An analysis of Vermont Health Reform and the ERISA legal constraint

1. Vermont Health Reform
A Single Payer System &
ERISA Legal Constraints

2. Agenda
• Vermont Health Care Situation
• Act 48
• ERISA
– Pre-emption Clause
• Case History
• Expert Opinions
• Conclusion

3. Vermont Health Care Situation

4. Act 48
• Who came up with this?
• What is a single payer system?
• Act 48 (May 26, 2011)
– How did this bill pass?
• Medicaid and Medicare benefits remain unchanged
• Single claims and payment system
• Uniform payment structure for providers
• Green Mountain Care Board

5. Act 48 (cont)
• How will this effect providers?
– Risk Adjusted Capitated Fee Reimbursements
• “No Fault” liability for medical malpractice
• BCBS will likely adjudicate claims
• Financing
– “a reformation of the payment system for health services to encourage quality
and efficiency in the delivery of health care”

6. Savings
• 25.3% decrease in overall health spending in 10 years
– 7.3% reduction in administrative costs
– 5% reduction from fraud and abuse
– 10% reduction from “wasteful and duplicated services”
– 1% reduction due to competition for claims administration
– 2% reduction from “No Fault” malpractice
Source: William C. Hsaio Ph.D., Steven Kappel, Jonathan Gruber. Act 128 : Health
System Reform Design: Achieving Affordable Universal: Health Care in Vermont, 2011.

7. Impacts
• Employer spending
– Small employers not currently offering benefits
– Employers currently offering benefits
• Projected tax rate
– Employers pay 10.6%, Employees pay 3.6%
• Net benefit to households is $100 per person (or $370 per household)
– Net gain of $500 for 133% of poverty line
– Net gain of $1,110 between 133% and 400%
– Families over 400% of poverty line would pay $550
• Other economic impacts
– 3800 new jobs in first year
– 2900 annual new jobs by 2019
– Total economic output projected to increase $100 million
Source: William C. Hsaio Ph.D., Steven Kappel, Jonathan Gruber. Act 128 : Health
System Reform Design: Achieving Affordable Universal: Health Care in Vermont, 2011.

9. ERISA
• What is ERISA?
– Employee Retirement Income Security Act of 1974
• Where did it come from?
– JFK, Studebaker, “Pensions: The Broken Promise”
• Amendments
– COBRA, HIPAA, Newborns’ and Mothers’ Protection Act, Mental Health Parity
Act, Women’s Health and Cancer Rights Act
• Why do we care?
– ERISA protects employees for the benefits offered by employers
– Provides a mechanism of enforcement if benefits are not paid
– Federal law “preempts” all state laws that relate to to any benefit plan

10. The Statute
• Title I protects employees' rights to their benefits. The following are some of the ways in which it achieves
that goal:
– Participants must be provided plan summaries.
– Employers are required to report information about the plan to the Labor Department and provide it
to participants upon request. The information is reported on Form 5500, which is available for public
inspection and may be viewed at websites such as freeerisa.com and free5500.com.
– If a participant requests, the employer must provide the participant with a calculation of her or his
accrued and vested pension benefits.
– Employers have fiduciary responsibility to the participants and to the plan.
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– Certain transactions between the employer and the plan are prohibited.
– A pension plan is barred from investing more than 10% of its assets in employer securities.
– Employee Benefits Security Commission (SBSC) is responsible for overseeing Title 1.
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11. All I want for Christmas is
compensation for my health
plan’s denial of benefits
Sorry, even
Santa is
preempted
by ERISA

12. Pre-emption Clause
• ERISA Section 504
– “supersede[s] any and all State laws insofar as they may now or hereafter relate to any employee
benefit plan.”
• Few enumerated exceptions
– Insurance Exception
• Savings Clause
• Deemer Clause
• “Any effort by a state to contain health care costs, expand the availability or insurance, or otherwise
reform health care delivery or financing that relates to ERISA governed health benefits will be preempted
unless it is regarded as a state law that regulates insurance – and even then it will not be enforceable
against self insured employers” (Wing p. 180)

