed Hawaii to enforce a mandate requiring all

employers to provide employees a standard health package and pay for

75 percent of the premium. However, congressional approval of Hawaii’s

ERISA exemption was due in part to the fact that Hawaii had enacted

comprehensive health care reform concurrently with the original federal

passage of ERISA.

53 The conference report explicitly stated that the Hawaii

exemption was not to “be considered a precedent with respect to

extending such amendment to any other state law,” and the Congress has

not approved any state ERISA exemption requests since Hawaii’s.54

Courts Have Played a

Key Role in Defining

the Scope and Extent

of ERISA

The original ERISA preemption language was sufficiently ambiguous that

the courts have had to define its scope. To a large degree, these court

cases have attempted to delineate how closely state laws must relate to

employer health plans to be preempted. Other major court decisions have

addressed the ERISA appeals requirements for denied claims and the ability

of employers to reduce benefits that are covered in their health plan.

In its seminal case, Shaw v. Delta Airlines,

55 a unanimous Supreme Court

relied on the dictionary meaning of “relate” and ERISA’s legislative history

to hold that a law relates to an employee benefit plan “if it has a

connection with or reference to such a plan.”56 However, the Court

indicated that “[s]ome state actions may affect employee benefit plans in

52H.R. Conf. Rep. No. 1280, 93d Cong., 3d Sess., 383 (1974); reprinted in 1974 U.S.C.C.A.N. 5038, 5162.

53Hawaii officials have unsuccessfully sought additional flexibility under ERISA to amend its 1974

reforms, particularly to be able to mandate employer coverage of dependents.

54As described later in this section, the Congress also amended ERISA in 1983 to allow states to

regulate health plans sponsored by “multiple employer welfare arrangements.” In addition, the House

of Representatives included 2-year ERISA waivers for four states (New York, Hawaii, Maryland, and

Minnesota) in its version of the 1993 budget act, but this provision was not included in the final

version. The tax code was amended, however, to temporarily require employers to pay New York

hospital surcharges to receive federal tax deductions for health plan contributions.

55463 U.S. 85 (1983).

56463 U.S. 85, 97 (1983).

Page 33 GAO/HEHS-95-167 ERISA and Health Reform
Appendix I 

ERISA History and Court Interpretations

too tenuous, remote, or peripheral a manner to warrant a finding that the

law ’relates to’ the plan.”57 By way of example, the Court cited a 1979 case

upholding garnishment of a spouse’s income to pay child support but

expressly refused to indicate where to draw the line between state actions

that are preempted and those that are not.

Two years later, in Metropolitan Life Ins. Co. v. Massachusetts,

58 a

unanimous Supreme Court identified a crucial distinction under ERISA

between the treatment afforded employee benefit plans that are

self-funded and those that are insured. At issue in the Metropolitan case

was the effect of ERISA on a so-called mandatory benefit law under which

Massachusetts required health insurance in the state to include certain

minimum coverage for mental illness. Noting the dearth of discussion

about the saving clause in the legislative history, the Court observed that

the wording of the saving clause did not change during the conference,

although its prominence was certainly enhanced when the preemption

clause was significantly broadened.

The Court went on to construe the saving clause broadly to permit states

to enforce such laws against insurers even though this would impact the

employee benefit plans that they insure. The Court noted that its holding

resulted in a distinction between insured and self-funded plans, with the

former being indirectly subject to state regulation, such as mandated

benefit laws, and the latter escaping such regulation.59 This distinction

provides an incentive for employers, particularly those operating in more

than one state, to self-fund because it frees them from state laws that

would otherwise affect them.

Two years later, in Pilot Life Ins. Co. v. Dedeaux,

60 a unanimous Supreme

Court explained that although the saving clause was to be interpreted

broadly, it could not save from preemption state laws that conflict with

substantive provisions of ERISA. The effect was that common law tort and

contract causes of action seeking damages for improper processing of an

employee benefit plan claim are preempted. In Pilot Life, an employee

sought to recover damages from the insurer that had, on the behalf of his

employer, denied him benefits under an employee welfare benefit plan.

The employee based his claims on state law, and the Court held that the

57463 U.S. 85, 101, n. 21 (1983).

58471 U.S. 724 (1985).

59471 U.S. 724, 747 (1985).

60481 U.S. 41 (1987).

Page 34 GAO/HEHS-95-167 ERISA and Health Reform
Appendix I 

ERISA History and Court Interpretations

civil enforcement provisions of ERISA were the exclusive means for

employees to seek such recoveries. Because the state law claims

conflicted with ERISA’s civil enforcement provisions, they were not saved

from preemption by the saving clause.

Relying on Pilot Life, ERISA has been held to protect third parties in

addition to insurers from tort liability and other state claims when they are

performing services on behalf of an employee benefit plan. For example,

in Corcoran v. United Healthcare, Inc.,

61 a utilization control organization

disagreed with a pregnant employee’s attending physician and indicated

that, if she remained in the hospital as her physician advised, her health

plan would not cover the costs.62 Although the employee could have

remained in the hospital at her expense, she left the hospital to receive

nursing care at home, which the utilization control organization indicated

would be covered. While the employee was at home when the nurse was

not present, the fetus went into distress and died.

In response, the employee brought a wrongful death action against the

utilization control organization. While mindful that its interpretation left a

gap in the remedies for protecting plan participants and beneficiaries, the

Court held that the case was controlled by Pilot Life, and the wrongful

death claim was preempted. The Court noted that fundamental changes in

employee benefit plans since ERISA’s passage may indicate a need to

reevaluate protections but acknowledged that such a task falls to the

Congress and not the courts.

Most recently, the Supreme Court issued its decision in New York State

Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.63 This

decision did not delineate fully between state actions that are preempted

and those that are not but indicated that courts may approve state actions

that do not conflict with ERISA’s underlying objectives or impact too greatly

on employee benefit plans. The case reached the Supreme Court as a

result of a conflict between federal circuits over the extent to which states

can impose hospital surcharges on employee benefit plans. The Third

Circuit had upheld a New Jersey hospital tax used to compensate hospitals

61965 F.2d 1321 (5th Cir. 1992).

62Unknown to the employee and her attending physician, the utilization control organization had

obtained an independent second opinion from another physician who also indicated that the employee

would be at considerable risk if not hospitalized (965 F.2d 1322 (5th Cir. 1992)).

63115 S. Ct. 1671 (1995).

Page 35 GAO/HEHS-95-167 ERISA and Health Reform
Appendix I 

ERISA History and Court Interpretations

with higher shares of indigent and Medicaid patients;64 the Second Circuit

had rejected New York’s system of imposing hospital surcharges on the

basis of whether the care was financed by commercial insurers, HMOs, or

Blue Cross & Blue Shield plans as a violation of ERISA.

65 Reversing the

Second Circuit in a unanimous decision, the Supreme Court elaborated

upon its holding in Shaw that “relate to” means “has a connection with or

reference to” and held that New York’s hospital surcharge system was not

preempted by ERISA. Because New York’s law was not directed specifically

at employee benefit plans, the Court concluded that its hospital rate

system had no reference to ERISA. Acknowledging that “connection with”

was no more helpful than “relate to” in defining ERISA preemption, the

Court reviewed the legislative history and ERISA objectives. The Court

found that its basic thrust was to permit the nationally uniform

administration of employee benefit plans by eliminating conflicting state

regulation and reiterated that state laws mandating benefits or otherwise

directly regulating the content or administration of plans are preempted.

