American Journal of Law & Medicine

Surviving preemption: the importance of Chapter 58 in the context of America's health care crisis.


Amidst a lavish ceremony in Boston's Faneuil Hall on April 12, 2006, Massachusetts Governor Mitt Romney signed into law Chapter 58 of the Acts of 2006: An Act Providing Access to Affordable, Quality, Accountable Health Care. (1) At that time, Chapter 58 represented the most comprehensive state health reform ever passed in the country, and the first with the potential to provide near universal health coverage. (2) Since Romney signed Chapter 58, it has been the focus of a great deal of national media attention. Other states are evaluating whether Chapter 58's complicated bipartisan formula could be effective within their borders, and Romney plans on basing his presidential campaign to a large extent on Chapter 58's potential as a model for national health reform. However, Chapter 58 faces a potential legal challenge under the preemption clause of the federal 1974 Employee Retirement Income Security Act (ERISA). (3) In part, ERISA acts to limit the burden on employee benefit plans established by multi-state employers from state regulation. (4) Chapter 58 relies on employer contributions as a source of revenue for the increased coverage prescribed by the legislation. (5) The provisions that outline this requirement, the Fair Share Contribution (6) and the Free Rider Surcharge, (7) are those at risk of preemption. Legislative history, recent court decisions, and public policy suggest, however, that Chapter 58 will sidestep the ERISA pitfalls that have trapped previous state health reform initiatives.

Part I of this note will provide an overview of ERISA's preemption clause. Part II of this note will provide an overview of Chapter 58 with particular emphasis on the two key prongs of employer responsibility: the Fair Share Contribution and the Free Rider Surcharge. Part III of this note will analyze Chapter 58's employer responsibility provisions in light of the ERISA preemption clause, trends established by recent court decisions, and public policy. Ultimately if Chapter 58 is faced with an ERISA challenge, Part IV will conclude that a court is likely to uphold the legislation's employer responsibility provisions.


The Employee Retirement Income Security Act (ERISA) was enacted by Congress in 1974 under the authority of the Commerce Clause. (8) The legislation was designed to impose federal standards on employee pension plans, an area traditionally regulated by the states. (9) At the last minute, Congress also decided to expand the legislation and prohibit state laws governing all types of employee benefit plans. (10) The intention of the expanded prohibition was to disallow states from interfering with the creation of uniform benefit plans by multi-state employers. (11) In that vein, section 514(a) of ERISA contains a preemption provision that precludes all state laws to the extent that they mandate the creation of ERISA plans or "relate to" existing employer sponsored health plans. (12) Normally, uniform standards are established when the federal government usurps state regulation, and this is exactly what ERISA provided with respect to pension plans. (13) However, the federal government declined to do so for many of the other benefits the legislation precluded in its final form. Unfortunately for state health policy makers, this includes health benefit plans. (14) The result "is a law that precludes state regulation of ERISA health plans without substituting federal standards, leaving the plans in a regulatory vacuum." (15)

Generally, if a state law is not automatically prohibited for mandating the creation of ERISA plans, courts ask four questions to determine whether the law should be preempted by ERISA. First, as a preliminary matter, the court must determine whether the existing employee benefit plan in conflict with the state law constitutes an ERISA plan. (16) This threshold is low; most welfare benefit plans qualify as an ERISA plans. (17) In the health context, the term "welfare benefit plan" is defined as any plan, fund, or program established by an employer to provide employees with medical, surgical, or hospital care benefits or benefits in the event of sickness, accident, disability, or death. (18)

Second, the court must determine whether the state law in question "relates to" the existing ERISA plan in accordance with section 514(a), ERISA's preemption provision. (19) The clause reads, "[e]xcept as provided in subsection (b) ... the provisions of this [law] shall supercede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan. ..." (20) Case law and legislative intent are somewhat unclear on the interpretation of this clause, and a fair amount of time will be spent analyzing this language.

