The state health reform movement is speeding along Eisenhower highways to Washington, where some legislators want to roll back federal protections that allow employers to run health benefit plans outside of state law.

Maryland gave up on its "Fair Share"" law in April, after a federal appeals court concluded the Employee Retirement Income Security Act of 1974 prevents the state from requiring Wal-Mart to spend at least 8% of payroll on employee health benefits or pay the difference into a state Medicaid fund. But more broadly based pay-or-play proposals remain on the table in other states, including California, Pennsylvania and Illinois.

At least 32 states considered some kind of employer-financed health care legislation this year, according to the Tax on Jobs Coalition, a group of employers assembled by the Washington, D.C.-based National Retail Federation to fight state mandates. And while the pace of legislative proposals slowed this year, momentum remains considerable.

"States are pushing the employers, both large and small, saying, 'You've got to be a player,'" said Joy Johnson Wilson, health policy director for the Denver-based National Conference of State Legislatures, at a recent briefing in Washington, D.C.

Even the widely publicized Massachusetts universal health law — considered an "individual mandate" because it requires residents to obtain health insurance — contains a questionable provision forcing firms with 11 employees or more to pay $295 per employee if they fail to offer a certain floor of health benefit coverage. At press time, the law was set to go into effect July 1 without a challenge from employers.

Meanwhile on Capitol Hill, two bipartisan bills — the Health Partnership through Creative Federalism Act and the Health Partnership Act — have been introduced to give states access to federal grants for health reform initiatives such as tax credits, risk-pooling arrangements or single-payer systems.

Some of these state plans, lawmakers say, would require Congress to take the unprecedented action of granting an ERISA waiver.

ERISA pre-emption debated

Employers express alarm at the prospect of ERISA erosion. The federal law, they argue, spares employers from a crazy quilt of state mandates and encourages them to provide health insurance to some 160 million workers.

The health care system is in danger of "creeping or galloping balkanization," says Neil Trautwein, vice president and employee benefits policy counsel for NRF. At a congressional hearing on state and federal health care reform in May, he told lawmakers: "ERISA pre-emption is a crucial linchpin to employer-sponsored coverage. State experimentation should be limited to state plans."

Kevin Covert, vice president and deputy general counsel for human resources at Honeywell, testified on behalf of the Washington, D.C.-based American Benefits Council that his company's ability to avoid state health mandates helps provide an affordable and competitive health benefit plan that includes a disease management program.

"It is critical that Congress not do anything with respect to ERISA pre-emption that would stifle our health care innovation," said Covert.

States, however, tell a different story. John Morrison, insurance commissioner for the state of Montana, where an estimated 20% of the population is uninsured, explained at the hearing that ERISA unfairly prevents his state from requiring local employers to pay into a risk-pool program for uninsured residents.

"Because of ERISA pre-emptions, self-funded employer plans do not contribute to the funding for this program, even though their employees are able to take advantage of the portability pool when they lose their employer coverage," said Morrison.

Morrison and other backers of state-sponsored initiatives to cover the uninsured are pushing for ERISA waivers that would allow states to require employers to contribute to state health programs. They also want the ability to collect data on benefits, enrollment and claims from self-insured plans, which could be used to evaluate whether an employer's plan meets state requirements.

Donna Cooper, policy secretary for Gov. Ed Rendell of Pennsylvania, says ERISA looms as an obstacle to the governor's state-subsidized health insurance plan that was unveiled in January. The "Cover All Pennsylvanians" program would levy a 3% payroll tax on businesses that do not provide qualified health benefits to workers.

"Let's say [employers] offer a product that has a $10,000 deductible and can only be used if you fall off a ski slope," Cooper said at a May forum in Washington, D.C., sponsored by the Alliance for Health Reform and the Robert Wood Johnson Foundation. "That wouldn't count to get out of our free-rider assessment."

But ERISA may halt Pennsylvania's efforts to sort out which self-insured health plans are eligible for an exemption from the so-called "free rider" tax, said Cooper, since the federal law prevents states from regulating large group health plans.