However, the Court distinguished New York’s system from these

preempted state laws because the New York law’s purpose was to assist

Blue Cross & Blue Shield rather than to regulate the content or

administration of employee benefit plans.66 While conceding that

economic impacts alone could in some cases sufficiently trigger ERISA

preemption, the Court held that New York’s hospital surcharges had only

an indirect economic influence on employee benefit plans and therefore

was not preempted.

In the wake of the Court’s ruling in Travelers, states are likely to perceive

that they have more options and greater flexibility than previously

recognized. The case suggests that state laws affecting employee benefit

plans will have to be judged individually on each instance’s facts and

circumstances. The nature and magnitude of the impact on employee

benefit plans of each state law at issue will determine the outcome. Where

the state law does not conflict with ERISA objectives, it should survive legal

challenge.

64United Wire, Metal & Mach. Health & Welfare Fund v. Morristown Memorial Hospital, 995 F.2d 1179

(3d Cir.), cert. denied, 114 S. Ct. 382 (1993).

65Travelers Ins. Co. v. Cuomo, 14 F.3d 708 (2d Cir. 1994) (subsequent history omitted).

66The Court noted that the state decision to assist Blue Cross & Blue Shield plans was based on its

ability to pay hospitals more promptly and its long history of open enrollment.

Page 36 GAO/HEHS-95-167 ERISA and Health Reform
Appendix II 

Administration and Enforcement of ERISA

The Department of Labor and the Internal Revenue Service (IRS) have

primary responsibility for enforcing ERISA requirements. Labor’s Pension

and Welfare Benefits Administration (PWBA) enforces ERISA’s fiduciary

requirements, which ensure that private pension and welfare benefit plans

operate in the best interests of plan participants and beneficiaries, and

reporting and disclosure requirements, which ensure that plans provide

financial and other information to the federal government and plan

participants and beneficiaries. IRS enforces ERISA’s participation, vesting,

and funding requirements for pension plans.

Since December 1986, PWBA’s ERISA enforcement strategy has focused on

investigating “significant issue” cases with a high potential for fiduciary

violations or other imprudent management practices. Although PWBA has

also emphasized investigations of multiple employer welfare arrangements

(MEWA), it has focused less on single employers that self-fund their health

benefit plans.

PWBA’s Enforcement

Strategy

The goal of PWBA’s enforcement strategy is to achieve the greatest possible

ERISA compliance by using resources effectively. PWBA believes that

investigations of significant issue cases have a broader impact than

investigations of individual cases because they focus on financial

institutions and service providers that usually serve many plans and many

participants. Thus, when a fiduciary violation by a financial institution or

service provider is corrected, dollar recoveries and the number of plans

and participants involved are typically larger than when a violation by an

individual plan is corrected.

As of May 1994, PWBA had about 400 enforcement staff working on

investigations of employee benefit plans (both pension and welfare benefit

plans) covered by ERISA. At that time, over 720,000 private pension plans

and 4.5 million welfare benefit plans were subject to title I of ERISA and

Labor regulation. These plans had about $2.5 trillion in assets and covered

about 200 million participants. PWBA allocates at least 50 percent of its

enforcement resources to significant issue cases, with no less than

20 percent spent on either financial institution or service provider cases.

PWBA devotes the remaining resources to investigating general cases. PWBA

officials could not estimate the number of enforcement staff positions

dedicated specifically to health benefit plan activities.

PWBA’s 1994 guidance to its 10 area offices required them to balance types

and sizes of plans selected for general investigations, with a general rule

Page 37 GAO/HEHS-95-167 ERISA and Health Reform
Appendix II 

Administration and Enforcement of ERISA

that no more than 5 percent of all such cases involve plans with fewer than

50 participants. PWBA uses several methods to identify financial

institutions, service providers, and pension and welfare plans for

investigation. The methods include referrals from IRS and other agencies,

complaints from participants and beneficiaries, manual review of financial

and other information on plans’ annual Form 5500 series reports, spin-offs

from other investigations, special area office projects, and computer

targeting. The computer targeting programs search automated Form 5500

series report information for characteristics that PWBA believes indicate a

high potential for ERISA violations. Generally, the targeting programs are

used to identify pension and welfare plans for investigation, although

some programs can be used to identify financial institutions and service

providers.

In addition, the Department told us that PWBA provides technical assistance

to beneficiaries and the general public. For example, PWBA may determine

that an individual contacting the Administration is inappropriately being

denied health benefits to which he or she is entitled and has attempted to

obtain. In these situations, PWBA may intervene to assist the individual in

obtaining coverage or payment of a specific benefit. PWBA also ensures

compliance with provisions of the Consolidated Omnibus Budget

Reconciliation Act of 198667 that provides for the continuation of group

health coverage for employees and family members whose coverage

would otherwise be discontinued in cases of terminated employment,

death of an employee, or divorce from a covered employee.

Focus on MEWAs PWBA officials told us that although they have been concerned with single

employers that offer self-funded health plans for several years, they have

placed more emphasis on investigating MEWAs.68 A MEWA is an ERISA welfare

benefit plan or other arrangement established or maintained to provide

benefit coverage to the employees of two or more employers. Their

promoters often represent to employers and state regulators that MEWAs

are employee benefit plans covered by ERISA and as such are exempt from

state insurance regulation under ERISA’s preemption provision.

By avoiding state insurance reserve, contribution, and other requirements

applicable to insurance companies, MEWAs can often market insurance

6729 U.S.C. 1161 et seq.

68See Multiple Employer Welfare Arrangements Under the Employee Retirement Income Security Act:

A Guide to Federal and State Regulation, U.S. Department of Labor, Pension and Welfare Benefits

Administration (Washington, D.C.: 1992).

Page 38 GAO/HEHS-95-167 ERISA and Health Reform
Appendix II 

Administration and Enforcement of ERISA

coverage at substantially lower rates. This makes MEWAs an attractive

alternative for small businesses that find it difficult to get affordable

employee health care coverage. In practice, some MEWAs have been unable

to pay claims due to insufficient funding and inadequate reserves, or, in

the worst situations, they were operated by people who drained a MEWA’s

assets through excessive fees and embezzlement. In 1992, we reported that

these problems were widespread.69 According to state insurance officials,

between 1988 and 1990, MEWAs left at least 398,000 participants and their

beneficiaries with over $123 million in unpaid claims and many other

participants without insurance. Further, over 600 MEWAs failed to comply

with state insurance laws, and some violated criminal statutes.

Recognizing that it was both appropriate and necessary for states to

establish, apply, and enforce state insurance laws concerning MEWAs, the

Congress amended ERISA in 1983 to provide an exemption to ERISA’s broad

preemption provision for regulating MEWAs under state insurance laws.

Since the late 1980s, Labor has acted to alleviate MEWA problems. In

May 1990, the Secretary of Labor announced a program to improve MEWA

enforcement efforts. The program included distributing to each state, on a

quarterly basis, copies of Labor’s advisory opinions; training state and

federal officials; sharing information on investigations; and developing

technical assistance material and reviewing information reported by plans

to the IRS to determine the feasibility of providing the states a list of MEWAs.

Labor also increased its investigations of MEWAs, from 30 in December

1989 to 86 in September 1991.

Recently, PWBA officials told us that about 40 percent of their current

health benefit investigations involved MEWAs. PWBA data on MEWA

investigations showed a total of 91 MEWA investigations pending (70 civil

cases and 21 criminal cases), and PWBA had recovered from MEWA cases

about $3.9 million in prohibited transactions reversed and plan assets

restored in fiscal year 1994. This total has declined considerably from

MEWA investigative efforts in 1993, when PWBA recovered about $6.3 million.

Statistics on PWBA’s investigations of single-employer self-funded health

plans are unavailable.

