A. ERISA Preemption and the Regulatory Vacuum

ERISA § 1144 prevents states from regulating employer-sponsored health plans, except indirectly by regulating health care providers or insurance carriers. The Supreme Court's interpretation of ERISA's “deemer” clause further exempts employer selffunded health plans even from state insurance regulation, leaving the dominant type of employer-sponsored health benefits beyond the reach of most state reforms.23 Like many other instances of express federal preemption, ERISA preemption has a deregulatory bent, consolidating authority in a single federal regulatory scheme. Yet for health benefits, ERISA preempts far more regulation than it enacts, leaving something of a regulatory vacuum, particularly for self-insured plans.24

ERISA does not require employers to offer benefits; it provides a unified set of federal rules if they voluntarily offer benefits.25 Once an employer voluntarily offers health care benefits, ERISA rules apply to how the benefit plan operates (administrative rules), and what health care the plan covers (substantive coverage rules). Administrative rules and duties make up the bulk of ERISA's federal regulatory scheme, establishing fiduciary duties over plan assets, requiring information disclosure to participants, and establishing complaint and review processes.26

State law fills in much of the substantive coverage regulations, pursuant to ERISA's savings clause. State laws, for example, mandate that insurance cover particular types of care like maternity and physical therapy, as well as requiring coverage for dependents. But states cannot enforce these coverage mandates against self-funded plans, pursuant to the Supreme Court's interpretation of the deemer clause. This leaves quite a swath of exclusively federal regulatory power over group health plans.

Congress has filled in very little of that space with ERISA regulations, offering some piecemeal statutory amendments over the years,27 while explicitly leaving § 1144 preemption unscathed.28 Congress has made many of these federal coverage rules contingent on an employer's initial choice to cover a particular service. For example, the Mental Health Parity and Addiction Equity Act of 2008 requires that if employers offer mental health or substance abuse coverage, they must cover those service on parity with medical and surgical procedures.29 Similarly, the Women's Health and Cancer Rights Act required that if group plans offer coverage of mastectomy, they must also cover reconstructive surgery.30 ERISA does not require either coverage of mental health services or mastectomies, though some states’ insurance laws do. Implicit from the construction of ERISA's if-then patches is that selffunded plans are exempt from offering the if coverage, even where state law mandates it.31

Under ERISA preemption, states may not directly mandate that employers provide health benefits. While states may raise payroll taxes on employers to help fund public programs and defray costs, Circuits have split over when states may make that tax contingent on an employer's choice to offer benefits or calculated with reference to it.32

When employers do offer health benefits, state law can regulate the coverage offered by health insurers. Thus, if an employer chooses to offer benefits by purchasing them from a health insurer, the employer's benefit plan imports state regulation. But states cannot enforce insurance regulations on employers who choose to self-fund. For example, if state law requires a minimum set of essential benefits in health insurance, an employer's fully-insured plan from an insurer must cover those essential benefits. If the employer chooses to self-fund, the plan does not have to cover those essential benefits, even if the employer purchases stop-loss insurance to limit its risk and hires a third party administrator (TPA) to process its claims.

B. Health Reform Federalism in the ACA Era

The ACA represented a sea-change in federal regulation of health insurance and filled in some of the exclusively federal spaces left by ERISA preemption. Under the ACA, most multistate employers must provide minimum essential coverage to most employees or pay a tax. The ACA thereby diluted one of the main justifications for ERISA's preemption — that compliance with state law would dissuade employers from offering benefits.

Courts and commentators often rationalize ERISA's preemption provisions as creating a nationwide uniformity necessary to encourage employers to provide health benefits.33 This emphasis on national uniformity, however, “is overblown and outdated.”34 The ERISA Congress's choice in 1974 to save state insurance regulation from preemption inevitably embraces a significant level of state-by-state disuniformity, often overlooked in this emphasis.35 And the legislative history does not suggest that Congress intended total national uniformity for health benefit plans.36 Of course, employer incentives with respect to health benefits have also changed significantly in the past 40 years. The ACA's national employer mandate, the sizeable tax-break for employers’ health benefits, and shifting labor market demands “cast doubt on the assumption that employers will abandon health coverage in response to state regulations.”37

The ACA's mandate that employers provide coverage is coupled with comparatively lighter federal baseline coverage regulations for large group plans than for individual and small-group market plans.38 States remain free under the ACA to add requirements to these federal baselines,39 but are preempted under ERISA from applying their insurance regulations to self-funded plans or from regulating in other ways that relate to employer-sponsored health benefits.