13. The result Clearly you
will be clear are unclear
if you just on the clarity
follow of ERISA.
ERISA.

14. Case History
• Metropolitan Life Insurance Co v Massachusetts (1985)
– Court found ERISA pre-emption does not apply
• Mandated benefits may relate to employee health plans
– Insurance Law Exemption – Regulation
• Court recognizes that Massachusetts could require benefit plans to include minimum, mandatory mental
health benefits without being subject to ERISA pre-emption
• Massachusetts could not deem self funded groups “insurers”, or it would be pre-empted
• “Section 47B, as applied, is a law "which regulates insurance" within the meaning of § 514(b)(2)(A), and
therefore is not preempted.” (Justice Blackmun)
– “Section 47B was designed to address problems encountered in treating mental illness in
Massachusetts. The Commonwealth determined that its working people needed to be protected
against the high cost of treatment for such illness. It also believed that, without insurance, mentally
VS
ill workers were often institutionalized in large state mental hospitals, and that mandatory insurance
would lead to a higher incidence of more effective treatment in private community mental health
centers.” (Justice Blackmun)

15. Case History (cont.)
• New York State Conference of Blue Cross and Blue Shield (BCBS) Plans v. Travelers Ins. Co. (1995)
– Court upholds law
– There is a presumption against preemption in areas of traditional state regulation
• Ruled that the indirect influence of the surcharge was not sufficiently connected to ERISA plans
so as to “bind plan administrators to any particular choice”
– “An indirect economic influence, however, does not bind plan administrators to any
particular choice and thus function as a regulation of an ERISA plan itself” (Justice Souter)
• Shaw Supra – “relate to”
– “Exorbitant” tax could possibly reach a level where health plan buyers would have no real choice and
offered to suggest that such a hypothetical mandate might violate ERISA.
• Such a test has not yet reached the Supreme Court
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16. Case History (cont)
• Retail Industry Leaders Association v. Fielder (2007)
– Court of Appeals for the 4th Circuit struck down a Maryland law
• Very large employers must spend at least 8% of their total payroll on their employees’ health
insurance costs or pay to the state the amount their spending fell short
• Walmart left with “no choice”
– Direct Effect
• “Were we to approve Maryland’s enactment solely for its noble purpose, we would be leading a charge
against the foundational policy of ERISA, and surely other States and local governments would follow.”
VS

17. Expert Opinions
• Phyllis Borzi, Assistant Secretary of Labor for the Employee Benefits Security Administration and former
attorney and research professor at the George Washington Medical Center’s School of Public Health and
Health Services
– “Clearly ERISA is not an impediment for states that choose to levy a fee or tax on all employers and to
then use the funds to subsidize health care coverage expansions. In such a situation, the regulated
entity is the employer, not the employer plan.”
– “Requiring an ERISA plan to be administered in a specific way or through a single processor would
most likely violate ERISA.”
– “It is clear that ERISA would not preempt a state rate-setting program that established rates for all
providers – including hospitals, physicians and other providers - as long as it dictates what providers
must charge rather than what payers must pay.”
– “But if those [Capitation] payments in no way determine the scope of benefits, and leave employers
free to design benefits with insurers, they should not be treated any differently in the courts than fee
for service rates.”
– “Risk adjustment mechanisms, for any kind of payment, should be easily defended against an ERISA
challenge. The surcharge on hospital bills paid by commercial insurers in New York was in fact a risk-
adjustment mechanism.”

18. Broker Response
• What are brokers thinking about the bill?
– “If it gets through, we are out of business”
– Cuts out brokers from the equation (part of Dr. Hsaoi’s administrative savings)
• How are physicians responding?
– “Extremely nervous. Bill promises not to cut reimbursements, but nothing compels it not to.”
• What about Dr. Hsaoi and Taiwan?
– “In Taiwan if you don’t like the system, you’d have to swim to the next island, in VT you can just drive
to NH”
• Dartmouth Hitchkock is heavily used by Vermont networks
– “The savings in the Hsaoi report were unrealistic, he only showed the best case scenario”
• Funding is to be passed in 2013, and its going to be a “bloodbath”
• In order for Vermont to move to the next step…
• Needs exemption from PACA
• “Prove they can do the same or better for the same or less”

19. Broker Response
• How are large employers like IBM reacting?
– “IBM Exodus effect”
• “IBM employs 7000 in the Essex semi conductor facility. For every IBM employee, there’s 2.5
other employees employed because of them. If IBM goes, you’re talking about 20,000 people
unemployed. 60,000 people if you count the implications on families.”
– “It would almost be like nuclear bomb fallout from Upper State New York, to Middlebury
to Canada”
• So why did this bill pass?
– “To create jobs. Shumlin wanted Vermont to be the place where businesses would go to stabilize
health care costs. However you have New Hampshire (with no state income tax) right next door. You
also have all the states in the south with better weather, tax incentives, and lower costs of living.”
• Most people think the bill is dead and the Exchange Bill 559 (passed May 4, 2012) will be the new focus
– “Most people in Vermont political circles think If it wasn’t for IBM and other large corporations then
the ERISA and PACA exemptions would likely have been sought.”