Civil Enforcement and

Criminal Penalties

When PWBA identifies violations, ERISA authorizes the Department of Labor

to assess penalties against the violators. Labor may assess a penalty of up

to $1,000 per day against a plan administrator who fails or refuses to file a

69Employee Benefits: States Need Labor’s Help Regulating Multiple Employer Welfare Arrangements

(GAO/HRD-92-40, Mar. 10, 1992).

Page 39 GAO/HEHS-95-167 ERISA and Health Reform
Appendix II 

Administration and Enforcement of ERISA

Form 5500 series report or whose report is rejected for lack of material

information.

When PWBA finds that welfare or pension plans that do not qualify for tax

exemption have violated ERISA’s prohibited transaction requirements,

Labor may assess parties in interest (such as fiduciaries, employees,

persons who provide plan services, employers or employee organizations

whose members are covered by a plan, or others) a penalty up to 5 percent

of the prohibited transaction and up to 100 percent if the transaction is not

corrected within 90 days. Labor must, with certain exceptions, assess a

penalty against a fiduciary or any person who knowingly participated in a

fiduciary breach that occurred or continued after December 19, 1989. The

fiduciary penalty is equal to 20 percent of the recovery amount agreed to

in a settlement with Labor or contained in a court order.

In addition, Labor investigates criminal charges for willful violations of

ERISA reporting and disclosure provisions. Upon conviction, a person can

be fined a maximum of $5,000 or imprisoned for up to 1 year or both;

except that, in the case of such violation by a corporate entity, the fine

imposed upon the person is not to exceed $100,000.

Forms 5500 Are of Limited

Value for Assessing the

Number and

Characteristics of

Self-Funded Health Plans

The Department of Labor obtains information on the number and

characteristics of self-funded health plans from the annual Form 5500

returns that employee benefit plans file with the IRS. However, PWBA

officials told us that the Forms 5500 are a poor source of data on

self-funded plans because they do not clearly define self-funded plans and

the data contain many errors. Further, Labor officials question the

accuracy of other sources of information on the number of self-funded

plans.

How Do Labor’s

ERISA Enforcement

Activities Compare

With Those Performed

by State Insurance

Departments?

The McCarran-Ferguson Act, passed in 1945, established a statutory

framework whereby responsibility for regulating the insurance industry

was left largely to the states. ERISA’s preemption provision is consistent

with this arrangement. The Supreme Court has recognized, however, that

this effectively creates a dual system, with states regulating fully insured

plans indirectly through their regulation of insurance but not self-funded

plans.

State insurance departments use different enforcement activities to

regulate the insurance industry than the Department of Labor uses to

Page 40 GAO/HEHS-95-167 ERISA and Health Reform
Appendix II 

Administration and Enforcement of ERISA

enforce ERISA’s requirements on self-funded employer health benefit plans.

The major responsibilities of state insurance departments typically include

• licensing insurance companies and the agents who sell insurance to

ensure that companies are financially sound and reputable and that agents

are qualified;

• setting standards for and monitoring the financial operations of insurers to

determine whether they have adequate reserves to pay policyholders’

claims;

• reviewing and approving rates to ensure that they are both reasonable for

consumers and sufficient to maintain solvency of insurance companies;

• reviewing and approving insurance policies to ensure that they are not

vague or misleading and meet state requirements, such as mandatory

benefit provisions; and

• monitoring insurers’ actions to ensure that they are not engaging in unfair

business practices or otherwise taking advantage of consumers and

assisting consumers by investigating their complaints, answering

questions, and conducting educational programs.

As previously noted, under ERISA, only the fiduciary and reporting and

disclosure standards apply to welfare benefit plans, including health plans.

The participation, vesting, and funding requirements apply only to pension

plans. Major differences in Labor’s and states’ enforcement activities are in

financial regulation of employer health plans, reporting and disclosure

requirements, and the handling of consumer complaints.

Financial Regulation The principal responsibility of all state insurance departments is to protect

consumers by ensuring that insurance companies comply with minimum

solvency standards. ERISA, however, does not require health benefit plans

to satisfy any solvency standards. According to the National Association of

Insurance Commissioners (NAIC), ERISA does not set standards to regulate

the continued solvency of health plans once they begin operation. As a

result, NAIC believes that employees covered under self-funded health

plans are vulnerable to plan mismanagement and a plan’s intentional

abuse of its discretion because state solvency standards are preempted for

self-funded plans.

NAIC also points out that while ERISA provides termination insurance for

defined benefit pension plans, no similar insurance exists for health plans.

Generally, insured health plans are protected by state guaranty funds, but

single-employer, self-funded health plans are not. NAIC states that, as a

Page 41 GAO/HEHS-95-167 ERISA and Health Reform
Appendix II 

Administration and Enforcement of ERISA

consequence, participants and beneficiaries of self-funded health plans

have few avenues of redress against an insolvent plan other than to join

the bankrupt employer’s other creditors to pursue the firm’s remaining

assets.70

Further, NAIC contends that participants in an insured single-employer

health plan enjoy the benefits of solvency oversight and insolvency

protection. NAIC believes this disparity likely is the unintended

consequence of ERISA’s failure to regulate the content of employer benefit

plans and the fact that ERISA exempts the insurance industry from state

purview. NAIC concluded that if an employer offers its employees an

insured health benefit plan, the plan’s contents are subject to the

requirements of state law, including solvency requirements. However,

employees covered by a self-funded plan would not be subject to these

requirements.

Reporting and Disclosure

Requirements

ERISA does not require administrators of single-employer self-funded health

plans to submit plan disclosure documents to any administrative agency

for review, according to NAIC. Moreover, ERISA allows the plan

administrator to distribute a summary of material modifications to

participants and beneficiaries 210 days after the end of the plan year in

which the changes were adopted. In contrast, according to the NAIC, state

insurance laws typically require that single-employer insured health plans

submit plan policy forms to the state insurance departments for review

and approval. Most states also require insured health plans to promptly

notify participants and beneficiaries of changes to the plan.

Consumer Complaints Another significant difference in state insurance department enforcement

activities and Labor’s is in handling consumer complaints. Labor’s

approach to assisting individual participants with health plan complaints

involves informing participants and beneficiaries of their rights under

ERISA and providing general information about how the law may apply to

their situations. Generally, Labor’s investigations of employer health plans

are broader in scope than individual consumer complaints and involve

financial institutions and service providers. In contrast, state insurance

departments actively investigate consumers’ complaints of high-pressure

sales practices, improperly denied claims, unfair discrimination, and

improper denial of coverage. Also, most states perform market conduct

70ERISA: A Call for Reform: Recommendations of the NAIC ERISA Working Group, NAIC (Washington,

D.C.: 1994).

Page 42 GAO/HEHS-95-167 ERISA and Health Reform
Appendix II 

Administration and Enforcement of ERISA

exams to review the marketing, underwriting, rating, and claims payment

practices of health insurers.

In addition, according to NAIC, ERISA does not ensure participants and

beneficiaries in health benefit plans an unbiased and independent review

process. Although ERISA requires that all single-employer health plans,

whether self-funded or insured, provide a mechanism to permit

participants and beneficiaries to appeal a plan’s denial of a claim, the

review may be based upon the written record and conducted by the same

plan administrator who denied the claim. In comparison, NAIC states that

participants and beneficiaries of single-employer insured health plans have

access to state insurance departments in which participants and

beneficiaries can obtain an independent and informal review of their

complaints. For example, NAIC reported that in the first 9 months of 1993

the Wisconsin insurance department handled 2,438 complaints relating to

insured single-employer health plans and recovered $485,580.