At the same time as the ACA has enhanced national uniformity outside of ERISA, the concerted undermining of the ACA, coupled with Congress's inability to pass interim reforms has rendered state health reform legislation more urgently needed at this moment. Conservative lawmakers and administrators seek to disengage from the ACA and roll back its protections under the cloak of federalism, touting “state empowerment”40 and “flexibility.”41 Yet ERISA preemption obstructs state regulatory efforts to address public health issues, expand health care coverage, to control costs, or even to collect information about health care prices.Reference Fuse and Sarpatwari42

ERISA's broad statutory language and the inscrutable precedent it has engendered invite private litigation against all kinds of state health system reforms. States seeking to establish all-payer claims databases (APCDs) to inform policymaking faced litigation from self-funded plans’ administrators all the way to the Supreme Court. The Court in Gobeille held that states could not require TPAs to contribute to the databases, though of course the Department of Labor remained free to collect this information and share it with states.43 Despite this setback, 18 states have enacted APCD legislation and more than a dozen others have considered it, speaking to the value that an APCD has for state health reform and management and the urgency states find in the absence of federal movement on the issue.44

Inevitable ERISA preemption litigation adds uncertainty and increases the transaction costs for states legislation. States have picked up momentum in regulations aimed at prescription drug prices, which strain state Medicaid and government employee benefit program budgets. These efforts have attracted ERISA preemption challenges.Reference Gudiksen and King45 Similarly, states have tried to regulate pharmacy benefit managers (PBMs), which purport to negotiate better prices from drug manufacturers on behalf of plans, but often require pharmacies to accept less than the plan reimbursement rate and then pocket the difference. PBMs have litigated the ERISA preemption issue into a circuit split, now pending before the Supreme Court.46 In the Supreme Court, the federal government filed an amicus brief supporting the states’ position of non-preemption.47

To deal with the continuing burden of medical costs on consumers, states have passed laws aimed at surprise out-of-network billing.48 There, too, state legislation faces ERISA preemption litigation,Reference Fuse49 while federal proposals have stalled and attracted fierce, shadowy resistance.50 State proposals for more transformative health system reforms, like the 21 states that have introduced bills to establish state-level single- payer systems, must contort to fit within the slim spaces ERISA preemption permits.51 Even those that thoughtfully navigate that space face inevitable litigation with an uncertain outcome.52

ERISA preemption frustrates state policy experimentation, while encouraging private employer-sponsored insurance to experiment with plan design. The results of those private experiments have been mixed. ERISA preemption proponents argue that the deregulatory environment for self-insured plans should decrease the cost of compliance for those employers and reduce the money spent on premiums. That conventional wisdom has not translated into reality, as large employers’ self-funded plans remain just as expensive as fully-insured ones.53 Recent data also question the value of employer-sponsored insurance as compared to public programs.54

Beyond the disappointing performance on costcontrol there exist powerful reasons to question the continued linking of health care coverage to employment — a link ERISA preemption supposedly bolsters. From a health equity perspective, linking health insurance to employment status can amplify the effects of discrimination on health disparities.55 From a public health perspective, as recently experienced in the COVID-19 pandemic, unemployment can exacerbate public health crises.56

The conditions are ripe for a new experiment.

C. Attempts at Waiver, Pre-ACA

Relieving states from ERISA preemption has been an issue since the very moment of ERISA's enactment. Three months before ERISA was enacted,64 — Hawaii passed a health reform law requiring employers in the state to provide health care coverage for some employees either by purchasing a state-approved plan or funding their own plan that meets state minimum coverage standards.65 Congress amended ERISA in 1983 to exempt Hawaii's law from preemption,66 subject to some limitations.67 Hawaii remains the only state to succeed in getting an ERISA preemption exemption. During the health reform debates of the mid 1990s, several other Hawaii-style legislative exemptions from ERISA were introduced in Congress that would permit specific universal coverage reforms in the sponsors’ home states.68 None of them passed.69

