B
Regulation of Employment-Based Health Benefits: The Intersection of State and Federal Law

Edward F. Shay*

The regulation of employment-based health benefits by state governments and the federal government intersect and diverge in complex ways. This paper surveys some, but not all, aspects of each regulatory arena and their interrelations.

States regulate health and other insurers. State regulation varies widely in both scope and intensity but may cover insurer formation, taxation and operation, insurance contracts and rates, unfair insurance practices, and other types of insuring organizations such as health maintenance organizations (HMOs), preferred provider organizations (PPOs), and related managed care organizations (MCOs).

Federal laws, on the other hand, regulate employee health benefits. Most significant is the Employee Retirement Income Security Act of 1974 (ERISA). It is primarily concerned with reporting, disclosure, and fiduciary duties related to the establishment and administration of employee health benefit plans. The most noteworthy aspect of current federal law, in particular, ERISA, may be the federal preemption of most state regulatory power relating to employee benefits. Federal tax policies, antidiscrimination laws, coordination with Medicare, and concurrent federal regulation of some HMOs also affect employee health benefits.

State regulation of health benefits arises from the historic role of the states as regulators of insurance. Federal regulation of health benefits arises from the federal role in taxation and in regulating the relationships between

*  

Paper prepared by Edward F. Shay, partner at Saul, Ewing, Remick & Saul in Philadelphia, Pennsylvania. Some editing of the paper, which initially covered a broader range of legal issues, was undertaken by IOM committee members and staff.



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Employment and Health Benefits: A Connection at Risk B Regulation of Employment-Based Health Benefits: The Intersection of State and Federal Law Edward F. Shay* The regulation of employment-based health benefits by state governments and the federal government intersect and diverge in complex ways. This paper surveys some, but not all, aspects of each regulatory arena and their interrelations. States regulate health and other insurers. State regulation varies widely in both scope and intensity but may cover insurer formation, taxation and operation, insurance contracts and rates, unfair insurance practices, and other types of insuring organizations such as health maintenance organizations (HMOs), preferred provider organizations (PPOs), and related managed care organizations (MCOs). Federal laws, on the other hand, regulate employee health benefits. Most significant is the Employee Retirement Income Security Act of 1974 (ERISA). It is primarily concerned with reporting, disclosure, and fiduciary duties related to the establishment and administration of employee health benefit plans. The most noteworthy aspect of current federal law, in particular, ERISA, may be the federal preemption of most state regulatory power relating to employee benefits. Federal tax policies, antidiscrimination laws, coordination with Medicare, and concurrent federal regulation of some HMOs also affect employee health benefits. State regulation of health benefits arises from the historic role of the states as regulators of insurance. Federal regulation of health benefits arises from the federal role in taxation and in regulating the relationships between *   Paper prepared by Edward F. Shay, partner at Saul, Ewing, Remick & Saul in Philadelphia, Pennsylvania. Some editing of the paper, which initially covered a broader range of legal issues, was undertaken by IOM committee members and staff.

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Employment and Health Benefits: A Connection at Risk employers and employees. Compared to current federal regulation of health benefits, state insurance regulation tends to be more extensive and explicit. To some extent, state regulation of health insurance and federal regulation of health benefits overlap and at times conflict. ERISA's preemption provisions, which are discussed below, coordinate the relationship between these concurrent systems for regulating health benefits. The nature of that coordination has important practical consequences for those being regulated. LEGAL FOUNDATIONS OF STATE INSURANCE REGULATION The role of the states as regulators of insurance evolved from the nineteenth-century view expressed by the Supreme Court of the United States in Paul v. Virginia1 that "commerce" under the Commerce Clause of the U.S. Constitution did not include making an insurance contract. Because an insurance contract was not interstate commerce, the Supreme Court upheld state regulation of insurance within state borders. With the blessing of the Supreme Court, the states for the next 75 years incorporated domestic insurance companies of every type, regulated and taxed foreign insurance companies within state borders, licensed their products, and regulated the relationship between the insurer and the insured. During this same period, the federal government did not regulate insurance companies. In 1944 the Supreme Court decided United States v. South-Eastern Underwriters Association2 and redefined dramatically the federal state balance in the regulation of insurance. In United States v. South-Eastern Underwriters Association, the Supreme Court reviewed a direct appeal from a federal district court that had dismissed an indictment against 200 insurance companies for fixing prices in interstate commerce in violation of the Sherman Anti-Trust Act. In order to maintain the paradigm of insurance regulation established by Paul v. Virginia and its sequelae, the South-Eastern Underwriters case would have required the Supreme Court to limit an act of Congress rather than regulatory efforts by a state. The Supreme Court reviewed 75 years of decisional law that held that insurance contracts were "local" commerce and not "commerce" under the Commerce Clause. Then the Court reviewed the size, complexity, and volume of insurance transactions and observed that only a "technical legal conception" rather than a ''practical one, drawn from the course of business" could continue to sustain the doctrine of Paul v. Virginia.3 The Court concluded that modern insurance transactions were "commerce" subject to the Sherman Act and the Commerce Clause. The states and the insurance industry were stunned by the "precedent-shattering decision in the South-Eastern Underwriter case." Together, they gave their "overwhelming endorsement" to remedial legislation intended to

