THE HEALTH INSURANCE MESS

And this remains at the core of the health-insurance crisis. More than 41 million people are still without coverage — up from 36 million in 1994 — at a time when a single hospital visit can bankrupt a family. Who are they? They are not the poor, who are covered by Medicaid, but rather people either self- employed or working for small businesses. Of those employed by businesses with 10 employees or fewer, a full 75 percent are without coverage.

And all the while, the whole subject of health insurance remains a mystery. Can anyone explain why we have a health-insurance crisis and no auto- insurance crisis or homeowner’s-insurance crisis? How is it that employees of large corporations can get low-deductible coverage on everything from psychiatry to dental care without paying a penny out of their paychecks, while others fork over $ 5,000 a year for insurance that covers nothing until they have spent $ 10,000 from their own pockets?

For 25 years, health insurance in America has been an odd burlesque, stage- managed out of Washington. And the unlikely stage manager? The Pension and Welfare Benefits Administration of the Department of Labor. This obscure federal agency has done more to shape health insurance than have senators and House members, the National Association of Insurers, and the American Medical Association put together. And it has done so while barely lifting a finger. PWBA administrators have only a slight idea of what they are administering. Says Gloria Della, an agency publicaffairs specialist, “We’ve always done most of our research on the pension side. We’re just starting to look at health statistics, because it’s become such an important issue.”

And here are some other important letters to learn: ERISA. For behind this unassuming acronym lie all the convolutions, the intrigue, the rhetoric, and the tragedies of the health-care crisis. The Employee Retirement Income Security Act is “the most underreported story in America,” says Mike Ferguson, of the Self-Insurance Institute of America. Adds Jennifer Belles, of the Association of Private Pension and Welfare Plans, “When you talk about health- care reform, you’re basically talking about ERISA.”

ERISA was born in 1974, culminating a decade of reaction to the bankruptcy of Studebaker, which left thousands of employees without their pensions. The specter of insolvent corporate pension plans haunted Congress, so Richard Nixon signed this bill, in the presence of Speaker Carl Albert and several union leaders, to ensure that it would never happen again. Nothing could come between an employee and his pension fund.

Then, in one of those quarter-turns of the screw that produce tremendous unforeseen consequences, health-benefit plans were added to the pot. There was no obvious reason. Some say that it was done as a favor to the unions, which wanted the Labor Department to oversee their Taft-Hartley plans, which are benefit trusts set up as part of collective-bargaining agreements. Others contend that the department itself wanted such oversight, fearing the plunder of those trusts. In any event, internally funded health plans — “self- insurance” — were gathered under the ERISA umbrella. What no one could have guessed is that, by 1996, 70 million Americans — almost a third of the population — would receive their health coverage through these self- insurance programs.

ERISA offered many advantages, the most important of which was exemption from state insurance regulations. Since World War II, the regulation of insurance companies has been almost entirely reserved to the states, whose main concern is fiscal solvency. States conduct audits and require companies to keep minimum reserve balances, to prevent them from making wild promises that they later do not fulfill. But states have rarely been content to limit themselves to financial review. Instead, they are filled with little Hillary Clintons, who try to “improve” health insurance by mandating additional coverage for specific services, which, of course, increases costs.

ERISA has always been justified by the argument that it is unreasonable to expect major corporations and labor unions to conform to different insurance rules in all 50 states. There is some truth to this. As states became more aggressive about tacking on insurance mandates, companies and unions discovered that the ERISA exemption was all the more valuable. “ERISA is the greatest consumerprotection plan ever devised,” says Fred Hunt, president of the Society for Professional Benefit Administrators. “Why should a company have to buy all kinds of extra benefits that its employees don’t want?” Echoes Mark Ugoretz, president of the ERISA Industry Committee, “The costs of conforming with these mandates is what has made health insurance so expensive. ”

In Minnesota, for example, insurers are required to cover nearly two dozen different types of medical and cosmetic services, including in-vitro fertilization, toupees, and hair transplants. And of course it isn’t employees seeking hair transplants who are lobbying for these mandates; it is the providers of these services. Any state that begins to mandate specific insurance benefits enters into an unholy alliance with medical providers. Particularly active are those on the fringe of need or respectability, for whom mandated coverage is the holy grail. Chiropractors, for example, are nationally organized and have besieged state legislatures to be included in mandated coverage. Their services are now mandatorily covered in 41 states. Twenty-four states now mandate coverage for social workers; seven do for occupational therapists, six for acupuncturists. Pastoral counselors are mandated in North Carolina, “natropaths” in Alaska, massage therapists in Florida.

