Demystifying ERISA: Understanding the Basics of a Complex Law
Federal Law Has Substantial Impact on Consumers and Practitioners
by Diane M. Pedulla, J.D. and Sid Rocke, J.D.
Practitioner Focus, May-June 1999
Legal and Regulatory Affairs
Practice Directorate
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Editor's note: This article and companion piece are intended to help clarify for readers certain key issues and trends related to the federal Employee Retirement Income and Security Act of 1974 (ERISA). This law has had a considerable impact on the course of litigation involving claims of negligent health plan decision making. In many instances, ERISA preempts state law and thereby denies patients an adequate remedy when they are injured by their health plan. Also importantly, the broad impact of ERISA preemption has shaped psychology's ongoing legislative efforts to reform the nation's health care system. The profession has devoted considerable time and resources to pursuing both legislative and legal strategies that would amend ERISA and enable holding managed care and other health plans legally accountable under state law for negligent treatment decision making.
While many industrialized nations subsidize health care for their citizens, the United States has relied largely on private industry to provide for health insurance coverage. Today an estimated 125 million Americans receive their health care through benefit plans sponsored by employers or employee organizations.
In years past, health benefits typically were provided through indemnity, or "fee-for-service," insurance that allowed enrollees to select health care professionals and obtain treatment without the insurance company's prior approval. Under indemnity plans most benefit disputes centered on questions of reimbursement for health care services that already had been provided.
Over the past two decades, however, a vast number of Americans have enrolled in managed care organizations (MCOs), entities that both provide health care services and assume the accompanying financial risk. By 1997, managed care plans accounted for 85 percent of employees in employment-based health plans. Because MCOs often require prior approval for many services, a growing number of benefit disputes have arisen over health care that an individual has yet to obtain. For many people, being told treatment will not be paid for through their health care plan effectively means the service is unavailable to them. As a result, individuals increasingly are turning to the courts to secure their access to health care services.
The rise of ERISA
The potential relief for anyone pursuing such a lawsuit depends in large part upon how the benefits are provided. Because most Americans receive health care coverage through their place of employment, many who contest denied health claims find their battle to obtain benefits hampered by the federal Employee Retirement Income Security Act of 1974 (ERISA).
For decades, employee benefit plans were essentially unregulated at the national level. Concern about this laissez-faire approach grew during the 1970s as more Americans reached retirement age only to discover their pension funds had been depleted. The reasons varied. Some funds were mismanaged, others vanished when companies went bankrupt and more than a few were lost to outright thievery. Responding to the outcry, Congress passed ERISA to establish uniform funding, reporting and fiduciary standards for employee benefit plans nationwide. Although designed to prevent the failure of pension plans, ERISA also applies to "welfare plans" that provide benefits for medical (including mental health), surgical and hospital care, disability, death and unemployment.
ERISA plan or not?
Twenty five years after the law's passage, there is still confusion among health plan beneficiaries about whether their benefits are provided through an "ERISA plan," that is, a plan subject to ERISA's jurisdiction. In general, almost all plans established or maintained by employers to provide benefits for employees and their families are "ERISA plans." Specific exceptions include plans for employees of churches and governmental entities. In addition, those who purchase insurance as individuals are not considered part of an ERISA plan.
Health care benefits generally are provided in one of two ways under ERISA plans. When an employer purchases an insurance policy to provide for employees' health care, the plan is referred to as "fully insured." Alternatively, if the employer pays directly for health care services on behalf of employees, the arrangement is known as a "self-insured plan."
To free employers subject to ERISA from having to meet a patchwork quilt of differing state laws, Congress included a mandate that ERISA preempt all state laws as they relate to employee benefit plans. Recognizing that certain regulatory functions had long been the domain of the states, however, Congress also inserted a "savings clause" that kept state laws regulating insurance, banking and securities from being preempted. Over the years since ERISA's passage, the question of when ERISA does and does not preempt state laws has become the source of widespread misunderstanding.