Page 43 GAO/HEHS-95-167 ERISA and Health Reform
Appendix III 

Estimation of Enrollment in Self-Funded

Health Plans

Although disparate sources of federal government information

characterize components of the U.S. health care market, no database

accurately portrays the number of individuals enrolled in ERISA plans or the

number of individuals enrolled in self-funded plans. Therefore, we

estimated these numbers using several data sources. This required

(1) estimating the number of individuals with employer-based health

coverage, (2) estimating the number of individuals enrolled in ERISA health

plans (subtracting coverage provided by government and church

employers from total employer-based coverage), and (3) incorporating

data from other sources to estimate how many individuals are enrolled in

self-funded ERISA health plans.

Thus, on the basis of different assumptions, we estimate that between 106

and 114 million Americans are enrolled in ERISA health plans. Of these,

between 41 million and 47 million individuals, representing 16 to 18

percent of the U.S. population, are enrolled in self-funded health plans.

Our estimate is that 44 million individuals, 17 percent of the population,

are enrolled in self-funded ERISA plans.

Number of Individuals

With EmployerBased Health

Coverage

The Bureau of the Census’ Current Population Survey (CPS) provides data

on the source of health insurance coverage, or lack thereof, for all

Americans. The survey asks questions about health insurance coverage at

any time during the previous year. For the March 1994 survey, Census

scientifically selected about 57,000 households and weighted the results to

represent the whole nation. As shown in table III.1, most Americans

receive coverage through their employment or from government programs

like Medicare and Medicaid.71

71Some individuals may receive coverage from several sources (for example, retirees who are Medicare

eligible but also receive supplemental coverage from their former employer). To avoid double

counting, we prioritized the source of coverage reported by the CPS. For our analysis, employer

coverage is considered primary to other sources of coverage, except for 8.3 million individuals who

also received Medicare and did not indicate that they were employed by the private sector or

governments. For these individuals, we assume that Medicare was the primary payer and that the

employer-based plan was Medicare supplemental coverage.

Page 44 GAO/HEHS-95-167 ERISA and Health Reform
Appendix III 

Estimation of Enrollment in Self-Funded

Health Plans

Table III.1: CPS Estimates of Health

Care Coverage Source, 1993 Source of coverage Individuals (in millions) Percent of population

Employmenta 140.0 53.9

Medicare 31.4b 12.1

Medicaid 23.9c 9.2

CHAMPUS/VA/military 4.5d 1.7

Individual 20.2 7.8

Uninsured 39.7 15.3

Total (U.S. population) 259.8 100.0

aAlso includes union-sponsored coverage.

bTo avoid double counting, this number does not include individuals who also received

employer-based coverage and who are working (1.7 million individuals). For these individuals, we

assumed that Medicare would be a secondary payer to the primary, employer-based coverage.

HCFA reports that, in 1992, 35.6 million individuals (13.7 percent of the population) were enrolled

in Medicare.

cTo avoid double counting, this number includes only those individuals who did not also have

either Medicare or employer-based coverage during 1993. If these individuals were included,

Medicaid enrollment would total 31.7 million individuals. HCFA reports that, in 1992, 31.2 million

individuals were enrolled in Medicaid.

dTo avoid double counting, this number does not include 5.1 million individuals who also received

employer-based coverage, Medicare, or Medicaid during 1993.

Number of Individuals

Enrolled in ERISA

Health Plans

Because government- and church-sponsored employee plans are not ERISA

plans, the number of individuals enrolled in ERISA plans is a subset of those

who have employer-based coverage. Therefore, to estimate the number of

individuals enrolled in ERISA plans, we used the number of individuals

receiving health coverage through private-sector employers and

government or church employers.

Of the 140 million individuals with employer health coverage in 1993, the

CPS reported that nearly 73 million individuals worked for a private

employer, 16 million worked for a government employer, and 51 million

did not indicate a category of employment. Most of these 51 million

unclassified individuals (82 percent) were children or spouses of workers

with employer coverage. We allocated these individuals to the related

worker’s employment category. The remaining 9 million individuals were

simply allocated proportionately to either private or government

coverage.72 As shown in table III.2, we estimate that nearly 114 million

individuals received health coverage through a private-sector employer.

72That is, 81 percent of these 9 million individuals were allocated to the private sector and 19 percent

were allocated to government.

Page 45 GAO/HEHS-95-167 ERISA and Health Reform
Appendix III 

Estimation of Enrollment in Self-Funded

Health Plans

Table III.2: Distribution of Individuals

With Employer-Based Health Care

Coverage

Private Government Unclassified

Initial CPS data (before

allocation of unclassified

individuals)

72.6

(82 percent)

16.0

(18 percent) 51.2

Estimates (after allocation of

unclassified individuals)

113.9

(81 percent)

26.0

(19 percent) 0

In some cases, individuals may have been employed under one category

but received coverage under another category. For example, a person may

work for a private firm but receive family coverage through a spouse who

is employed by the government. If government benefits are more generous,

then it is likely that many spouses may elect the government-sponsored

coverage rather than their own private-sector coverage. However, the CPS

data do not allow us to determine when this situation occurs.

Comparing the CPS data with other sources, our estimate of

employer-based health coverage offered by governments is lower than

expected. On the basis of enrollment in the Federal Employees Health

Benefits Program (FEHBP) and employment by state and local

governments, the CPS data may underestimate government-sponsored

health coverage by as much as 8 million individuals.73 If our estimate of

enrollment in government-sponsored health plans is low, then our number

of individuals covered through private-sector health plans is high. In our

final estimates for self-funded health plans, therefore, we tested the

sensitivity of our analysis to different assumptions of employer-based

coverage offered by private-sector and government employers.

In addition to health plans offered by government employers, health plans

sponsored by churches are also exempt from ERISA. To estimate the

number of participants in church-sponsored health plans, we analyzed the

CPS data to identify about 250,000 individuals who were clergy or religious

workers and who received employer-based health coverage. We estimate

that about 500,000 individuals and dependents receive employer coverage

through church-sponsored health plans. However, this may be an

73In 1993, FEHBP enrollment was about 9 million individuals, including 2.4 million employees,

1.7 million retirees, and approximately 5 million dependents. However, most FEHBP enrollees who are

retirees of the federal government would also have Medicare as their primary coverage. Thus, we

estimate that about 6 million individuals receive FEHBP as their primary source of coverage. The

Bureau of Labor Statistics (BLS) reported that about 15.4 million individuals were employed by state

and local governments in 1992, with 90 percent of full-time state and local government employees

participating in their employers’ health plans. Using these data, we estimate that roughly 28 million

individuals (including dependents) would be covered by employer health plans sponsored by local and

state governments. Thus, government-sponsored coverage estimated from these sources would be

about 34 million individuals, compared with the 26 million individuals we estimated from the CPS data.

Page 46 GAO/HEHS-95-167 ERISA and Health Reform
Appendix III 

Estimation of Enrollment in Self-Funded

Health Plans

underestimate because many church workers would be classified in

administrative or other occupations and cannot be separately identified as

church employees. Because of the relatively small number of people

receiving employer coverage through church-sponsored health plans, this

number is unlikely to significantly affect our final estimates of the number

of individuals in ERISA self-funded plans.

Thus, of the nearly 140 million individuals that the CPS reported receive

employer-based health coverage, we estimate that about 114 million are

enrolled in ERISA health plans, as summarized in table III.3.

Table III.3: Participants With

Employer-Based Health Care Coverage

Overseen by ERISA

Number of

participants

(in

millions)

Employer-based coverage 140.0

Government-sponsored coverage 26.0

Church-sponsored coverage 0.5

ERISA health plans 113.5

Using a similar approach with the March 1990 CPS, we estimate that of the

144 million individuals with employer-based health coverage in 1989,

approximately 117 million were in ERISA health plans.