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Employment and Health Benefits: A Connection at Risk restore by statute what the Supreme Court no longer conferred by constitutional right.4  On March 9, 1945, Congress restored to the states their primary role as the regulators of insurance by enacting the McCarran-Ferguson Act.5 Under the McCarran-Ferguson Act, the states could regulate and tax insurance companies without the limitations posed by the Commerce Clause.6 However, the McCarran-Ferguson Act reserved a federal regulatory role "to the extent that such business is not regulated by state law."7 Rather than encourage federal regulation in the absence of adequate state regulation, the state insurance commissioners formed the National Association of Insurance Commissioners (NAIC) shortly after the passage of the McCarran-Ferguson Act. The NAIC prepared model acts for adoption by the states to preclude a federal regulatory role.8 The NAIC continues today as a resource to which both regulators and the regulated may look for information on regulation of insurance and for model regulations and guidelines. EARLY REGULATION OF HEALTH INSURANCE Regulation of group health insurance began at the state level for other reasons of historical and legal importance. Initially, group health insurance was a tentative experiment at the local level. In the 1930s, hospitals and medical societies began one of the earliest forms of group health benefits, which evolved over two decades into Blue Cross and Blue Shield plans.9 By 1945, Blue Cross and Blue Shield covered 19 million subscribers through 80 plans nationwide.10 Initially, Blue Cross and Blue Shield plans were organized as nonprofit service plans. As service plans, the Blue Cross and Blue Shield plans applied rudimentary, but community-based, rates and relied on direct contracts with hospitals and physicians to provide for their insured's a service benefit (e.g., hospital room and board) rather than a cash (indemnity) payment. Many Blue Cross and Blue Shield plans were initially exempted from taxation by early enabling legislation that also conferred upon state insurance commissioners considerable regulatory authority to review and approve premiums and provider and subscriber agreements. 11 Prior to 1950, commercial insurers generally did not offer group health policies, relying instead on individual accident and health policies offered in conjunction with disability coverage for lost income.12 Commercial insurers did not contract with hospitals and physicians and paid instead a fixed cash indemnity to their insured's, which varied with the nature of the loss involved. State regulation of commercial insurers often involved less burdensome "file and use" rate setting, which allowed commercial insurers to use a filed rate unless it was specifically disapproved by state insurance regulators. 13

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Employment and Health Benefits: A Connection at Risk OVERVIEW OF CURRENT STATE REGULATION OF HEALTH INSURANCE As envisioned by the drafters of the McCarran-Ferguson Act, the states have played the dominant role in regulating the health insurance products and their vendors that may be chosen by employers to provide insurance funded health benefits. Logically, regulation by 50 states permits considerable variation in the scope and intensity of regulation. This overview summarizes state regulation of insurance company formation and financial matters; insurance contracts and rates; unfair insurance practices; health insurer coverage and mandates; managed care; and so-called anti-managed-care laws. Formation and Financial Matters Through laws on incorporation and laws on the licensing of insurance companies, states regulate the organizational structure and financial affairs of insurance companies. Most states permit insurance companies to organize under general corporate statutes and to comply with industry-specific requirements by obtaining a license, sometimes called a certificate of authority. The purpose of licensing is to protect the public against ineptly managed or financially unsound insurance companies. Prospectively, regulators may condition initial licensure on compliance with requirements for minimum capital and surplus, security deposits with the state, and participation in a state guaranty association that allows a state to assess companies to make up some or all of the losses of a failed insurer. Once a company is licensed, state regulators use periodic reporting and audits to assess the current financial condition of a company. This monitoring focuses on loss and claim reserves, unearned premium reserves, and other financial indicators. State regulation of health insurers also includes taxation on insurance companies and on the premiums paid by purchasers of health and accident insurance.14 Some Blue Cross and Blue Shield plans are exempt from taxation. However, in most states, Blue Cross and Blue Shield pay taxes or some equivalent to taxes. Insurance Contract and Rate Regulation States regulate health insurance contracts and seek to balance the interests of consumers in obtaining fair and reasonable coverage against the interests of insurers in avoiding unreasonable or undisclosed risks. However, the intensity with which state regulators pursue this objective may vary greatly from state to state. A representative approach to contract

