Employer-Based Health Plans: Issues, Trends, and Challenges Posed by
ERISA (Letter Report, 07/25/95, GAO/HEHS-95-167).

Pursuant to congressional requests, GAO provided information on the: (1)
Employee Retirement Income Security Act's (ERISA) relationship to the
current system of employer-based health coverage; (2) implications of
the trend toward employer self-funding on the oversight of employees'
health care coverage; (3) kinds of state actions preempted by ERISA; and
(4) advantages of ERISA preemption to employers that offer health care
coverage to their workers.

GAO found that: (1) although historically courts have interpreted ERISA
to broadly restrict state regulation of employer health plans, recent
Supreme Court decisions may allow states greater flexibility under
general health care regulation provisions; (2) self-funded employer
health plans appear to be increasing, but many employers are moderating
their risks by using stop-loss coverage or managed care arrangements;
(3) about 40 percent of ERISA plans, which cover about 44 million
people, are employer self-funded plans which states are preempted from
regulating and taxing because they are not considered to be insurance;
(4) other ERISA plans cover an additional 27 percent of the U.S.
population; (5) states believe that ERISA impedes their ability to
ensure adequate consumer protections and enact health cost reduction
reforms; (6) states also believe that they should be able to tax and
collect data on all health plan participants uniformly; (6) employers
believe that ERISA has made it possible for them to offer their
employees health care coverage tailored to their needs and thus reduce
their costs; and (7) employers fear that changes to ERISA that would
give states greater regulatory flexibility would increase their costs
and jeopardize their ability to provide employee health coverage.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-95-167
     TITLE:  Employer-Based Health Plans: Issues, Trends, and Challenges 
             Posed by ERISA
      DATE:  07/25/95
   SUBJECT:  Employee medical benefits
             Health insurance cost control
             Judicial opinions
             Health insurance
             Insurance premiums
             State law
             Insurance regulation
             State taxes
IDENTIFIER:  Hawaii
             Massachusetts
             New York
             Oregon
             North Carolina
             
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Cover
================================================================ COVER


Report to Congressional Requesters

July 1995

EMPLOYER-BASED HEALTH PLANS -
ISSUES, TRENDS, AND CHALLENGES
POSED BY ERISA

GAO/HEHS-95-167

ERISA and Health Reform


Abbreviations
=============================================================== ABBREV

  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

Letter
=============================================================== LETTER


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-based\1 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. 

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. 


--------------------
\1 Such plans may be established or maintained by employers, employee
organizations (such as unions), or both. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

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 44 million people, the
employer chooses to self-fund\2 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. 

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. 


--------------------
\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. 


   BACKGROUND
------------------------------------------------------------ Letter :2

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.\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. 


--------------------
\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."


   EFFECT ON HEALTH PLANS CHANGING
   AS COURTS CONTINUE TO INTERPRET
   ERISA PREEMPTION
------------------------------------------------------------ Letter :3

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. 


      COURT DECISIONS LEAD TO
      SHARP DISTINCTION IN
      REGULATING SELF-FUNDED AND
      FULLY INSURED PLANS
---------------------------------------------------------- Letter :3.1

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. 

Table 1 categorizes and summarizes regulatory differences among
employer-based health plans. 



                                     Table 1
                     
                       Regulatory Status of Employer-Based
                                 Health Insurance


                                                Federal
Type of                                         Employees
employer-                                       Health          State/local
based health                                    Benefits        government
plan            Self-funded     Fully insured   Program         employees
--------------  --------------  --------------  --------------  ----------------
Risk bearer     Employer\b      Insurer         Insurer\c       Insurer or
                                                                government

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

Regulation      Exempt from     Insurer         Exempt from     State
                state           subject to      state           determines
                regulation and  state           regulation and
                mandated        regulation and  mandated
                benefits        mandated        benefits
                                benefits        (since 1978)    No significant
                Department of                                   federal role
                Labor           Department of   Administered
                administers     Labor           by Office of
                fiduciary,      administers     Personnel
                reporting, and  fiduciary,      Management
                disclosure      reporting, and  (OPM) laws
                requirements    disclosure
                                requirements

Rights and      Appeals         Appeals         OPM reviews     Determined by
remedies for    reviewed        reviewed        appeals         state law
denied claims   internally by   internally by
                employer        insurer
                                                Law exempts     Damages
                Employer not    Employer and    from punitive   determined by
                subject to      insurer not     or              state law
                punitive or     subject to      compensatory
                compensatory    punitive or     damages
                damages         compensatory
                                damages
--------------------------------------------------------------------------------
\a Church plans are also exempt from ERISA. 