Number of Individuals

Enrolled in

Self-Funded Health

Plans

Employer benefits surveys that BLS has produced indicate the percentage

of plan participants with employer-based health care coverage that are

enrolled in self-funded plans. A difficulty with these data, however, is that

they are collected in alternating years for establishments with fewer than

100 employees and for establishments with 100 or more employees.74 To

generate a rate for the number of individuals enrolled in self-funded plans

for establishments of all sizes, we blended the results of survey years 1992

and 1993, as shown in table III.4.

74See Employee Benefits in Medium and Large Private Establishments, 1993, U.S. Department of Labor,

BLS (Washington, D.C.: Nov. 1994), and Employee Benefits in Small Private Establishments, 1992, U.S.

Department of Labor, BLS (Washington, D.C.: May 1994).

Page 47 GAO/HEHS-95-167 ERISA and Health Reform
Appendix III 

Estimation of Enrollment in Self-Funded

Health Plans

Table III.4: BLS Estimates of the

Number of Full-Time Participants in

Self-Funded Health Plans in 1992 and

1993

Survey year

Establishment size

(number of employees)

Full-time

employees

represented

by survey

Full-time

employees

with

coverage

Participants in

self-funded

plans (percent)

1992 Fewer than 100 34.4 million 24.4 million 32

1993 100 or more 28.7 million 23.5 million 46

The overall percentage of participants enrolled in self-funded plans,

39 percent, is the weighted average of the BLS data representing all

full-time employees with health coverage.

To examine the trend in enrollment in self-funded plans, we also

calculated a blended self-funded rate from BLS’ survey for years 1989 and

1990. On the basis of this calculation, the percentage of participants

enrolled in self-funded health plans in 1989 and 1990 was 33 percent. (See

table III.5.)

Table III.5: BLS Estimates of the

Number of Full-Time Participants in

Self-Funded Health Plans in 1989 and

1990

Survey year

Establishment size

(number of employees)

Full-time

employees

represented

by survey

Full-time

employees

with

coverage

Participants in

self-funded

plans (percent)

1990 Fewer than 100 32.5 million 22.8 million 28

1989 100 or more 32.4 million 29.8 million 36

Other Sources of Data

on Prevalence of

Self-Funding

To verify the accuracy of our results, we compared the BLS survey findings

with other potential sources of data on the prevalence of self-funding.

These included reports that health plans are required to submit to the

Department of Labor as well as private employer benefit surveys.

However, in most cases, these sources were incomplete or error prone.

Few sources provide data for employers of all sizes, including small

employers that tend less to self-fund.

All employers with at least 100 employees that provide employee benefits

are required to report to the Department of Labor, using a Form 5500.75

Unfortunately, the Department of Labor acknowledges that the data from

this form are of limited value in estimating the number of self-funded

health plan participants because the form is primarily designed for

pension plans, the data are not reported consistently, and the data may be

75Employers with fewer than 100 employees are not required to file a Form 5500 unless they self-fund

their benefits and pay from a trust fund (rather than from general assets).

Page 48 GAO/HEHS-95-167 ERISA and Health Reform
Appendix III 

Estimation of Enrollment in Self-Funded

Health Plans

prone to filer errors and errors introduced in the data processing.76

Despite these limitations, an analysis of the Form 5500 filings by

Mathematica Policy Research, Inc., for the Congressional Research

Service estimated that, for employers with more than 100 employees in

1991, 42 percent of participants were in fully insured plans, 26 percent of

participants were in partly self-funded plans, and 32 percent of

participants were in fully self-insured plans. Mathematica excluded firms

with 100 or fewer employees because the data were too incomplete.

A 1994 survey in 10 states conducted by Rand, Inc., for the Robert Wood

Johnson Foundation and the Department of Labor found results very

similar to the BLS survey we used.77 In the 10 states it surveyed, Rand found

that 41 percent of participants were enrolled in self-funded health plans.

Like the BLS survey, these results included health plans of all sizes,

including those with fewer than 100 employees. However, it is limited to

the states included in the survey. The National Center for Health Statistics

is currently using a similar survey nationwide; the results of its employer

benefit survey are expected in fall 1995.

Finally, several private employer benefits consulting firms have estimated

the proportion of health plans offered by employers of different size

categories that are self-funded. In 1993, Foster Higgins reported that,

among employers with more than 500 employees, 64 percent of indemnity

plans were self-funded and 62 percent of preferred provider organization

(PPO) plans were self-funded. For employers with fewer than 500

employees, only 17 percent of indemnity plans were self-funded and

4 percent of PPO plans were self-funded. Similarly, KPMG Peat Marwick’s

1994 survey of employers with at least 200 employees found that

62 percent of conventional (indemnity) plans were self-funded, 63 percent

of PPOs were self-funded, and 58 percent of point-of-service plans were

self-funded. Peat Marwick did not survey firms with fewer than 200

employees. In both cases, these surveys only reported the percentage of

plans that are self-funded, not the percentage of individuals enrolled in

self-funded health plans.

Because the BLS survey is the only one of these sources that reports

national percentages of participants in self-funded health plans in firms of

all sizes, we used this source in our final estimates of the number of

76For example, some employers report multiple Forms 5500 for each health plan they provide, whereas

others report a single Form 5500 for all of their health plans. It is also difficult to determine whether

the health plan is a single-employer plan or a multiemployer plan.

77The states surveyed include Colorado, Florida, Minnesota, New Mexico, New York, North Dakota,

Oklahoma, Oregon, Vermont, and Washington.

Page 49 GAO/HEHS-95-167 ERISA and Health Reform
Appendix III 

Estimation of Enrollment in Self-Funded

Health Plans

Americans enrolled in self-funded health plans. Since the Rand survey also

included all firm sizes (although only 10 states were surveyed), we used its

slightly higher percentage of participants in self-funded health plans to

examine the sensitivity of our results.

Number of Individuals

in Self-Funded Health

Plans

We estimate that about 44 million participants (17 percent of the U.S.

population) were enrolled in self-funded ERISA health plans in 1993.78 This

estimate is calculated by multiplying the percentage of participants in

self-funded plans (39 percent) in 1992-93 by the number of participants in

ERISA health plans in 1993 (113.5 million). Using the same approach, we

estimate that approximately 39 million participants were enrolled in

self-funded ERISA health plans in 1989.

Because of uncertainties in the number of enrollees in employer health

plans sponsored by governments or churches, we tested the sensitivity or

our estimate using a lower number of participants in ERISA health plans. By

estimating that 106 million individuals participated in ERISA health plans

(rather than 114 million), we calculated approximately 41 million enrollees

in self-funded ERISA health plans in 1993 rather than 44 million enrollees.

This represents about 16 percent of the U.S. population.

We also tested our estimates using a higher percentage of participants in

self-funded plans. On the basis of the 10-state survey conducted by Rand,

we assumed that 41 percent of participants were in self-funded health

plans (rather than the 39 percent estimated by BLS). Thus, using this

assumption, we estimate 47 million enrollees in self-funded ERISA health

plans (nearly 18 percent of the population) rather than 44 million

enrollees.

78Some state and local governments also self-fund their health plans. In 1992, a BLS survey found that

27 percent of participants receiving health care coverage from state and local government employers

were in self-funded plans. Our analysis of the 1993 CPS survey estimates that about 20.9 million

Americans receive coverage from state and local government employer health plans. Thus, about

5.7 million of these state and local government workers and dependents are in self-funded plans.

