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. 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. 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. 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. 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. 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 increasingly significant as the number of self-funded health plans has grown. The original ERISA preemption language was sufficiently ambiguous that courts have had to elaborate on its scope. 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, 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. 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. Table 1 categorizes and summarizes regulatory differences among employer-based health plans. 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. 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 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. 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. 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. 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. 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). An additional 27 percent of the population, or about 69 million individuals, 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), Medicaid (24 million), 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); 40 million individuals were uninsured. 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. 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). 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; in 1990, 28 percent of plan participants in such firms were in self-funded plans.