Chris Reed, one of the editorial writers at the San Diego Union Tribune, has made clear his skepticism that Governor Schwarzenegger’s health insurance initiative for the State of California will not survive due to ERISA preemption. I’ve previously linked to his comments here and here. Although ERISA preemption is a dense thicket, I don’t believe his pessimism is justified. States working to reform their health insurance structure to provide universal coverage are likely to survive ERISA preemption so long as they pay attention to the evolution of ERISA preemption over the past 25 years. A caveat: this is a byzantine, ever shifting area of law. But if I were a state legislator, I wouldn’t let the spectre of ERISA preemption deter me from attempting to reform healthcare financing. However, I would study it carefully before embarking on that venture. What follows is just a birdseye view of the legal terrain. ERISA was designed to provide uniform national standards for the administration and operation of employee welfare benefit plans, of which medical benefit plans are a part. To accomplish this goal, Congress placed in the statute language establishing that, as a general rule, any state laws which “relate to” an ERISA plan are preempted. 29 U.S.C. §1144(a). Because most privately provided health insurance or benefits come from ERISA governed plans, determining the breadth of ERISA’s preemption clause is no small matter. In the first twenty years or so of ERISA’s existence, hundreds of cases were brought in various state and federal courts across the country to challenge a wide variety of state laws and a few of them ended up at the Supreme Court. Until 1995, the Supreme Court consistently interpreted the “relate to” clause in expanding terms. Then, in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995), (free registration required) the Supreme Court made an effort to identify the limits of ERISA’s “relate to” clause. In that case the unanimous Court held that a New York law requiring hospitals to collect a higher surcharge from non-Blue Cross commercial insurers than from Blue Cross insurers was not preempted. The Court ruled that because the surcharge law had only an indirect effect on ERISA plans, it did not “relate to” those plans in a way which brought it within the sphere of ERISA preemption. Travelers did not mark the end of cases declaring that state laws were preempted but it did indicate that the Supreme Court would impose limits on what “relate to” meant as it was used in the context of ERISA preemption of state laws. Fast forward to 2007. Chris’ concerns about whether any proposed California health insurance initiative will escape ERISA preemption are based in large part on how badly Maryland’s Fair Share Health Care Fund Act fared recently in the face of an ERISA preemption challenge. The Maryland act was a state law aimed at Wal-Mart’s relatively low spending levels for healthcare benefits. Maryland legislators felt that Wal-Mart’s stinginess on healthcare coverage for its employees and their dependents improperly shifted costs to Maryland taxpayers who had to fund that state’s Medicaid program at higher levels than would have been the case if Wal-Mart had opened wider its medical benefits wallet. The legislation all but named Wal-Mart as its target when it required employers with more than 10,000 employees in the state to either pay no less than 8% of its total wages paid to employees in healthcare benefits or pay the difference to the state. Being in the legislature’s gunsights bothered Wal-Mart. A trade association of which it was a member sued to have the federal district court in Maryland declare that the law was preempted by ERISA. The court did so and the State of Maryland appealed to the Fourth Circuit which affirmed the trial court ruling. The case, Retail Industry Leaders Assoc. v. Fielder, 475 F.3d 180 (4th Cir. 2007), made clear that the problem for the proponents of the law was that it was directly aimed at Wal-Mart’s business judgment about what benefits it would pay its employees. This type of state law interference with, or at the very least, targeted influence on, employer decisions about employee benefit plan design violates ERISA’s prohibition of state laws that “relate to” an employee welfare benefit plan. I am not surprised by the Fourth Circuit ruling. However, not all state healthcare insurance initiatives need carry the defects that Maryland’s statute possessed. In reviewing this summary of various approaches to achieving universal medical coverage for Californians, there is little discussion of employer mandates, taxes or assessments. Likewise, this recent article in the L.A. Times does not suggest that mandating minimum coverage levels for employer based medical benefits will be a significant part of the California initiative. The reform proposals appear to be primarily, if not exclusively, aimed at other methods for achieving universal coverage. If the act that eventually becomes law is not specifically aimed at employers and their decisions about how they provide health benefits, I don’t think ERISA preemption will likely be a basis to strike down the legislation. Other state laws that seem to me to more directly and clearly “relate to” ERISA plans have passed unscathed through the ERISA preemption gauntlet at the U.S. Court of Appeals for the Ninth Circuit, the federal appeals court that would ultimately hear any challenge to a California healthcare insurance initiative. See, for example, Providence Health Plan v. McDowell, 385 F.3d 1168 (9th Cir. 2004). Of course, no one can know with certainty what a court will do. ERISA preemption litigation is notoriously complex and unpredictable. But even a statute as poorly drafted to withstand an ERISA preemption challenge as the Maryland act earned a dissent from one of the members of the three judge panel in the Fourth Circuit. Judge Michael felt that, despite its targeting of Wal-Mart, the Maryland Fair Share Act should not be preempted in light of the critical need for legislative action to protect Medicaid funds. In light of the momentum developing behind exploring whether and how we can feasibly provide universal healthcare coverage, a judge or panel of judges would likely be reluctant to wipe off the books state laws that in good faith attempt to avoid directly impacting employer sponsored health benefit plans. So long as healthcare insurance reform is carried out intelligently, with an eye toward not targeting employer based plans, my prediction is ERISA preemption will not prove to be the downfall of state based healthcare insurance reform.