Page 50 GAO/HEHS-95-167 ERISA and Health Reform
Appendix IV 

State Taxes Assessed on Health Plans

One of the most direct and quantifiable advantages that firms receive from

self-funding their health plans is their exemption from state premium taxes

and some other assessments paid by health insurers and HMOs. Most

insurers and HMOs will pass on the costs of these taxes to their customers

through higher premiums. However, their ability to do so, as well as the

overall impact on an employer, depends on factors such as the

competitiveness of the market, size of the employer, and insurer’s

marketing strategy.

As shown in table IV.1, premium taxes on commercial health insurers

range from less than 1 percent to over 4 percent, with most states having

premium tax rates of about 2 or 3 percent. Many states also provide

exemptions or discounted tax rates for Blue Cross & Blue Shield Plans,

HMOs, and locally based insurers.

Table IV.1: State Health Insurance

Premium Tax Rates Numbers in percent

Health insurers

Blue Cross & Blue

Shield plans HMOs

Alabama 1-4a 1-4a 1b

Alaska 2.7 6c 2.7

Arizona 2 2 2d

Arkansas 2.5 1 2.5e

California 2.35 0 0

Colorado 2.25 5¢ per enrolleef 0g

Connecticut 1.75h 2h 1.75h

Delaware 2 0 0

District of Columbia 2.25 0 0

Florida 1.75 1.75 0

Georgia 2.25 2.25 2.25i

Hawaii 4.265 0 0

Idaho 1.4-2.75j 1.4-2.75j .04¢ per enrolleef

Illinois 2k 0 0

Indiana 2 0 0

Iowa 2 2 0-2l

Kansas 1-2a 1-2a 0.5-1l

Kentucky 2 2m 2m

Louisiana 2-2.25n 2-2.25n 2-2.25n

Maine 2 0.015 0

Maryland 2 0 0o

Massachusetts 2-2.28p 0 0

(continued)

Page 51 GAO/HEHS-95-167 ERISA and Health Reform
Appendix IV 

State Taxes Assessed on Health Plans

Numbers in percent

Health insurers

Blue Cross & Blue

Shield plans HMOs

Michigan 0q 0 0

Minnesota 2 0 0

Mississippi 3 0 0

Missouri 2 0 0

Montana 2.75r 0 0

Nebraska 0.5 1 1

Nevada 3.5 3.5 3.5

New Hampshire 2s 0 2s

New Jersey 1.05 2¢ per subscriber 0

New Mexico 0.9-3j 0.9-3j 3

New York 1 0 0

North Carolina 1.9 0.5 0

North Dakota 1.75 1.75 1.75t

Ohio 2.5u 2.5u 0

Oklahoma 2.25 2.25 2.25v

Oregon 2.25w 0 0

Pennsylvania 2 0 2x

Rhode Island 2 0 0

South Carolina 1.25 1.25 0y

South Dakota 2.5 2.5 2.5b

Tennessee 2.5 2.5 2

Texas 1.75 0 1.75z

Utah 0 0 0

Vermont 2 0 0

Virginia 2.25 0.75aa 0bb

Washington 2cc 2cc 2cc

West Virginia 3 0 0

Wisconsin 2 0 0dd

Wyoming 0.75 0.75 0.75

Note: Premium taxes expressed as percentage rate assessed on gross premiums unless

otherwise noted.

aDomestic (state-based) insurers pay lower rate.

bCredit for HMOs with state home office.

cTax based on gross premium less claims paid.

dTax assessed on net charges.

Page 52 GAO/HEHS-95-167 ERISA and Health Reform
Appendix IV 

State Taxes Assessed on Health Plans

eCredit for HMOs with state home office and local salaries and wages.

f

Per month.

gFee collected on the basis of premium volume.

hTax collected on the basis of net direct premiums.

i

Credit for HMO city license fee.

j

Lower rate applies to insurers investing in state securities.

k

Domestic insurers meeting certain requirements are tax exempt.

l

HMOs less than 6 years old pay the lower rate.

mAdditional tax of $0.25 per outpatient pharmaceutical drug if tax is not paid by pharmacist.

nTax set as $140 for $7,000 or less in premiums received and $225 for each additional $10,000 in

premiums received.

oHMOs are tax exempt except where HMO benefits are offered by a for-profit commercial insurer.

HMOs offered by nonprofit insurer are tax exempt.

pLower rate is paid by insurer if also licensed as life insurance company. PPOs taxed at

2 percent.

qInsurers pay business tax.

r

Health insurers also pay $0.70 per Montana resident to fund genetics program.

s

Minimum payment of $200.

t

HMO credits for exam fees and state home office.

uDomestic insurers pay lesser of 2.5 percent of franchise tax.

v

Federal payments (Medicare and Medicaid) to HMOs are tax exempt; HMOs get a credit if

invested in state securities; credit for HMO state home office.

wDomestic insurers pay income tax instead.

x

Nonprofit or benevolent HMOs are tax exempt.

y

Taxed as a corporation at 5 percent; also have a license tax.

z

For first $450,000 of gross reserves collected, HMO tax rate is 0.875 percent. HMOs receive a

credit for Texas investments not to exceed $2 per enrollee.

aaTax assessed on subscriber fees.

bbPay insurance commission maintenance assessment of no more than 0.1 percent of premium,

with a minimum of $300.

ccAdditional fee assessed for Department of Insurance operations, not to exceed 0.125 percent of

receipts.

ddHMOs pay franchise tax of 7.9 percent.

Source: NAIC, 1995.

Page 53 GAO/HEHS-95-167 ERISA and Health Reform
Appendix IV 

State Taxes Assessed on Health Plans

Health insurers are also liable for paying other miscellaneous assessments

collected by the states.79 For instance, all states maintain guaranty funds

to pay outstanding claims in cases of an insurer’s failure. Every state

except New York retroactively assesses insurers to finance these guaranty

funds. That is, in years that moneys are drawn from the guaranty funds

because of an insurance failure, insurers are assessed a fee on the basis of

their market share within the state to pay for the guaranty fund expenses.

States cap the maximum rate insurers may be assessed in a year, typically

at about 2 percent of gross premiums. However, except in a few states

where a large insurer failed, actual assessments are much lower than the

maximum rate. For example, in 1990, actual assessments against life and

health insurers for guaranty funds averaged about 0.15 percent. That year,

20 states (including Puerto Rico) either made no assessments or made

refunds for surpluses in life and health insurance guaranty funds; guaranty

fund assessments exceeded 1 percent of premiums in only three states.

Another significant cost for health plans in some states results from taxes

assessed on providers, such as hospitals. A 1994 survey by the American

Public Welfare Association found that about half of the states have

adopted provider revenue taxes. Many states have tax rates ranging from 1

to 7 percent, although New York imposes a 13-percent tax on hospital

services paid by commercial insurers.80 In many states, these funds are

popular because they can be used to receive federal matching funds for

Medicaid.81 In other states, such as Massachusetts, these taxes are

redistributed to hospitals to reimburse for uncompensated care costs.

Finally, New York has used these taxes for hospital rate-setting programs

79State regulations also require health insurers to maintain reserves to protect the insurer’s financial

solvency. Although not directly a tax, reserve standards require the insurer to maintain and account for

these funds in a specified way and may result in an opportunity cost to the insurer. This opportunity

cost results from the insurer not having the flexibility to use the funds in other ways that may have a

higher rate of return. In contrast, self-funded health plans do not have reserve requirements. It is

impossible to accurately estimate the costs saved by self-funded health funds from the lack of reserve

requirements because (1) the extent to which self-funded plans voluntarily reserve assets for paying

future health claims is unknown; (2) in the absence of state regulations, insured plans could invest the

funds currently maintained in reserve in many ways; and (3) how fully insurers pass on the associated

costs of reserve requirements (or a tax) to employers through higher premiums is unclear. Because

solvency standards would require a self-funded employer to set aside funds to pay for future health

care claims, the employer could encounter an opportunity cost by losing the flexibility to invest the

funds at a higher rate of return.

