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Myths & Facts |
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Does federal law prevent states from implementing health care reform?
What’s Behind It?
The Employee Retirement Income Security Act of 1974 is a federal law governing pension and other employee benefits, including health coverage, offered by private-sector employers. Because Congress was concerned about conflicts among state laws and that federal and state regulations might discourage employers from voluntarily offering employee benefits, ERISA contains a "preemption clause." This clause essentially provides that federal law trumps state law when it comes to regulating employee benefits.
Some states that have tried to expand health coverage by including employers as a source of financing have encountered legal obstacles with implementation because of the ERISA preemption clause. For example, courts have held that ERISA prohibits states from requiring employers to cover workers' health benefits. Some of the court rulings have led people to conclude that ERISA significantly limits California's ability to implement health care reform, particularly any type of reform that puts requirements on employers, like a "pay or play" requirement.
The Broader Picture
Although it is impossible to predict exactly how a particular state coverage expansion approach will fare under an ERISA challenge, recent Court decisions offer some guidance on features that might make proposals more or less vulnerable. - Spending on care versus coverage. An employer spending requirement might not be legally problematic. One court decision concluded that an employer "pay or play" requirement violates ERISA. However, a law that requires an employer to pay into a state fund (as partial support for a public insurance pool) but allows a credit against the payment for actual employer spending on health services for employees might not violate ERISA. Such a law might be acceptable because it gives employers the choice of whether to contribute to a public purchasing pool or directly pay for employee health services. Conversely, the closer a state law comes to dictating that employers must offer coverage or specifying the benefits that must be offered, the more susceptible to ERISA challenge it's likely to be. A district court in San Francisco recently held that ERISA preempts a local ordinance requiring employers to fund employee health care directly or through a public city program because the court characterized this requirement as a benefits mandate, but the court indicated that an employer tax against which health spending could be credited would not violate ERISA. However, the federal Court of Appeals stayed the local ordinance, allowing it to go into effect, at least until the formal appeal hearing on the ground that the ordinance allows employers to choose between making a full or partial payment to the city and providing health care to their workers.
- Broad versus narrow applicability. Requirements that affect a broad spectrum of employers and serve a broad social goal might hold up better than narrowly targeted requirements. In 2006 Maryland passed a law requiring private employers with more than 10,000 workers to either spend at least 8% of payroll on employee health services or pay the shortfall to the state to help fund its Medicaid program. According to the law's sponsors, the proposal's purpose was to require Wal-Mart, and only Wal-Mart, to expand its health benefits. A federal district court and the 4th Circuit Court of Appeals held that the law was preempted by ERISA because it targeted one employer and virtually compelled that employer to modify its benefits. Following the 4th Circuit's reasoning, a federal court in New York recently held that ERISA preempts a similar ordinance adopted by Suffolk County that required a few large food retailers to spend a minimum amount on employee health care. A law that offers a large number of employers a choice between paying a fee or making health expenditures on behalf of employees might not pose a problem.
The Bottom Line
Until a court (and, ultimately, the Supreme Court) decides a particular case, it is not possible to predict with certainty whether ERISA preempts a specific state law. Court decisions depend heavily on the interplay between the objectives of the preemption clause and the purpose and effect of the challenged state laws. When drafting legislation, all proponents can do is look at case law and try to design laws differently from those the courts have found preempted by ERISA.
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