ERISA plans quickly discovered that they could avoid these mandates by exercising their federal option. As a result, health-care costs for employees at large corporations and major unions remained low. But for everyone who stayed under state jurisdiction, things got more expensive.

Nor was that all. Insurance involves pooling risks — the broader the pool, the less risk any individual has to bear. But as ERISA companies opted for self-insurance, they took large pools of healthy workers with them. ERISA was originally designed for major firms and unions, but smaller groups began to enter the game. Soon, canceling your commercial insurance policy and switching to self-insurance became an easy route to cheaper health benefits. Slowly but inexorably, American health insurance began to divide into separate tiers: those with the ERISA exemption and those without it.

Of course, there were considerable risks in setting up an insurance pool with only 100 or so employees in it; if one person required expensive medical treatment, a small number of people had to shoulder the costs. But this was quickly alleviated by the invention of “stop-loss” insurance — which is really nothing more than health insurance with high deductibles. A company with only 10 employees can self-insure up to $ 10,000 per individual, $ 50, 000 for the group, then buy stop-loss insurance to cover all expenses beyond that. To the untutored, this is merely health insurance with high deductibles, but legally and technically, it is “business insurance,” which allows companies to buy it and still retain their ERISA exemption. When Maryland and Missouri recently tried to limit this practice, both lost in federal court. According to the Self-Insurance Institute, there is no reason that a twoperson law partnership could not qualify for the ERISA exemption. Says the PWBA’s Della, “There’s no qualifying process. It’s essentially a self- declaration. We’re not a gatekeeper. After all, there are 2.5 million ERISA plans around the country, and we have a staff of fewer than 600. How many plans could we get through?”

Before long — by the early 1980s — entrepreneurs entered the picture. They invented multiple-employer welfare arrangements (MEWAs), which are essentially group-insurance plans designed to exploit the ERISA exemption. Pooling people on any kind of basis (profession, church membership — even soil-conservation district), they set up self-funded plans that offered insurance unfettered by state regulation. Some were honest, but in the absence of financial oversight, the possibilities for fraud were almost limitless.

Congress received enough complaints about this that, in 1983, it granted to the states some oversight over MEWAs. They are now illegal in 25 states, but they have been embraced by the remainder. Many MEWAs are legitimate plans that offer ERISA-protected insurance to small-business employees, the selfemployed, part-timers, the unemployed, and others. But the fly-by-nights still flourish. According to the National Association of Insurance Commissioners, almost 400,000 MEWA participants between 1988 and 1991 were stuck with more than $ 123 million in unpaid medical claims.

By the end of the 1980s, the two-tier system was creating astounding distortions. People in corporate plans often had “first-dollar” (no- deductible) coverage and would crowd doctors’ offices for the slightest complaints. “As long as patients and doctors are spending someone else’s money, there’s no reason for restraint,” says health-care author Gerald Musgrave. But this pushed up demand and made care more expensive and even less accessible for people without employer coverage. As more and more people opted out of commercial insurance pools, those who remained were increasingly lumped with the “uninsurable” — people with AIDS, multiple handicaps, chronic diseases, and so forth.

So the states took some action. One strategy was to create high-risk pools, which function exactly as highrisk auto-insurance pools do for accident-prone drivers. About half the states now have such funds. Some states established funds to reimburse hospitals for “uncompensated care” (that is, care provided to the poor who cannot pay their bills). Some states directed additional funds into Medicaid. And almost without exception, these programs were funded by a special tax on health-insurance premiums, usually about 2 percent. Every state in the country except Utah now has one.

Incredibly, self-insured ERISA plans argued that they were exempt from such a tax. The 1974 act, after all, stated that their health-benefit plans could be spent on their own medical expenses, not someone else’s. The federal courts agreed; no ERISA plan pays a state premium tax.

