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ERISA Tort Preemption and HR 3962, Take Four

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In recent days, Mark Hall, Richard Johnson, and Peter Jacobson have all offered opinions as to how HR 3962, if enacted, would affect ERISA preemption of state tort claims against insurers. Let me offer a fourth opinion.

First, remember that ERISA tort liability preemption is based primarily on section 502 of ERISA (29 USC 1132). Section 502 does not explicitly preempt state tort law, but the Supreme Court in Pilot Life and again in Davila concluded, reasoning by analogy to judicial interpretation of the LMRA, that Congress intended to preempt state law by enacting section 502’s comprehensive remedial scheme. Section 502(a)(1) applies to claims for benefits or to clarify rights against a “plan,” which is defined by section 3 of ERISA to include an “employee welfare benefits plan,” i.e. an ERISA plan. ERISA section 514 (29 USC 1144), preempts state laws that “relate to” employee benefits, except for state laws regulating insurance, which are saved from preemption, except state laws are not saved from preemption that regulate self-insured plans. Section 514 independently preempts state tort law of general applicability (Pilot Life), but arguably preempts state remedies specifically directed at insurers only insofar as it is read together with section 502.

Nowhere in HR 3962 is section 502(a)(1) explicitly repealed or amended, so if 502 preemption is changed by HR 3962, it must be indirectly. Section 251 of HR 3962, “Relationship to Other Requirements,” is clearly the most important provision for parsing the continued applicability of section 502 of ERISA. Section 232, which requires the creation of internal and external grievance and appeal procedures for qualified health benefit plans, states that, “Nothing in this section shall be construed as affecting the availability of judicial review under State law for [internal and external review determinations], but it then says “subject to section 251.” So 251 is central.

Section 251 has two sections, the first dealing with coverage not offered through exchange and the second dealing with coverage offered through the exchange. Under 202(c)(1), non-grandfathered individual health insurance can only be offered through the exchange. Under section 302(c), employees of eligible employers may also purchase insurance through the exchange if their employers elect to allow them to do so. Health insurance coverage not offered through the exchange would, therefore, presumably consist of all other health insurance coverage, i.e. grandfathered individual health insurance and employment-based coverage not purchased through the exchange.

Section 251(a)(1) provides that “in the case of health insurance not offered through the Exchange (whether or not offered in connection with an employment-based plan), and in the case of employment-based health plans,” the requirements of Title II of HR 3962 (dealing with protections and standards for qualified health plans), do not supersede the HIPAA and COBRA provisions of ERISA and of the Public Health Service Act, or State law, except insofar as those provisions conflict with the requirements of the insurance reform provisions of HR 3962, as determined by the Health Choices Commissioner. Section 251(a)(2) further provides that “Nothing in paragraphs (1) or (2) shall be construed as affecting the application of section 514” of ERISA. (Presumably, as Mr. Johnson notes, the reference to paragraphs 1 and 2 is a drafting error, as the reference is contained within paragraph 2).

This makes sense. Grandfathered individual policies and employment-based plans (which HR 3962 defines to include ERISA plans, government plans, and church plans) remain subject to existing law, including state law insofar as section 514 saves the state law from preemption, unless the existing law conflicts with HR 3962. Section 502 is nowhere mentioned, but presumably it still applies to ERISA plans, but not to individual plans or to government or church plans or other plans excluded from ERISA.

Section 251(b) applies to “Coverage Offered through Exchange.” This provision states that “in the case of coverage offered through the Health Insurance Exchange,” the requirements of Title II do not supersede any requirements of title XXVII of the Public Health Services Act (basically the HIPAA provisions) or of state law, except insofar as those requirements prevent the application of the insurance reforms as determined by the Health Choices Commissioner. Section 251(b)(2) further states that “individual rights and remedies under State laws shall apply.”

The first sentence of section 251(b)(2), states again that in the case of health insurance offered through the exchange, State law rights and remedies apply to health insurance issuers. The second sentence, however, states “The previous sentence shall not be construed as providing for the applicability of rights and remedies under State laws with respect to requirements applicable to employers or other plan sponsors in connection with arrangements that are treated as group health plans under section 802(a)(1)” of ERISA.

Section 802(a)(1) is a new section added to ERISA under the employer mandate provisions of HR 3962. It provides that if an employer makes an election to offer health benefits under section 801, that election shall be treated as the establishment and maintenance of a group health plan under section 733(a) of ERISA (42 USC 1191b). Section 801 refers to an election by an employer “to be subject to the health coverage participation requirements,” which are defined by section 803 to be the requirements of the employer mandate found in sections 411 et seq. Sections 411 and 412 allow an employer to 1) offer a group health plan; 2) offer coverage through an Exchange-participating health benefits plan, if the employer is Exchange-eligible; or 3) to make a contribution in lieu of coverage.

It would seem that under section 802(a)(1), therefore, coverage offered by an employer, either directly or through an exchange, is group health plan coverage. But, remember the language of 251(b)(2) says (twice) that state law rights and remedies apply against health insurance issuers, but not against “employers or other plan sponsors” who offer a group health plan under 802(a)(1). ERISA defines “plan sponsors” to mean the employer or employee organization that establishes a plan. Section 251(b), therefore, says quite plainly that state law remedies (including tort remedies) apply against health insurers who participate in the exchange, you just can’t sue your employer if your employer provides coverage through the exchange. Section 502, therefore, no longer preempts state tort remedies against insurers that offer coverage through an exchange. Section 514 would not seem to either, since it is not mentioned in section 251(b).

There is only one loose end to tie up. Although section 251(a)(1) is titled “coverage not offered through the Exchange,” it appears to apply not only to “coverage not offered through the Exchange (whether or not offered in connection with an employment-based health plan,” but also separately, to all “employment-based health plans,” presumably including employment-based health plans offered through the exchange, since otherwise the clause is redundant. Remember, section 251(a) preserves ERISA section 514. But section 251(b), on its face, applies to all coverage offered through the exchange, including coverage funded by an employer, and expressly applies state law remedies against health insurance issuers. How one is to reconcile these provisions is not clear, but in any event section 251(a) does not expressly preserve 502, and, although it preserves 514, section 514 only preempts state insurance law with respect to self-insured plans, which plans purchased through an exchange decidedly are not. Only if a court read section 251(a)(1) rather than section 251(b) to cover employment-based plans offered through the exchange and section 514 to preempt all state laws providing remedies against insurance plans purchased through the exchange with employer contributions, would preemption of state remedies against insurers continue. This would be a strained and improbable (though possible) interpretation of section 251.

In sum, the most likely interpretation of section 251 is that it preserves state law rights and remedies against insurers marketing policies through the exchange, and that ERISA preemption does not apply.

One final question, is subjecting health plans sold to employees through the exchange to state tort liability a good thing? While I am generally in favor of holding people and institutions accountable for their actions and for compensating victims of negligence, allowing tort suits against insurers when insurance is sold to employees through the exchange but not when they insure employees as part of a group that is an ERISA plan risks making policies sold through the exchange more expensive, and thus undercuts the exchange as a means of improving the quality of health insurance and controlling costs. I believe that we need a solution to this problem that applies to all health insurance, not just within the exchange.

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The views reflected in this expert column are those of the individual authors and do not necessarily represent those of the O’Neill Institute for National and Global Health Law or Georgetown University. This blog is solely informational in nature, and not intended as a substitute for competent legal advice from a licensed and retained attorney in your state or country.

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