ERISA preemption: broad in impact
Generally speaking, the practical effect of ERISA preemption of state laws depends upon whether a person is enrolled in a fully insured or self-insured health plan. State insurance laws apply to individuals in fully insured ERISA plans. By contrast, state insurance laws are preempted for those enrolled in self-insured ERISA plans.
Many states require insurance companies, for example, to include particular items and services known as mandated benefits in their health care contracts. Because ERISA's savings clause keeps state insurance laws from being preempted, insurance companies must still comply with these laws when they are providing the benefits for an ERISA plan. When state insurance laws mandate specific health benefits, they must be provided for all individuals in fully insured plans. By contrast, self-insured plans are not in the business of insurance and therefore are not subject to state insurance laws. Because ERISA does not require plans to provide specific benefits, enrollees in self-insured plans receive only the benefits their employers choose to offer.
There are numerous other patient protection measures beyond mandated benefits found in state laws that are also unavailable to many enrollees in ERISA plans. These include the ability to seek damages for injuries - including "compensatory" damages for pain and suffering as well as economic losses, and "punitive" damages designed to deter the defendant from engaging in similar conduct in the future. Additional examples of patient protections include assistance in resolving disputes with insurers, external appeals of benefit denials and expedited timelines for urgent care decisions. When such measures are found in state insurance laws, the protections do extend to enrollees in fully insured ERISA plans. Patient protections contained in state laws other than those regulating insurance, however, generally are preempted by ERISA and therefore are denied to enrollees in both fully insured and self-insured ERISA plans.
Although the law does give individuals the right to pursue benefit claims in federal court, many feel ERISA works to discourage such challenges. If a health plan administrator has the authority to determine eligibility for benefits under the plan, a court will review any benefit denials to determine if they are "arbitrary and capricious." This means that the administrator's decision will be upheld unless it can be shown that the decision clearly was unreasonable.
Even when claimants prevail, the potential remedies are very restricted. The plaintiffs who bring a claim cannot recover compensatory or punitive damages because ERISA's remedies are generally limited to benefits due under the health plan. Attorneys' fees may be awarded but only at the discretion of the court. For the employer or plan sponsor, in essence, ERISA has become a buffer against high cost damage awards.
A key legal issue
Court decisions surrounding the scope of ERISA preemption of state laws historically have had a substantial impact on the course of health care litigation. Plaintiffs who have filed suit in state court, whether under traditional tort and contract theories or more recent consumer protection statutes, often have found their legal action removed to federal court by the defendants. The federal court often would then rule that the defendants could use ERISA as a shield to deflect the plaintiff's claims.
Over time, however, the judiciary increasingly has hesitated to accord such a broad reading to the ERISA preemption doctrine. Courts have been willing to hold MCOs "vicariously," rather than directly, responsible for negligent actions that injure health plan beneficiaries. Some courts have even been willing to hold companies liable for quality of care actions.
However, the courts still generally distinguish between what they perceive as quality of care issues versus benefit determination issues. Virtually all courts consider the denial of health plan benefits per se as not constituting a quality of care issue. Therefore, the courts are generally unwilling to hold companies liable for negligent utilization review, for example. Psychology advocates counter that this sets up an artificial distinction that ignores the direct link between managed care benefits decision making and the quality of care that MCO patients receive.
In instances where claims of negligence are considered protected from ERISA preemption and allowed to proceed in state court, plaintiffs have at their disposal a wide variety of remedies that would be unavailable for an ERISA case heard in federal court. Yet a plaintiff's right to pursue a claim based on state law may well depend on which federal court has jurisdiction in that state.
In short, ERISA has often blocked patients injured by managed care and other health plans from holding these plans legally accountable for their treatment decision making. At times the law precludes patients and providers outright from obtaining any state-based relief to which other plaintiffs in similar situations would be entitled. Further, as the companion piece to this article demonstrates (see page 3), ERISA has repeatedly been used as a procedural device to delay legal action. In light of these serious constraints, the Practice Directorate is using both legal and legislative strategies to seek an amendment to ERISA that would broadly enable injured health consumers to seek relief in state courts.
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