State Based Health Care Reform-Getting Out from Under Preemption

In January the Fourth Circuit decided RILA v. Fielder, 39 EBCases 2217, 2007 U.S. App. LEXIS 920 (4th Cir. 2007) holding, in a split decision, that Maryland's law requiring certain large employers (most notably Wal-Mart) to spend 8% of payroll on healthcare for their employees or pay the difference to the state to defray the cost of Medicaid.  According to the court, such a law is preempted because it "effectively requires employers in Maryland covered by the Act to restructure their employee health plans."   

The preemption test is fair enough, but the law does no such thing.  It gives employers a choice between increasing health care spending to a certain level or paying the state--a real choice as far as the dissent was concerned--hardly a "requirement."  In any event, contrary to what the court thought there are ways to spend money on health care for employees without establishing a plan--all that's required is that employers avoid promising a particular level of benefits, i.e. decide what to pay for as an act of genuine discretion.  Oddly, this concept horrifies every defender of free enterprise I meet.  But the law is pretty clear; absent a specifically identified benefit--i.e. something definite enough that you know a promise has been broken when it doesn't get paid, there is no employee benefit plan.  A discretionary bonus payment is not an ERISA plan.

But I don't want to belabor the point.  The law shouldn't have been held preempted, but the Maryland Fair Share Health Care Fund Act was hardly comprehensive health care reform.

I write to suggest that there are other ways to skin this cat (and irritate fellow Advisory Board member Frank Cummings).  The outlines of one approach can be found in a proposal that was before the Wisconsin Legislature last year.   See www.wisaflcio.org which contains a summary and text of the bill. 

I'll omit details, but the basic approach is simple.  Employers pay a per capita assessment to the state which some state agency decides is about equal to the cost of coverage.  The state provides coverage.  Employees in the state get the coverage whether the employer actually pays or not--so the employer payments are in the nature of a tax, not the payment of a premium without which no coverage is provided.  The employer doesn't establish or maintain the plan--the state does.   No employee benefit plan, no preemption. It's a miracle.  ERISA doesn't preempt everything.

If the employer wants to provide more (e.g. a smaller co-pay for his employees), he's free to do so or not, so everyone is not reduced to the least common denominator; employers who want to use richer coverage to attract employees are free to do so.

The success of this scheme is based on the notion that the state, with all employee in the system, can provide health care more cheaply than the hodge podge of employer and individual arrangements that we now have, and cover at least all employees and their families to boot.  Large employers with older workforces stop paying more than their fair share--there's a real risk pool-no opting out for the young and the healthy, and no skimming the cream by hiring and providing coverage to just the kids in their twenties. 

I'm a lawyer, not a health care economist. The plan makes sense to me, but maybe it won't work.  But suppose it does.  Wouldn't that be grand (for everyone but health care insurers)?  Shouldn't at least one state give it shot so we'll finally know the answer?  Must we try this only on the national level, or not at all? The states should be laboratories to try out new ideas.  It's time to set them free.  End the tyranny of ERISA preemption.  If it works, the federal government can incentivize other states to do the same thing, and our long national health care nightmare will be over. 

Comments

[Roy Harmon]

With regard to the comment regarding association plans, Don, I have reservations about the use of association plans based upon the checkered history of MEWA's. I don't deny this approach has worked for some groups, but it is not the panacea that advocates claim. As for Wal-Mart, the problem is that their employees place a substantial burden on Medicaid because they offer paltry benefits by industry standards. Wal-Mart thus benefits from the public sector which is what rankled the Maryland lawmakers. They do have a point.

Roy

[Don Levit]

Roy:
I agree with you that a tax on individuals will fly legally.
The problem with that solution, in my opinion, is that we are mandating people to buy the same old, tired products.

It is interesting that the case seemed to be directed at Wal-Mart skimping on health benefits, in lieu of Medicaid being the insurer.
I spoke to the fellow who represented Medicaid Matters in Maryland, who was one of the plaintiffs. He was not aware that associations could form to lessen the burdens of Medicaid, by offering innovative products through a tax-exempt trust. I sent him the appropriate IRS decisions in this matter. I never heard from him again. Maybe the objective was to bring Wal-Mart down, and not to raise up other alternatives.
Don Levit

[Jeffrey Clayton]

It seems to me that an important part of the RILA case was that while the criteria regarding who was subject to the act seemed neutral enough, in reality it applied to one employer, Wal-Mart. There were plenty of statements made by legislators that the intent of the act was to force Wal-Mart to spend more money on health care for its employees.

This was not an attempt at health care reform, this was an blatant attempt to get Wal-Mart. It's one thing to make a real attempt at health care reform. It's entirely another to pass a law which applies only to one employer in the state. In reading the majority opinion, it seems the Court was well aware of the narrow application of the law and I believe these bad facts influenced how the case ultimately was decided.

The RILA case is a good example of bad facts make bad law. The act was bad public policy. Hopefully the RILA precedent will not be an impediment to real attempts at health care reform at the state level.

[Don Levit]

Marc:
Thanks for your posting.
Your definition of a plan is a bit limited, I believe.
Rather than just having specific benefits, a plan is also a regular, consistent, methodical way of providing benefits.
Also, this law will have to contend with the Supreme Court's ruling in regards to costs that are acute, which this legislation seems to suggest.
If the costs are not mandatory, why would any employer participate, unless the fine is more or less equal to the cost?
(I have not read the legislation)
And, if you really want states to experiment, they should give multiple employer self-funded VEBAs a better chance.
Wisconsin is one of the worst states in regard to providing this opportunity.
And, in regards to the Wal-Mart legislation, if the intent is to reduce the strain of Medicaid, why don't ststes pursue the option of associations forming tax-exempt trusts to lessen the burdens of government?
Don Levit,CLU,ChFC

[Roy Harmon]

I do not think the Wisconsin bill would survive an ERISA challenge. In my opinion, the federal courts will take the position that State health care initiatives, when directed at employers through tax regimes, place an impermissible burden on the administration of the employers' ERISA plans. The issue will be cast in terms of the burden the initiative places on the adoption and administration of the employers' plans. Other than the obvious populist (read political) appeal of taxing employers, why not just take the Wisconsin proposal to the next level and place the tax on individuals? The individual taxpayer will feel the effect in any event since employers will have to pass the costs on to consumers. That is not my preference, but the economic (if not political) equivalent.

[Frank Cummings]

"End the tyranny of ERISA preemption"? Mark, please!

Try it this way: "Let's all jump on this bandwagon and balkanize employee benefits."

Be careful what you wish for -- you might get it.

Frank Cummings