Third, if the court finds that the state law in question is preempted by section 514(a), the court must determine whether the law is "saved" by ERISA's "savings clause" because it regulates the business of insurance. (21) Today, section 514(b) uses a two part test to make this determination. (22) First, the law "must be specifically directed towards entities engaged in the business of insurance," and second, the law "must substantially affect the risk pooling arrangement between the insurer and the insured." (23) This test represents a "clean break" (24) from the old ERISA "savings clause" analysis established in Metropolitan Life Insurance Co. v. Massachusetts. (25) The "savings clause broadly preserves the States' lawmaking power over much of the same regulation preempted under section 514(a)." (26) This represents a source of confusion because, "while Congress occasionally decides to return to the States what it has previously taken away, it does not normally do both at the same time." (27)

Last, if the court finds that the state law can be saved under section 514(b), it must evaluate whether the law falls under the "deemer clause" exception of section 514(b). (28) The "deemer clause" prevents a state from treating a self-insured employee benefit plan as an insurance company just so they can regulate it under the "savings clause." (29) The result is that ERISA plans can be split into two types: insured and self-insured plans. An intermediate estimate is that of Americans enrolled in ERISA plans, fifty-three million (43%) are covered by self-insured plans that cannot be regulated by state laws because of the "deemer clause" exception to ERISA's "savings clause." (30)


The cost of health care in our country is growing at an alarming rate. Specifically, health care spending has risen at an average rate of 9.9% per year over the last two decades. (31) This figure exceeds our overall economy's rate of growth (gross domestic product, or GDP) by 2.5%. (32) As a percentage of our economy, health care costs have increased over the last two decades from 7.2% to 16%. (33) In another decade, health care expenditures are projected to consume 20% of our total economy. (34) The rapid increase of health care expenditures as a percentage of the economy raises questions about our health care system's mortality: (35) Can Medicare and Medicaid survive rising costs and the aging of the population? (36) How will rising costs of private health insurance premiums affect the coverage decisions of employers? (37) As the cost of health care and the uninsured population increases, (38) where will hospitals turn for reimbursement? If we begin trying to hold the growth rate of the cost of health care to the projected growth rate of the GDP next year, we would need to lower health care spending each year until 2015 by an average of 340 billion dollars. (39)

With this background, "lack of insurance is clearly a catastrophic problem, since health care now bears prices that are very high relative to the income of a typical citizen." (40) While numerous cost containment and quality improvement measures have been undertaken, (41) it seems obvious that entirely new models need to be explored if we wish to solve this problem. Enter Massachusetts and Chapter 58.

Several unique factors encouraged Massachusetts to start down the path of health reform. First, from the outset, a relatively low percentage of the state's population was uninsured. (42) Second, Massachusetts had a strong base of employer-sponsored insurance. Roughly 98% of employers with more than 100 employees and 65% of employers with fewer than 100 employees were already contributing to their employees' health insurance premiums. (43) Third, and most importantly, the federal government indicated they would not reauthorize the state's federal Medicaid waiver unless Massachusetts reduced its uninsured population by adjusting their health care expenditures. (44) Massachusetts's 1115(a) MassHealth Demonstration Waiver annually nets the state hundreds of millions of dollars for their Medicaid program. (45) To save the waiver, the federal government asked Massachusetts to stop reimbursing institutions (46) and start using the money to subsidize health insurance for low income individuals and families. (47)

Mechanically, Chapter 58 is highly complex. While only a small portion of Chapter 58 raises ERISA preemption concerns, a basic overview of the legislation will be useful for the legal analysis of the employer responsibility provisions and ERISA preemption in Part III of this note. Chapter 58 represents one of the most comprehensive health reform bills ever passed. No state has ever mandated health insurance coverage for all individuals who can afford it. Chapter 58 also represents unprecedented political compromise. While the uninspiring catalyst for the bill was the desire to retain funding from the federal wavier discussed above, Chapter 58 successfully outlines a plan to create affordable insurance products for all Massachusetts residents through a combination of state subsidies, tax benefits, insurance market reforms and mandates. …

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