Faced with this loss, the states tried to impose taxes on the providers of medical services. But once again, ERISA plans claimed that they were exempt. In 1993, for example, Minnesota instituted a program aimed at extending insurance coverage to working families whose employers cannot provide them with insurance. About 92,000 people pay 52 percent of the costs through premiums, with the remaining 48 percent subsidized by $ 134 million raised each year through a 2 percent medical-provider tax. Before the plan went into effect, the state was sued by a cluster of unions, which argued that the tax violated their ERISA exemption. In an unusual reversal of trends, a federal court ruled in 1995 that such indirect taxation of ERISA plans is in fact permissible. The Supreme Court upheld a similar New York hospital tax in 1996.

Yet ERISA plans remain untouched by every other state attempt to provide health care for the sick and the poor. They are exempt from state guaranty funds, which cover medical claims unpaid by private insurers that go bankrupt; from state laws allowing punitive damages in medical malpractice suits; and from “community-rating” systems, intended to lower insurance costs to the sick and the elderly.

This last is particularly burdensome to people outside ERISA. New York, for example, mandated a statewide community rating in 1991, meaning that insurance companies could not rate people according to age or health. The predictable result was that premiums rose 80 percent for the young and well and fell 30 percent for the old and sick. A family of four must pay $ 5,000 a year for a policy with a $ 10,000 deductible. There are more people without insurance in New York today than there were in 1990.

The states petitioned Congress for waivers that would allow them to bring ERISA plans into these programs, but the ERISA lobby — whose spokesmen are usually from General Motors or IBM — easily shot them down. Several states now have abandoned efforts to broaden insurance coverage because of the ERISA roadblock. Says Sue Crystal, of the Washington State Health Care Policy Board, “It’s hard to do anything when half the employees in the state can immediately opt out through ERISA.”

And while recusing themselves from broader societal responsibilities, some ERISA plans began to purge the seriously ill from their own ranks. In fact, most of the horror stories told during the ClintonCare push — usually blamed on the health-insurance industry — were actually the actions of ERISA plans operating in the free-fire zone created for them by the Labor Department. A Texas company, which had guaranteed lifetime benefits up to $ 5 million, abruptly changed this limit to $ 25,000 when an employee contracted AIDS; the Supreme Court affirmed that ERISA overrode this breach of contract. Many ERISA plans do not enroll newborn babies until they have been deemed healthy, saddling parents of struggling infants with colossal medical bills. And so on.

So the appeal of ERISA is practically irresistible. Almost all companies with more than 20,000 employees are ERISA companies; 84 percent of companies with 10,000-19,999 employees are ERISA companies; 82 percent of those with 5, 000-9,999 employees; 78 percent of those with 1,000-4,999; but only 13 percent of those with 10-49. Where does that leave us? In the push-and-pull of Washington lobbying, two broad approaches to ending this “two-societies” system have been proposed. One is to give everybody the ERISA exemption; the other is to eliminate it entirely. Either solution would probably work, but the problem is that, with reformers tugging in both directions, nothing gets done.

Here is a simple but utterly indispensable observation: There is no reason that private carriers cannot provide health coverage to the entire nation through basic risk-based commercial policies. We have almost universal coverage for other types of insurance, and the health variety should not be all that more difficult. One state, Hawaii, has been allowed to opt out of the ERISA system. It spends only 9 percent of gross product on health care, as opposed to the nation’s 14 percent, and 99 percent of its residents are covered, the highest such percentage in the country.

The secret of delivering affordable health insurance should be a secret no longer. It should be whispered — shouted — as follows:

(1) Allow everyone to buy health coverage with taxfree dollars.

(2) Avoid mandated benefits, at either the state or the national level.

(3) Continue the actuarial regulation of insurance companies, at either level.

(4) Put all those people who are truly uninsurable in subsidized high-risk pools, openly and justifiably.

(5) Level the playing field by making ERISA allinclusive or abolishing it entirely.

There. That should satisfy the Republicans. And if the Democrats won’t come along, just call this system “socialized medicine” and the rest will take care of itself.

William Tucker is a writer living in Brooklyn.