80Hospital services provided to Blue Cross & Blue Shield enrollees are exempt from the surcharge, and

HMO enrollees pay from 0 to 9 percent depending on the share of Medicaid enrollees in the HMO. Until

1993, commercial insurers also were required to pay an additional 11 percent surcharge on hospital

revenues.

81See Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal Government

(GAO/HEHS-94-133, Aug. 1, 1994). In 1991, the Congress enacted the Medicaid Voluntary Contribution

and Provider-Specific Tax Amendments of 1991 to severely restrict the use of provider-specific taxes

and donations as a source of state Medicaid matching funds.

Page 54 GAO/HEHS-95-167 ERISA and Health Reform
Appendix IV 

State Taxes Assessed on Health Plans

and to provide a competitive advantage to Empire Blue Cross & Blue

Shield because the insurer has maintained a policy of open enrollment and

has thereby insured higher risk and costly individuals.

Even though these taxes are imposed on providers rather than directly on

health plans, they have an indirect effect on health plan costs. Hospital

services provided to enrollees in self-funded health plans as well as those

provided to fully insured health plan enrollees have been taxed.82 Because

of this indirect effect on health plans, several states, including New York

and New Jersey, have had their provider taxes challenged under ERISA.

However, the Supreme Court ruled in the Travelers case that the New

York system of hospital surcharges, which is essentially a provider tax, has

too indirect an effect on health plans to be preempted by ERISA. Thus,

pending further litigation, states appear to have the ability to impose

general provider taxes without violating ERISA.

82To some extent, a hospital tax may not proportionately affect all payers equally. For example, even

though a state may impose a 10-percent tax on hospital charges, a large insurer or self-funded health

plan may negotiate an additional 10-percent discount from hospital services and nullify the effect of

the tax on its health plan costs.

Page 55 GAO/HEHS-95-167 ERISA and Health Reform
Appendix V 

State-Mandated Benefits

State governments require, or mandate, that companies selling health

insurance cover specified health services or the services provided by

specified providers.83 Mandates are typically narrowly defined provisions

and may be applied to commercial insurance companies, Blue Cross &

Blue Shield plans, and HMOs.

Mandates are often classified as treatment mandates, provider mandates,

and special-population mandates. Treatment mandates require insurance

companies to cover treatment for specific conditions, such as alcoholism

and mental health problems, or for specific procedures, such as in vitro

fertilization services. Provider mandates require payment for covered

services from specific types of providers, such as chiropractors,

psychologists, or optometrists. Special-population mandates require

insurance coverage for defined groups, such as newborns, adopted

children, or handicapped dependents.

Mandated benefits are often debated, the debate usually centering on the

value of mandated benefits relative to their cost. Proponents of mandates,

including many consumer groups and health care providers, argue that

they may (1) provide equal access to necessary services; (2) pay for

themselves in the long run, especially preventive care services; (3) make

certain benefits available to those who are likely to become uninsured or

uninsurable; and (4) prevent some insurers from experiencing substantial

adverse selection, that is, attracting individuals who have costly health

conditions or are more likely to incur high health costs. Opponents,

including many business groups and insurers, argue that mandates may

(1) raise total health care costs and thus premiums, (2) cause employers to

self-fund or discontinue their health plans, (3) interfere in the voluntary

contract between insurers and employers, (4) result from political

pressure from special interest groups and providers, and (5) create

administrative burdens for insurers or employers operating in many states.

States Usually

Mandate Benefits for

Select Types of

Coverage

The number and type of benefits mandates vary by state. Although

analyses have shown that the total number of mandates adopted by the

states exceeds 700, this overstates the scope of mandated benefits because

many states have identical or similar requirements.

States most frequently mandate coverage for preventive treatments like

mammograms and pap smears or for treatment of mental illness or alcohol

83States’ ability to require insurers to sell insurance policies to employee welfare benefit plans

containing specified benefit or provider provisions was upheld in Metropolitan Life v. Massachusetts,

471 U.S. 724 (1985). See appendix I for a more detailed discussion of this case.

Page 56 GAO/HEHS-95-167 ERISA and Health Reform
Appendix V 

State-Mandated Benefits

and substance abuse. In addition, states often require coverage for more

common alternative providers like chiropractors and optometrists and for

special populations like newborns and the handicapped. A small number

of states requires coverage for more specific conditions or treatments,

such as congenital defects like cleft palate or hair loss due to specific

medical conditions or treatment. Table V.1 shows the number of states

with specific mandated benefits as identified by NAIC and Blue Cross &

Blue Shield of America.84 States typically mandate that insurers cover

specific benefits in all plans sold, whereas some states merely mandate

that insurers offer specific benefits but the insurer may also offer other

plans without these benefits. In some cases, the mandates are limited to

particular plans, such as HMOs or group insurance plans.

Table V.1: Number of States With

Specific Mandates Covera Offerb Total

Treatment mandates

Mammography screening 41 4 45

Mental illness 15 16 31

Alcoholism treatment 24 16 40

Drug abuse treatment 15 8 23

Pap smear 19 0 19

Well child care 14 4 18

Infertility treatment/in vitro fertilization 11 3 14

Temporomandibular joint disease treatment 10 3 13

Maternity care 11 2 13

Breast reconstruction following mastectomy 9 2 11

Phenylketonuria 7 1 8

Cleft palate 6 0 6

Prostate cancer screening 4 1 5

Bone marrow transplant 3 1 4

Scalp hair prothesis (for alopecia areata) 2 0 2

Provider mandates

Psychologists 40 1 41

Chiropractors 39 2 41

Optometrists 35 2 37

Podiatrists 30 0 30

(continued)

84We used data from NAIC for treatment mandates because this source refers to specific state laws

that require mandates, whereas Blue Cross & Blue Shield data are based on a survey of Blue Cross &

Blue Shield plans, which may be less consistent in identifying mandates. However, NAIC does not

report provider or special population mandates, and therefore we reported the data from Blue Cross &

Blue Shield. In general, the two sources are similar, although Blue Cross & Blue Shield reported

somewhat more states with treatment mandates.

Page 57 GAO/HEHS-95-167 ERISA and Health Reform
Appendix V 

State-Mandated Benefits

Covera Offerb Total

Nurse midwives 28 2 30

Social workers 21 3 24

Nurse practitioners 17 2 19

Psychiatric nurses 15 0 15

Osteopaths 13 1 14

Physical therapists 10 0 10

Nurse anesthetists 10 1 11

Professional counselors 9 1 10

Speech/hearing therapists 5 5 10

Occupational therapists 6 1 7

Acupuncturists 5 1 6

Special-population mandates

Newborns 48 1 49

Handicapped dependents 35 0 35

Continuation of coverage for dependents 32 1 33

Dependent students 7 0 7

aStates require specified benefit to be covered in health insurance plans sold.

bStates require insurers to offer specified benefit, generally at a higher cost, although insurers

may also sell plans without specified benefit.

Source: For treatment mandates, NAIC State Positions: Mandated Benefits, 1994.

For provider and special-population mandates, State Legislative Health Care and Insurance

Issues: 1994 Survey of Plans (Dec. 1994).

