Health Care Reform: Use ERISA As A Model

I have spent the past 28 years administering employee benefit plans covered by the Employee Retirement Income Security Act of 1974, commonly known as ERISA. Your 401(k) plan, your profit sharing plan, even your employer-provided health insurance are all covered under ERISA in one form or another. Broad-sweeping, progressive, and even radical for its time, ERISA has come to be one of the most solid pieces of social legislation passed.

Were it not for some leaders with passion and vision, it would never have happened at all.

A Brief History

Employer-provided pension plans were in much the same condition as our current health care system. Before ERISA, pension plans were minimally regulated and were not viewed as a social obligation, but as a gift from the employer to the employee. Enjoying tax-favored treatment from the early 1900’s on, by the 1950’s financial abuse of the plans was rampant. Benefit definitions were discriminatory and fluid, assets were used and abused to the benefit of the employer and very often, the detriment of the employee.

The monumental failure of the Studebaker plan highlighted the abysmal state of the pension industry and abuse taking place within union pension plans and outside. At the point of the plan’s termination, the group who had reached age 60 received full benefits (this included the executives of Studebaker, by the way), the group aged 40-59 received 15% of their earned benefits, and the rest of the employees received nothing, despite having funded part of their benefits through union contributions made during the course of their employment.

A more personal example of this happened to my grandmother. My grandfather worked for the Southern Pacific Railroad for 51 years. He was murdered either on the job or just after leaving his job in 1971. He had worked past his normal retirement date with no corresponding increase in benefits. A loyal union member, he had also contributed many thousands of dollars to that pension plan over the course of his employment with SP. When my grandmother went to claim his Railroad Retirement benefits as his surviving widow, she was denied all benefits. Because he was still an active employee and had not begun to receive payment of his benefits, she was denied survivor benefits which she would have received if he had been retired and paid his earned pension. My grandmother was forced to live the rest of her life with the tragedy of his death in an extremely precarious financial situation. She only had her own Social Security benefits that she earned during her years of employment (he was a Railroad employee and therefore exempt from Social Security), and a very small life insurance policy that paid double indemnity. When she passed away, she still owed 5 years of her 30-year mortgage on the only asset she had left.

Her story was not unusual. Similarly, we’ve arrived at a time where health care is controlled by insurance companies, pharmaceutical companies and litigators. Like pensions, health care benefits for employees have been regarded as a gift rather than an extension of the compensation package for employees, and like pensions, rampant abuses and profit-taking abound. Health care policy is determined on a state-by-state basis with no overall federal mandate and no consistent policy. As a consequence, insurance companies are able to tailor their policies to the state’s rules and regulations, which is to their benefit in some states; to their detriment in others.

What ERISA Accomplished

ERISA laid the foundation for broad reform of pension plan operations and responsibility. It established four basic principles:

1. Required Reporting and Disclosure of Financial and Operational Information
2. Required Standards of Conduct for Fiduciaries and Related Parties (and penalties for non-compliance)
3. Defined Internal Revenue Code provisions to govern the operation of pension plans and preserve tax-deferred status
4. Established the Pension Benefit Guaranty Corporation (PBGC) to insure certain guaranteed pension benefits

Although the PBGC (Title IV of ERISA) is probably the most controversial prong of ERISA reforms today, for the most part, all four prongs have withstood the test of time to the benefit of every employee who has been covered by a qualified pension plan. Every few years Congress amends various provisions to meet their tax goals, but still, for the most part, ERISA is a solid and significant law that benefits each and every American. Despite those amendments, the basic principles of ERISA remain inviolate 34 years after its passage.

Why ERISA Succeeds

Here are the fundamental reasons that I believe ERISA has withstood the test of time:

• It established broad-based principles for the establishment and maintenance of employee benefit plans: disclosure, responsibility, compliance and benefit guarantees.
• It split the regulatory oversight responsibility between three different agencies: the IRS, the Department of Labor, and the PBGC, allocating specific responsibilities to each agency.
• It was not an attempt to amend the status quo, but instead approached pension reform from the standpoint of what should have been implemented at the start.
• Compliance was phased in over a short period of time in reasonable increments, which minimized the economic disruption.
• Because ERISA was drafted with a broad, sweeping reform brush, amendments made subsequent to its passage have remained largely within the letter and spirit of the law. I can think of one exception which was repealed shortly after its passage and was specifically intended to reduce employer tax deductions in a budget bill. But most legislation passed which touches on or amends ERISA remains within the constraints of the original intent — to ensure that employees’ retirement funds are inviolate, prudently invested, and benefits are available and earned in a non-discriminatory fashion to all covered employees.
• ERISA pre-empted individual state pension laws and brought the universe of pension plans under a federal umbrella, ensuring consistent treatment no matter what state one lived in.

Why Health Care Reform Should Follow The ERISA Model

I believe any health care reform plan will also need solid foundational pillars to its foundation in order to succeed. They are:

1. Universal Availability, Portability and Choice of Plan Defined by Federal Law, pre-empting state laws.
2. Federal limits on malpractice claims
3. Mandatory reporting, disclosure and transparent operations of insurance companies and related entities (including pharmacy benefit providers)
4. Broad minimum benefit and funding requirements
5. Parity in incentives for employers and individuals in the form of tax deductions and/or credits for Health Savings Accounts and payment of health insurance premiums (currently available only to employers)

The Democratic candidates have all put forward meaningful health care reform proposals. However, I don’t believe they go far enough, because they don’t define an overall policy going forward which will guide future legislative bodies when considering reforms. Further, they don’t assign clear lines of responsibility for enforcement and accountability that I can see. I believe it’s essential for the candidates to begin the process with a clean slate and clear vision rather than trying to reshape what is in place now for the future.

The architects of ERISA, led by John Erlenborn and John Dent, were passionate about their belief that the only pension reform worth making would be lasting reform, and lasting reform meant beginning with a clean slate and clear-cut principles. Any effort at health care reform that does not follow these same principles is doomed to fail in the long run, because it will be the domain of all of those who lobby for their own interest at the expense of those most in need. What health care reform needs is a leader who is willing to take risks, define broad policy-based principles for implementation and administration, create carrots for compliance and participation and sticks for exploitation. Anything less will be no reform at all.

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