Congress has entertained ERISA waiver legislation in the past, too. In the Clinton-era health reform debates, Congress members from Washington and Oregon introduced federal legislation that would fund state universal health care efforts, supported by administrative waivers of ERISA.70 Those bills failed. House members from Hawaii, New York, Minnesota, and Maryland then introduced legislation proposing two-year ERISA waivers for their states’ reforms,71 but those failed, too.72 On the heels of defeat for the Clinton federal health reform plan in 1994,Reference Oberlander73 a bipartisan bill to support state reform efforts by expanding the savings clause and authorizing specific preemption waivers for sponsors’ states (Hawaii, Oregon, Minnesota, Washington, and Connecticut)74 also failed to pass.75

D. Waiver Proposals in the ACA Era

The drafting and passage of the Affordable Care Act presented an opportunity to address ERISA preemption as part of comprehensive health reforms. Congress declined to take this opportunity,Reference Vukadin76 and instead drafted the ACA to explicitly disavow any impact on ERISA preemption.77

Statutory waiver has featured prominently in the first decade of the ACA era, through the ACA's § 1332 waiver for “State Innovation” and states’ uses and abuses of Medicaid's § 1115 waiver. An executive branch hostile to the ACA has been receptive to Republican-led states’ proposals to dilute ACA protections and shrink access to public programs, perverting these statutory waiver provisions in the ACA and Medicaid into weapons against the statutes themselves. The same executive philosophy has discouraged those statutory waivers to state proposals (from both Republican-led and Democrat-led states) that seek to expand coverage and protections.

Meanwhile, federal and state legislators have renewed the bipartisan call for ERISA preemption waiver to enable state health reforms — from the incremental to the transformative. Representative Ro Khanna reintroduced the State-Based Universal Health Care Act in the House of Representatives in November, 2019, adding ERISA preemption to the list of provisions waivable under the ACA's § 1332.78 The National Council of Insurance Legislators earlier this year passed a resolution “urg[ing] members of Congress to take action and pass legislation that would amend ERISA to add a waiver provision enabling states to include self-insured single state employers in a wide range of healthcare reforms.”79 It has circulated to members of Congress, the Secretaries of Labor and HHS, and the NAIC.

Either route to ERISA preemption waiver would offer welcome relief to state health reform, though a direct amendment to ERISA offers some additional benefits over amendment via ACA § 1332.

E. Assessing Waiver

The proposed State Health Reform Waiver avoids some, but not all, of the pitfalls of the ACA § 1332 waiver and other waiver schemes. Most obviously, leaving the grant/denial decision to agency discretion does not fully insulate against the dangers of a hostile administration and agency's unfaithful execution of the statute. This danger materialized in the current administration's use of Medicaid's § 1115 waivers to impose work requirements and ACA's § 1332 waiver as resistance to the ACA's Medicaid expansion and health insurance exchanges. What in theory is a resort to federal agency expertise can in practice enable that agency to act politically under the guise of expertise. While the State Health Reform Waiver might avoid this political pitfall by making the grant of a waiver mandatory for all applications meeting certain criteria, that still would leave agency discretion in determining whether the criteria were met and could be cast as a stealth repeal of the entire preemption, diminishing waiver's stance as a compromise position maintaining the preemption baseline with targeted opportunities for flexibility.

The proposal's inherent structure avoids other major pitfalls of statutory waiver because it does not waive ERISA's core provisions and protections, but rather waives only the prohibition on additional state regulations. It is mostly a one-way ratchet, enabling expanded state protections and coverage initiatives. Unlike in statutory waivers such as ACA § 1332, even the Secretary's grant of a State Health Reform Waiver would leave ERISA's federal protections and baselines (scant as they are) in place. If a state wanted to pass a law contradicting or weakening ERISA's protections (or the ACA’s), ordinary conflict preemption doctrine would still prevent state enforcement.89

Giving an executive agency the authority and discretion to determine preemption waiver applications thus has the potential for some mischief. Yet a preemption waiver provision also provides states a venue other than litigation in which to argue their positions about the extent and desirability of ERISA preemption. Even with its acknowledged limitations, the potential for a preemption waiver is preferable to maintaining ERISA preemption's status quo.