In addition to treatment, provider, and special-population mandates, states

have increasingly considered any-willing-provider laws that require

managed care plans to accept health care providers in their networks that

meet the terms and standards of the plan. According to the Group Health

Association of America, of the states with any-willing-provider laws, 10

have laws that apply to all providers, 14 have laws that apply to

pharmacists, 3 have laws that apply to physicians, and 4 have laws that

apply to nonphysician providers. However, in most states the laws are

limited because they do not apply to HMOs or to only particular types of

managed care plans.

Page 58 GAO/HEHS-95-167 ERISA and Health Reform
Appendix V 

State-Mandated Benefits

Mandates Increase

Cost of Health

Insurance Premiums,

but Overall Cost

Effect Is Unclear

The limited research on state benefit mandates indicates that they increase

health care claims costs. The effect of mandates on costs is not uniform,

however, since coverage for select benefits like mental health and

substance abuse often accounts for a large percentage of increased claims

costs.85

Determining the effect of a specific health insurance mandate on

premiums can be difficult, in part because it is hard to assess a mandate’s

effect on the overall increase in health claims and the attendant impact on

health insurance premiums. Also, a mandate’s cost effect on an employer

can vary sharply depending on the demographics and health needs of the

employee population. In addition, it is difficult to assess the true impact of

mandates when a large percentage of employer plans, both fully insured

and self-funded, offer benefits similar to the more costly state mandates.

Studies Show That

Mandates Increase Health

Care Claims Costs

Studies in several states have found that benefit mandates generally

increase claims costs by 5 to 22 percent. These analyses have aggregated

insurance company claims data and determined payments for mandated

benefits as a percentage of total medical benefits paid. Table V.2

summarizes various state studies that have estimated the increased claims

costs from mandated benefits.

Table V.2: Costs of Mandated

Treatment Benefits, Selected States

State Year

Total costs

(percent)

Iowa 1987 5.4

Maryland 1988 22.0

Massachusetts 1990 18.0

Oregon 1989 8.1

Virginia 1989 22.0

Wisconsina 1989 7.1

aIncludes five mandated benefits: mental health (including substance abuse), chiropractic,

diabetes, home health care, and skilled nursing care.

Sources: Jonathon Gruber, “State-Mandated Benefits and Employer-Provided Health Insurance,”

Journal of Public Economics, Vol. 55 (1994), pp. 433-464; Michael L. Hand and G. Marc Choate,

“The Cost of State-Mandated Health Care Benefits in the State of Oregon,” unpublished, 1991;

Gail Jensen and Jon Gabel, “Price of State Mandated Benefits,” Inquiry, Vol. 26 (1989), pp.

419-431; and Gregory Krohm and Mary H. Grossman, “Mandated Benefits in Health Insurance

Policies,” Benefits Quarterly, Vol. VI, No. 4 (1990), pp. 51-60.

85Another mandate often cited as imposing a significant health claims cost is continuation of health

insurance benefits for terminated employees. State laws requiring this coverage were largely

superseded with the passage of federal requirements in 1986 (29 U.S.C. 1161 et seq.).

Page 59 GAO/HEHS-95-167 ERISA and Health Reform
Appendix V 

State-Mandated Benefits

However, the results of these studies should not necessarily be generalized

to all states, even to states with identical mandates. The reason for this is

that many factors that are difficult to account for, such as provider

charges and practice patterns and policy deductibles and copayment rates,

may influence claims costs in each state.

Impact of Mandates on

Claims Costs Is Not

Uniform

While the limited research generally shows that state benefit mandates

increase costs, it suggests that some mandates have a greater impact on

claims than others. Studies have shown that mental health, substance

abuse, dental care, and maternity and neonatal care mandates are among

the highest cost mandates. For example, a summary of five state studies

estimated that mental health benefits added between 2.6 and 6.5 percent to

health care claims. Mandates determined not to add significantly to health

insurance costs include services for in vitro fertilization, acupuncture, and

cleft palate, as well as services provided by chiropractors and home health

nurses. It is these low-cost mandates, however, that are often cited by

employers as examples of the added wasteful expense mandates cause

them. Whereas the added claims costs caused by mandates may affect

small businesses’ decisions on whether to offer health care coverage,

larger businesses, many of which offer more comprehensive benefits

regardless of mandates, tend to express concern about the added

compliance costs resulting from varying mandates and limited flexibility to

design their own benefit packages. However, these costs would be even

more difficult to measure than the claims costs incurred by mandates.

Problems With Study

Approaches May Make

Their Results Less

Conclusive

In addition to the difficulty of generalizing studies of benefit mandates to

all states, the methodological problems inherent in existing studies

obscure the entire cost impact of benefit mandates. These studies clearly

show that benefit mandates increase claims costs to some extent, in part

because the availability of insurance coverage for specific treatments will

undoubtedly result in claims for those treatments. The extent of the

overall increase in health claims and the attendant impact on health

insurance premiums is unclear, however.

Some of these methodological problems follow:

• Many mandate studies were conducted in the 1980s and may not reflect

the trend of more individuals being enrolled in managed care plans that

attempt to manage utilization of health care services.

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Appendix V 

State-Mandated Benefits

• Studies may understate actual utilization due to a mandate because other

related health services, although not themselves mandated, may also be

provided. For example, some analysts have noted that conditions such as

alcoholism may cause other medical problems such as malnutrition.

Treatment for these related conditions would not be provided under the

mandate and, therefore, costs related to the treatment of alcoholism may

be understated.86

• Studies may also overstate the increase in use of services. This could

occur if services provided under the mandate substitute for services

formerly provided through traditional coverage. In addition, many health

plans may offer benefits similar to those mandated before its enactment.

Thus, attributing the use of services to a mandate would overstate the

mandate’s effect.

• Studies may not capture overall lower health care utilization if coverage is

required for services delivered by a lower cost provider.

• Claims-based studies rely on accurate treatment coding by the provider

and an insurer’s ability to isolate claims through its claims paying system.

This may be difficult, especially in the case of multiple diagnoses.

• Studies traditionally focus on the costs of mandates, not on the benefits.

Although a cost-benefit analysis would be difficult, if not impossible, to

undertake, a truly rigorous analysis of state mandates would track health

care utilization of a specific population over time to determine if medical

interventions based on state mandates ultimately improved overall health

status and avoided more costly medical interventions later on.

In addition to these methodological problems, mandate studies have not

conclusively shown that benefit mandates are a large burden to employers

that would cause them to self-fund or not seek coverage. Many employers

currently offer coverage similar to state mandates, and, for those that

self-fund, mandates are commonly not a factor or are only one of several

factors affecting that decision.

86Krohm and Grossman, p. 54.

Page 61 GAO/HEHS-95-167 ERISA and Health Reform
Appendix VI 

Comments From the Department of Labor

Page 62 GAO/HEHS-95-167 ERISA and Health Reform
Appendix VI 

Comments From the Department of Labor

Page 63 GAO/HEHS-95-167 ERISA and Health Reform
Appendix VII 

GAO Contacts and Acknowledgments

Contacts Michael Gutowski, Assistant Director, (202) 512-7128

John Dicken, Senior Evaluator, (202) 512-7135

Rafe Forland, Senior Evaluator

Craig Winslow, Senior Attorney, (202) 512-8225

Acknowledgments In addition to those named above, the following individuals made

important contributions to this report: Roger Thomas provided legal

assistance; John Hansen and Darryl Joyce evaluated the Department of

Labor’s enforcement of ERISA; and Paula Bonin provided computer

programming for the analysis of the Current Population Survey.

(108206) Page 64 GAO/HEHS-95-167 ERISA and Health Reform
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