\b Many employers may pass on some risk to a stop-loss insurance
carrier. 

\c The 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 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


--------------------
\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)). 

\9 115 S.  Ct.  1671 (1995). 

\10 In appendix I, we further discuss ERISA's provisions relating to
health plans and the courts' major decisions on ERISA preemption. 


      EMPLOYERS ADOPT FUNDING
      METHODS THAT BLUR
      DISTINCTION BETWEEN
      SELF-FUNDED AND FULLY
      INSURED
---------------------------------------------------------- Letter :3.2

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 ARE LIMITED BUT INDICATE
   THAT EMPLOYERS ARE INCREASINGLY
   SELF-FUNDING
------------------------------------------------------------ Letter :4

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, 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

   Figure 1:  Health Coverage by
   Source, 1993

   (See figure in printed
   edition.)

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. 

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). 

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

   (See figure in printed
   edition.)

Note:  Includes establishments with 100 or more employees only. 

Source:  BLS Employee Benefits Surveys, 1988-1993. 

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. 


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

\12 For 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. 

\13 This 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. 

\14 To 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. 

\15 To 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. 

\16 To avoid double counting, this number does not include 5 million
individuals who also received employer-based coverage, Medicare, or
Medicaid during 1993. 

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




\18 Self-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. 

\19 This 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. 


   STATES CLAIM ERISA LIMITS THEIR
   ABILITY TO REFORM THEIR HEALTH
   CARE SYSTEMS
------------------------------------------------------------ Letter :5

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. 

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. 


--------------------
\20 For 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). 


      STATES CONCERNED THAT
      CONSUMERS IN SELF-FUNDED
      PLANS HAVE INADEQUATE
      PROTECTION
---------------------------------------------------------- Letter :5.1

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 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


--------------------
\21 While 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. 

\22 For 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). 

\23 Even with stop-loss coverage, some believe that small firms, for
example, those with fewer than 50 employees, cannot safely self-fund. 

\24 An 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. 

\25 In 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. 


      ERISA RESTRICTS STATE
      EFFORTS REGARDING EMPLOYER
      HEALTH PLANS
---------------------------------------------------------- Letter :5.2

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;

  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


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

\27 For 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. 

\28 Current 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. 

\29 For 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. 


      STATE SUPPORT FOR EMPLOYER
      MANDATES IS FADING
---------------------------------------------------------- Letter :5.3

Several states have passed comprehensive health care reform
legislation, including employer-mandated coverage or play-or-pay\30
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


--------------------
\30 This approach would require employers to either provide health
care coverage to their employees or pay a tax to subsidize
state-sponsored health care coverage. 

\31 The sunset clause requires Oregon to receive necessary ERISA
waivers by January 1996, or relevant sections of the reform act
become invalid. 


      STATES BELIEVE THAT ERISA
      PREEMPTION ALSO UNDERMINES
      INCREMENTAL INITIATIVES
---------------------------------------------------------- Letter :5.4

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 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. 


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

\33 For 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). 

\34 This 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. 


   EMPLOYERS VIEW ERISA AS
   CRITICAL TO THEIR ABILITY TO
   EFFICIENTLY PROVIDE HEALTH CARE
   COVERAGE
------------------------------------------------------------ Letter :6

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


--------------------
\35 See G.  Lawrence Atkins and Kristin Bass, ERISA Preemption:  The
Key to Market Innovation in Health Care, Corporate Health Care
Coalition (Washington, D.C.:  1995). 

\36 In 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). 


      EMPLOYERS CONCERNED THAT
      ERISA CHANGES MAY REDUCE
      THEIR COST-CONTAINMENT
      ABILITY
---------------------------------------------------------- Letter :6.1

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 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 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. 


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

\38 Any-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. 

\39 A 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. 


      EMPLOYERS CONTEND THAT ERISA
      CHANGES COULD INCREASE THEIR
      COSTS
---------------------------------------------------------- Letter :6.2

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. 

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 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. 


--------------------
\40 See Health Care Alliances:  Issues Relating to Geographic
Boundaries (GAO/HEHS-94-139, Apr.  8, 1994). 

\41 Despite 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. 

\42 The 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. 

\43 Employers 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. 


   CONCLUSION
------------------------------------------------------------ Letter :7

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
------------------------------------------------------------ Letter :8

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. 

