ERISA 101: The United States’ Hands-Off Approach to Regulating Employer Health Plans
As health care costs continue to grow at an alarming rate, adequate health insurance coverage is becoming increasingly unaffordable for those at the backbone of the U.S. health insurance system: employers and employees. This financial threat is catalyzing a growing focus on the role employer-sponsored plans can play in health care cost containment. But under the current legal framework—the Employee Retirement Income Security Act of 1974 (ERISA)—the access, affordability, and adequacy of employer coverage is dictated less by law and regulation and more by individual employers, and their ability and willingness to subsidize the ever-growing cost of care. To effectively reform this market, it is critical to understand how ERISA works and the obligations it puts on employer health plans.
The Basics
ERISA establishes the primary framework for regulating employee benefit plans, including pension and retirement plans and health and welfare plans. But despite this bedrock status, health insurance largely has been an afterthought during enactment and implementation of the law, as Congress and the Department of Labor (DOL), the primary agency implementing and enforcing ERISA, have focused most of their attention on ERISA’s retirement plan provisions.
With respect to health plans, ERISA sets out basic standards governing the actions of plan fiduciaries (discussed more below), as well as reporting and disclosure requirements. Generally, these requirements aim to ensure that plans are administered appropriately—that is, consistent with the terms written in the plan document, and that plan funds (or assets) are not mismanaged or abused. They also help to give plan members access to information about the plan, and their rights and obligations under the plan.
When it comes to the actual terms of the plans—who is eligible, what benefits are covered, and how much the employer contributes—ERISA gives employers significant latitude. To the extent Congress has constricted employer flexibility to define the scope and generosity of their plans, the exceptions have been narrowly tailored and originated in subsequent laws that amended ERISA. For example, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) prohibits employers from considering an employee’s health when determining eligibility or setting their premium, but employers can still establish different plans or eligibility requirements based on other factors, such as an employee’s part- vs. full-time status. Laws like the Newborns’ and Mothers’ Health Protection Act of 1996 and the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) set rules on the scope of coverage that are necessary if a plan chooses to cover certain types of benefits, but do not actually require employers to provide those benefits. And while the ACA imposes some new requirements on employee health plans, most of its reforms are limited to the individual and small group markets.
Indeed, the most significant feature of ERISA’s treatment of health plans is its deregulatory effect. Unlike other federal health and insurance laws, which tend to set a regulatory floor on which states can build, ERISA contains provisions broadly preempting states from regulating employer health plans, even when no federal rules otherwise apply. Although states can continue to enact regulations that have indirect effects on employer health plans (such as capping provider reimbursement rates or regulating pharmacy benefit managers), reforming employer-sponsored insurance itself would require federal action.
ERISA Fiduciaries And Their Duties
Although federal regulation of employer-sponsored insurance under ERISA is relatively minimal, there are basic minimum standards and rules. In particular, ERISA regulates the management of plans and plan assets (including employee premium contributions and other funds held in reserve to pay claims) through the concept of fiduciaries and fiduciary duties. Fiduciaries, such as plan sponsors (i.e., employers and unions), make discretionary decisions on behalf of a health benefit plan about how to implement a plan and dispense funds. Discretionary decisions include hiring and monitoring service providers, like health care providers, third-party administrators (TPAs), and pharmacy benefit managers (PBMs), and adjudicating claims. While ERISA plans must identify at least one fiduciary in writing, the test for who is a plan fiduciary is functional, hinging on actions and responsibilities. Accordingly, entities an employer hires to help operate their health plan, like TPAs may hold fiduciary status depending on the circumstances.
Under ERISA, fiduciaries must act: (1) “with the care, skill, prudence, and diligence” a prudent person “familiar with such matters” would use in similar circumstances, (2) “solely in the interest of the participants and beneficiaries of the plan,” and (3) “in accordance with the documents and instruments governing the plan,” insofar as they are consistent with ERISA’s requirements. Court decisions have fleshed out what this can look like in practice, but only for specific facts and circumstances. In one of the few guidance documents DOL has issued interpreting how these requirements apply to health plans—a 1998 informational letter to a plan sponsor—the agency advised that fiduciaries “must ensure that the compensation paid to a service provider is reasonable in light of the services provided to the plan.” To do this, a fiduciary must “obtain and consider information relating to the cost of plan services.” DOL has also emphasized that fiduciaries must monitor their service providers, including regularly evaluating “whether to continue using the current service providers or look for replacements,” reviewing their performance, and checking the fees they charge.
Nonetheless, for decades health plan sponsors have been acting without the very types of information DOL has said they need to fulfill their fiduciary duties. In the past, plan sponsors may have been able to argue that this information was not available to them, but recent reforms to increase transparency in health care may put new pressure on employers to be more prudent health care purchasers. These changes include federal rules as well as private initiatives to increase price transparency. Additionally, in the Consolidated Appropriations Act of 2021, Congress prohibited health plans from entering into agreements with service providers that contain gag clauses restricting the plan’s access to cost and quality information, including deidentified claims data. This effectively gives health plans a right to data that their vendors have long denied them. Congress also required brokers and other plan consultants to disclose all direct and indirect compensation they expect to receive when entering or renewing contracts with health plans, better enabling plans to identify and act on potential conflicts of interest.
Looking Ahead to Reform
ERISA establishes a relatively hands-off approach to regulating health plans that cover nearly half the U.S. population. But its fiduciary obligations may provide an opening for both DOL and plan members to push health plans to act as better stewards of health care dollars, particularly as more relevant information and data becomes available under new federal requirements. Stakeholders and policymakers seeking to reform the employer-sponsored insurance market and control health care costs can familiarize themselves with ERISA’s framework and take heed of this opportunity.