20. Conclusions
• The legal issue is whether or not a single payer system would be pre-empted by ERISA
– Does the law “relate to” ERISA protected plans?
– Would the deemer clause apply and self funded employers be exempt?
• Would there be a direct or indirect effect on Employers’ Benefit Plans?
– Drop of modify self funded coverage (NY v Travelers)
– Double pay for both taxes and existing benefits
• ERISA legal experts, like Patricia Butler, however point out that taxation and financing are traditionally
areas of state authority, which could protect it from “preemption”
• Reformers are urging Congress to pass an ERISA/PACA waivers for states seeking to expand health
insurance.
• No cases regarding tax financed universal health care have been heard at state level.
• Can this law, or another like it, realistically survive?

21. Discussion

22. Additional Cases
• Golden Gate Restaurant Association v. City and County of San Francisco (2010)
• Rush Prudential HMO, Inc v. Moran (2002)
• Kentucky Association of Health Plans v. Miller (2003)

23. Vermont Reform Challenges?
• Costs : Extending coverage to those currently uninsured and underinsured
– $252 mil in first year
• $62 more mil to recruit providers and update facilities
• About 2/3 of the expected savings in the first year
• Challenges
– Providers fear healthcare budgets will be balanced with chronically low reimbursement rates
– Different grassroot organizations had different opinions on equitable and generous benefits
• Vermont Uniform Health Care Reporting and Evaluation System
– Vermont ‘s all payer claims database
– Found that 87% of medical costs covered by benefits
– 13% out of pocket
» The “actuarial value” of this is on par with the Platinum level of the ACA benefit
plan
– Some advocates wanted “free” care with no cost sharing, but Vermont decided to stay at
the 87/13 actuarial value
– Businesses weary of increased government control of healthcare
• Fear ever increasing taxes
• Loss of flexibility in health care choices, which is an important cost center

24. Other Constraints/Considerations
• Vermont is in the 2nd Circuit
– Decisions in other circuits are not binding on Vermont
– Also makes it difficult to ascertain the limits of what may be permitted in this state under ERISA.
– Hard to determine how the courts would treat an untested scenario, like a single payer health care system.
• ERISA may not preempt a state’s ability to largely align other aspects of the health care delivery system through a
single channel
– Claims payment rules
• Allows the state to replicate some of the beneficial features of a single payer system and keep
multiple payer and benefit plans.
• Federal rules governing Medicaid and Medicare limit state flexibility with regards to benefits, payments to
providers, and claims administration
– Will require waivers
• Vermont already operating under a waiver program granting flexibility to determine which populations
get payments and how much
• Accountable Care Act Implications
– Having to run an exchange along side single payer system would mean running two programs with similar
goals and different administrative structures
– In 2017 states will be able to apply for waiver if they have their own systems in alignment with ACA goals
• Lump sum payment equal to ACA amount

25. Sources
• Information & news for understanding a Universal Health Care System for Vermont.. Vermont Health Care
for All: Myths, Realities Pertaining to a Universal Health Care System. 2012.
• www.dol.gov/topic/health-plans/erisa/htm
• Kenneth R. Wing, Benjamin Gilbert, The Law and the Public’s Health, 7th Edition, Health Administration
Press, 2007: 146-147, 178-179, 310-315, 329-330.
• William C. Hsaio Ph.D., Steven Kappel, Jonathan Gruber. Act 128 : Health System Reform Design:
Achieving Affordable Universal: Health Care in Vermont, 2011.
• William C. Hsiao, Ph.D., Anna Gosline Knight, Sc.M., Steven Kappel, M.P.A., and Nicolae Done . What
Other States Can Learn from Vermont's Bold Experiment: Embracing a Single-Payer Health Care Financing
System. Health Affairs, July 2011 30(7):1232–41.
• Justia.com: U.S. Supreme Court Center. Metropolitan Life v. Massachusetts – 471 U.S. 724 (1985).
• Cornell University Law School: Legal Information Institute. New York State Conference of Blue Cross and
Blue Shield Plans v. Travelers, 514 U.S. 645 (1995).
• Harmon, Ron. Health Plan Law: Retail Industry Leaders Association v. Fielder: A Case of Preemption Over
Federalism. ERISA Group Health Plan Administration. January 18, 2007.
• Frankenfield, Christopher. The relationship between ERISA, state, and local health care experimentation,
and the passage of national Health Reform. Journal of Health Care Law & Policy. Volume 13:423. pp.
423-457.