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

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


ERISA HISTORY AND COURT
INTERPRETATIONS
=========================================================== Appendix I

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. 


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


   INITIAL ERISA LEGISLATION
   FOCUSED ON PENSION PLANS
--------------------------------------------------------- Appendix I:1

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. 


--------------------
\45 ERISA'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. 

\46 In 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. 


   ERISA REQUIREMENTS RELATING TO
   HEALTH PLANS
--------------------------------------------------------- Appendix I:2

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 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. 


--------------------
\47 As described in ERISA, a welfare benefit plan generally provides
for hospital, medical, surgical, sickness, accident, disability,
death, unemployment, severance, or similar benefits. 

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


      REPORTING AND DISCLOSURE
------------------------------------------------------- Appendix I:2.1

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
------------------------------------------------------- Appendix I:2.2

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
------------------------------------------------------- Appendix I:2.3

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 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
--------------------------------------------------------- Appendix I:3

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 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


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

\50 Passed 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). 

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

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

\53 Hawaii officials have unsuccessfully sought additional
flexibility under ERISA to amend its 1974 reforms, particularly to be
able to mandate employer coverage of dependents. 

\54 As 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. 


   COURTS HAVE PLAYED A KEY ROLE
   IN DEFINING THE SCOPE AND
   EXTENT OF ERISA
--------------------------------------------------------- Appendix I:4

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 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 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 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. 


--------------------
\55 463 U.S.  85 (1983). 

\56 463 U.S.  85, 97 (1983). 

\57 463 U.S.  85, 101, n.  21 (1983). 

\58 471 U.S.  724 (1985). 

\59 471 U.S.  724, 747 (1985). 

\60 481 U.S.  41 (1987). 

\61 965 F.2d 1321 (5th Cir.  1992). 

\62 Unknown 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)). 

\63 115 S.  Ct.  1671 (1995). 

\64 United Wire, Metal & Mach.  Health & Welfare Fund v.  Morristown
Memorial Hospital, 995 F.2d 1179 (3d Cir.), cert.  denied, 114 S. 
Ct.  382 (1993). 

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

\66 The 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. 


ADMINISTRATION AND ENFORCEMENT OF
ERISA
========================================================== Appendix II

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
-------------------------------------------------------- Appendix II:1

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 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 1986\67 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. 


--------------------
\67 29 U.S.C.  1161 et seq. 


      FOCUS ON MEWAS
------------------------------------------------------ Appendix II:1.1

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 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. 


--------------------
\68 See 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). 

\69 Employee Benefits:  States Need Labor's Help Regulating Multiple
Employer Welfare Arrangements (GAO/HRD-92-40, Mar.  10, 1992). 


      CIVIL ENFORCEMENT AND
      CRIMINAL PENALTIES
------------------------------------------------------ Appendix II:1.2

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 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
------------------------------------------------------ Appendix II:1.3

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? 
-------------------------------------------------------- Appendix II:2

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
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
------------------------------------------------------ Appendix II:2.1

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 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. 


--------------------
\70 ERISA:  A Call for Reform:  Recommendations of the NAIC ERISA
Working Group, NAIC (Washington, D.C.:  1994). 


      REPORTING AND DISCLOSURE
      REQUIREMENTS
------------------------------------------------------ Appendix II:2.2

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
------------------------------------------------------ Appendix II:2.3

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 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. 


ESTIMATION OF ENROLLMENT IN
SELF-FUNDED HEALTH PLANS
========================================================= Appendix III

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
   EMPLOYER-
   BASED HEALTH COVERAGE
------------------------------------------------------- Appendix III:1

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



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

                    Individuals (in     Percent of
Source of coverage  millions)           population
------------------  ------------------  --------------------
Employment\a        140.0               53.9

Medicare            31.4\b              12.1

Medicaid            23.9\c              9.2

CHAMPUS/VA/         4.5\d               1.7
military

Individual          20.2                7.8

Uninsured           39.7                15.3

Total (U.S.         259.8               100.0
population)
------------------------------------------------------------
\a Also includes union-sponsored coverage. 

\b To 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. 

\c To 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. 

\d To avoid double counting, this number does not include 5.1 million
individuals who also received employer-based coverage, Medicare, or
Medicaid during 1993. 


--------------------
\71 Some 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. 


   NUMBER OF INDIVIDUALS ENROLLED
   IN ERISA HEALTH PLANS
------------------------------------------------------- Appendix III:2

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. 



