Understanding ERISA

The Association of American Physicians and Surgeons (AAPS) published an interesting article on Governor Jan Brewer’s (R-AZ) veto of several measures intended to stem ObamaCare in Arizona.

It is a fine article with one exception: It mentions ERISA in passing and repeats a very common misperception. The article says:

About 60% to 70% of employers have more than 100 employees and thus fall under ERISA. Freed of state mandates, they can buy their insurance in any state that gives the best price and the best packages of benefits. The rest of us–individuals and small businesses—are chained to the insurance companies and mandates in our respective states of residence, and tied to whatever deals that these companies cut with the state government.

I hate to single out AAPS, because this perception is widely held by all kinds of people. But it is wrong.

The fact is that EVERY employer (except government and church plans) falls under ERISA. It has nothing to do with the size of the group. ERISA says that states cannot regulate ANY employer health plan. What states CAN regulate is insurance companies. Some employers self-fund their benefits and others buy their coverage from a regulated insurance company. The ones that buy from insurance companies are indirectly affected by the regulations that apply to those insurance companies. Many large employers still buy fully-insured coverage, so they too are subject to the mandates, and other regulations, that apply to the insurers.

Back in 2000, I wrote a paper for the Cato Institute that explains a lot of this. At the time it was widely believed that ERISA prevented people from suing HMOs for denying legitimate services. That wasn’t true, either, even though the proposed Patients’ Bill of Rights legislation was predicated on it.

Again, I don’t fault AAPS for misunderstanding this. ERISA is probably the least understood and most litigated law even enacted – at least up until now. If it stands, ObamaCare will cause ten times as much confusion and litigation. Indeed, ObamaCare will compound all the problems of ERISA. Employers will still be exempt from any and all state regulation. But now insurance companies will be subject to dual regulation from both the states and the Feds.

I wonder if the Supreme Court will have time for anything else.

Comments (7)

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  1. Devon Herrick says:

    I don’t understand why states are afraid of interstate competition in the insurance market. It also sounds like this would have benefited insurers by allowing them to drop mandated benefits if their out-of-state competitors were not required to cover them.

  2. Joe Barnett says:

    Greg: Thanks for clarifying this.

  3. Tom H. says:

    Thanks, Greg. This is very good. Excellent post.

  4. Simon says:

    Very interesting, good post.

  5. Greg Scandlen says:


    States bureaucrats don’t want to lose control, as we see in Arizona. The fact is most Blue plans like the current system just fine because they typically have to deal with only one set of regulations. It’s a lot harder for a multi-state insurer that has to keep track of ever changing laws and regs in every state they cover. So, Blue plans LIKE the complexity since it keeps competitors out of their markets. The Blues swing a lot of weight with their legislatures.

  6. John R. Graham says:

    Thanks to Greg Scandlen for straightening this out. I was also disturbed to see that sentence in the AAPS message. I’ve read so much about the ERISA Shield, ERISA lawsuits, ERISA pre-emption, ERISA Abracadabra, etc. that they should have given me a law degree by now!

    It goes to show you how screwed up federal law is: ERISA is designed to protect retirement income. It was passed in the wake of a big railroad bankruptcy because the retirees got shafted in the bankruptcy. ERISA’s primary objective was to define fiduciary responsibility and accounting standards to minimize this risk, and keep pensioners at the front of the line in bankruptcy.

    Well, now we’ve moved from defined benefit to defined contribution retirement plans – making that objective less relevent. But now over half of current employees get their employer-based health benefits via ERISA – something for which it’s not really designed.

    Yet another reason to make health benefits the property of the indvidual, not his employer.

  7. Beverly Gossage says:

    “Yet another reason to make health benefits the property of the indvidual, not his employer.”

    We should make a list of all those reasons, John.

    Great post, Greg!