Creeping threat to ERISA

The Arlington, Va.-based Retail Industry Leaders Association, which successfully sued Maryland in the Wal-Mart case, objected to Pennsylvania's proposed 3% payroll tax at a hearing before state lawmakers in April.

"We're not objecting to the theories of universal access and expanding insurance to individuals," says John Rinzel, vice president for state government affairs at RILA. "Hopefully, these things will drive down costs. But when you introduce a payroll tax, you're threatening the provisions of ERISA."

RILA has no quarrel with the Massachusetts health plan, however, because it hinges on requiring people to secure health insurance on their own. "These laws don't, in theory, affect the practices of a business in terms of offering health care," Rinzel says.
Neither is Rinzel particularly concerned with aspects of the Massachusetts law that require employers to set up a Section 125 plan or pay a fee if their health benefits are deemed insufficient. RILA's members, mostly large employers, are expected to meet those requirements easily.

Local retailers also support the law, says John Hurst, president of the Retailers Association of Massachusetts.

"Keep in mind how far we came," he notes. "The early versions of this included a pay-or-play 7% payroll tax, which we vehemently opposed. This is uncharted territory, and the employer community in Massachusetts is dedicated to giving it shot."

Ed Kaplan, senior vice president and national health practice leader for the Segal Co., says the Massachusetts mandate may lower costs for large employers by reducing surcharges levied by the state for uncompensated health care.

In addition, he says, some employers will use the law to remove employees from the health benefit plan while still meeting minimum coverage requirements set by the state.

In the short term, the Massachusetts health care reform plan appears to have little impact on self-insured employers, which is likely why the law's employer mandate hasn't been challenged in court.

"No one has come out and said, 'Hey, ERISA is pre-empting this,'" says Kaplan. "It may have a good chance of silently going forward without an ERISA challenge. If that happens, then the other states will follow. Then gradually, without any federal change, ERISA becomes less powerful."

Some policy experts, however, say the Massachusetts law would be able to withstand a challenge from employers.

Amy Monahan, an associate law professor at the University of Missouri at Columbia, writes, "Unlike Maryland's act, which has a very strong 'pay' provision, Massachusetts' fair share contribution law has a weak 'pay' provision, arguably allowing it to survive an ERISA pre-emption challenge and be the first such law to do so."

Phyllis Borzi, a health policy research professor at George Washington University, believes state health care reform laws that are structured like Maryland's, but more broadly based, imposing a refundable tax on all employers, also would evade ERISA preemption.

"By 'broadly based' I mean something like Massachusetts or like what Governor Schwarzenegger has proposed in California," Borzi says. "Something that reasonable people can look at and say the state has tried to make everybody bear the cost and didn't single out one employer or group of employers."

Self-insurance remains popular

Despite continuing threats to ERISA pre-emption, self-insurance remains a popular strategy among employers.

"Self-funding is alive and well," says James Kinder, CEO of the Self-Insurance Institute of America. "Reports indicate more companies, municipalities and other governmental agencies are turning to self-insurance not only to save dollars but also to develop benefit programs to meet the specific needs of their workforces."

In 2006, 55% of workers with health insurance belonged to a plan that was either completely or partially self-funded, up from 49% in 2000, according to the Kaiser Family Foundation and the Health Research & Educational Trust.

One of the latest employers to switch to self-insurance is the City of Melrose, Mass.
Between 2001 and 2005, the city's health insurance premiums shot up by a total of 75%. CFO Patrick Dello Russo figured the city would be better off self-funding its plan, which covers about 800 employees. The new plan was implemented in 2006.

"We pay the claims that are submitted. The rate increase in the budget is less than it normally would be," Dello Russo says. "This year it's 7%." That kind of self-insurance success story may be repeated for lawmakers if threats to ERISA pre-emption continue.

Meanwhile, two presidential candidates appear to have taken a cue from state health reform initiatives. Former North Carolina Sen. John Edwards and Illinois Sen. Barack Obama have announced health plans with pay-or-play as a major feature. As details about these and other candidates' plans emerge, employers are sure to look closely at the impact. —E.B.N.