                        Table III.2
          
              Distribution of Individuals With
            Employer-Based Health Care Coverage

                       Private    Government  Unclassified
------------------  ----------  ------------  ------------
Initial CPS data          72.6          16.0          51.2
 (before                   (82  (18 percent)
 allocation of        percent)
 unclassified
 individuals)
Estimates (after         113.9          26.0             0
 allocation of             (81  (19 percent)
 unclassified         percent)
 individuals)
----------------------------------------------------------
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 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
                                                      partic
                                                      ipants
                                                         (in
                                                      millio
                                                         ns)
----------------------------------------------------  ------
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. 


--------------------
\72 That is, 81 percent of these 9 million individuals were allocated
to the private sector and 19 percent were allocated to government. 

\73 In 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. 


   NUMBER OF INDIVIDUALS ENROLLED
   IN SELF-FUNDED HEALTH PLANS
------------------------------------------------------- Appendix III:3

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. 



                        Table III.4
          
            BLS Estimates of the Number of Full-
          Time Participants in Self-Funded Health
                   Plans in 1992 and 1993

                               Full-
                                time            Participan
                            employee     Full-       ts in
                                   s      time       self-
             Establishment  represen  employee      funded
Survey     size (number of    ted by    s with       plans
year            employees)    survey  coverage   (percent)
--------  ----------------  --------  --------  ----------
1992        Fewer than 100      34.4      24.4          32
                             million   million
1993           100 or more      28.7      23.5          46
                             million   million
----------------------------------------------------------
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

                               Full-
                                time            Participan
                            employee     Full-       ts in
                                   s      time       self-
             Establishment  represen  employee      funded
Survey     size (number of    ted by    s with       plans
year            employees)    survey  coverage   (percent)
--------  ----------------  --------  --------  ----------
1990        Fewer than 100      32.5      22.8          28
                             million   million
1989           100 or more      32.4      29.8          36
                             million   million
----------------------------------------------------------

--------------------
\74 See 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). 


   OTHER SOURCES OF DATA ON
   PREVALENCE OF SELF-FUNDING
------------------------------------------------------- Appendix III:4

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 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 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. 


--------------------
\75 Employers 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). 

\76 For 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. 

\77 The states surveyed include Colorado, Florida, Minnesota, New
Mexico, New York, North Dakota, Oklahoma, Oregon, Vermont, and
Washington. 


   NUMBER OF INDIVIDUALS IN
   SELF-FUNDED HEALTH PLANS
------------------------------------------------------- Appendix III:5

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. 


--------------------
\78 Some 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. 


STATE TAXES ASSESSED ON HEALTH
PLANS
========================================================== Appendix IV

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)

                                Blue Cross &
                      Health     Blue Shield
                    insurers           plans          HMOs
----------------  ----------  --------------  ------------
Alabama                1-4\a           1-4\a           1\b
Alaska                   2.7             6\c           2.7
Arizona                    2               2           2\d
Arkansas                 2.5               1         2.5\e
California              2.35               0             0
Colorado                2.25          5ï¿½ per           0\g
                                  enrollee\f
Connecticut           1.75\h             2\h        1.75\h
Delaware                   2               0             0
District of             2.25               0             0
 Columbia
Florida                 1.75            1.75             0
Georgia                 2.25            2.25        2.25\i
Hawaii                 4.265               0             0
Idaho                   1.4-      1.4-2.75\j      .04ï¿½ per
                      2.75\j                    enrollee\f
Illinois                 2\k               0             0
Indiana                    2               0             0
Iowa                       2               2         0-2\l
Kansas                 1-2\a           1-2\a       0.5-1\l
Kentucky                   2             2\m           2\m
Louisiana           2-2.25\n        2-2.25\n      2-2.25\n
Maine                      2           0.015             0
Maryland                   2               0           0\o
Massachusetts       2-2.28\p               0             0
Michigan                 0\q               0             0
Minnesota                  2               0             0
Mississippi                3               0             0
Missouri                   2               0             0
Montana               2.75\r               0             0
Nebraska                 0.5               1             1
Nevada                   3.5             3.5           3.5
New Hampshire            2\s               0           2\s
New Jersey              1.05          2ï¿½ per             0
                                  subscriber
New Mexico           0.9-3\j         0.9-3\j             3
New York                   1               0             0
North Carolina           1.9             0.5             0
North Dakota            1.75            1.75        1.75\t
Ohio                   2.5\u           2.5\u             0
Oklahoma                2.25            2.25        2.25\v
Oregon                2.25\w               0             0
Pennsylvania               2               0           2\x
Rhode Island               2               0             0
South Carolina          1.25            1.25           0\y
South Dakota             2.5             2.5         2.5\b
Tennessee                2.5             2.5             2
Texas                   1.75               0        1.75\z
Utah                       0               0             0
Vermont                    2               0             0
Virginia                2.25         0.75\aa          0\bb
Washington              2\cc            2\cc          2\cc
West Virginia              3               0             0
Wisconsin                  2               0          0\dd
Wyoming                 0.75            0.75          0.75
----------------------------------------------------------

Note:  Premium taxes expressed as percentage rate assessed on gross
premiums unless otherwise noted. 

\a Domestic (state-based) insurers pay lower rate. 

\b Credit for HMOs with state home office. 

\c Tax based on gross premium less claims paid. 

\d Tax assessed on net charges. 

\e Credit for HMOs with state home office and local salaries and
wages. 

\f Per month. 

\g Fee collected on the basis of premium volume. 

\h Tax 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. 

\m Additional tax of $0.25 per outpatient pharmaceutical drug if tax
is not paid by pharmacist. 

\n Tax set as $140 for $7,000 or less in premiums received and $225
for each additional $10,000 in premiums received. 

\o HMOs are tax exempt except where HMO benefits are offered by a
for-profit commercial insurer.  HMOs offered by nonprofit insurer are
tax exempt. 

\p Lower rate is paid by insurer if also licensed as life insurance
company.  PPOs taxed at 2 percent. 

\q Insurers 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. 

\u Domestic 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. 

\w Domestic 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. 

\aa Tax assessed on subscriber fees. 

\bb Pay insurance commission maintenance assessment of no more than
0.1 percent of premium, with a minimum of $300. 

\cc Additional fee assessed for Department of Insurance operations,
not to exceed 0.125 percent of receipts. 

\dd HMOs pay franchise tax of 7.9 percent. 

Source:  NAIC, 1995. 

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 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. 


--------------------
\79 State 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. 

\80 Hospital 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. 

\81 See 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. 

\82 To 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. 


STATE-MANDATED BENEFITS
=========================================================== Appendix V

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. 


--------------------
\83 States' 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. 


   STATES USUALLY MANDATE BENEFITS
   FOR SELECT TYPES OF COVERAGE
--------------------------------------------------------- Appendix V:1

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 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

                                      Cover\  Offer\
                                           a       b   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            11       3      14
 fertilization
Temporomandibular joint disease           10       3      13
 treatment
Maternity care                            11       2      13
Breast reconstruction following            9       2      11
 mastectomy
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         2       0       2
 areata)

Provider mandates
------------------------------------------------------------
Psychologists                             40       1      41
Chiropractors                             39       2      41
Optometrists                              35       2      37
Podiatrists                               30       0      30
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              32       1      33
 dependents
Dependent students                         7       0       7
------------------------------------------------------------
\a States require specified benefit to be covered in health insurance
plans sold. 

\b States 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. 


--------------------
\84 We 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. 


   MANDATES INCREASE COST OF
   HEALTH INSURANCE PREMIUMS, BUT
   OVERALL COST EFFECT IS UNCLEAR
--------------------------------------------------------- Appendix V:2

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. 


--------------------
\85 Another 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.). 


      STUDIES SHOW THAT MANDATES
      INCREASE HEALTH CARE CLAIMS
      COSTS
------------------------------------------------------- Appendix V:2.1

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

                                                       Total
                                                       costs
                                                      (perce
State                                           Year     nt)
--------------------------------------------  ------  ------
Iowa                                            1987     5.4
Maryland                                        1988    22.0
Massachusetts                                   1990    18.0
Oregon                                          1989     8.1
Virginia                                        1989    22.0
Wisconsin\a                                     1989     7.1
------------------------------------------------------------
\a Includes 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. 

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
------------------------------------------------------- Appendix V:2.2

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
------------------------------------------------------- Appendix V:2.3

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. 

  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. 



(See figure in printed edition.)Appendix VI

--------------------
\86 Krohm and Grossman, p.  54. 


COMMENTS FROM THE DEPARTMENT OF
LABOR
=========================================================== Appendix V



(See figure in printed edition.)


GAO CONTACTS AND ACKNOWLEDGMENTS
========================================================= Appendix VII

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. 