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Employment and Health Benefits: A Connection at Risk regulation could involve statutes or regulations that by their terms fix the definitions of important terms in health insurance contracts, require a grace period prior to cancellation for nonpayment of premiums, and require written disclosure of any coverage limitations or exclusions for preexisting conditions.15 Juxtaposed to contract regulation that protects insured's is regulation enabling insurers to fully and fairly assess the risks that they underwrite. For example, regulators may permit or require a contract provision that allows an insurer to examine the person of an insured for whom a claim is made,16a contractual right that permits an insurer to enforce an exclusion for preexisting conditions and facilitates the investigation of questionable claims. Rate regulation seeks to ensure that the price of insurance is not excessive, inadequate, or unfairly discriminatory. This standard for rate setting was first propounded in 1946 by the NAIC in model legislation drafted after enactment of the McCarran-Ferguson Act. 17 In reviewing rates, state regulators follow one of two basic procedures. Under the "file and use" approach, companies are deemed approved to use their rates if they receive no pertinent communication from state regulators after a prescribed period, perhaps 60 days after filing. Under a "review and approval" process, companies (especially Blue Cross and Blue Shield plans) may use rates only following approval. Unfair Insurance Practices Insurance regulators rely upon unfair insurance practice laws in many states to regulate discriminatory or deceptive behavior by insurers. Although plainly intended to protect consumers, these laws have been widely interpreted by the courts to prohibit injured consumers from suing deceptive insurers.18Instead, insurance regulators must initiate a lawsuit on behalf of the government. Typically, unfair insurance practice laws are generic and regulate broadly all types of insurance companies and their dealings. They prohibit specific unfair practices in considerable detail. Typical unfair practices include misrepresenting benefits, making false or misleading statements, engaging in false advertising, or engaging in unfair discrimination. Unfair discrimination includes making unfair or unreasonable distinctions between individuals of the same class and essentially the same level of risk.19 With mixed results, regulators have applied unfair insurance practice laws to accident and health insurance to expand or maintain the availability of insurance for classes of persons to whom insurance is not readily available. One court has held it unfairly discriminatory for insurers to apply individual medical underwriting to small groups while not applying the

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Employment and Health Benefits: A Connection at Risk practice to large groups.20 Another court has found no unfair discrimination where insurers used HIV testing results to deny coverage because HIV-positive individuals were held not to be in the "same class" as persons who did not test positive for HIV.21 Coverage and Mandates States seek also to regulate the type of health insurance coverage that is available to their residents. Many require health insurers to offer specified benefits or to make payments to particular types of practitioners. One recent survey of these laws reports that 992 requirements in various states are applicable to some or all types of health insurance.22 Known as "mandates," these laws typically follow two approaches. The first involves mandated coverage for specific conditions such as premature birth or substance abuse and dependency. The second type of mandate specifies those practitioners such as nurse midwives or optometrists who may receive payment under group health insurance policies. In some states where concern for the availability of insurance for small employers and for uninsured individuals has commanded legislative attention, states have abandoned their emphasis on mandates in favor of so-called "bare bones" policies.23 These policies offer a limited array of basic benefits and are intended to provide an affordable alternative to group health policies whose cost has been increased by mandated benefits. Managed Care States also regulate insurance like, or risk-assuming, entities in what has come to be called managed care. In a broad sense, managed care involves organized systems of cost containment achieved through management of consumer and provider patterns of consumption of health care services. HMOs and PPOs are the most widely regulated types of managed care organizations. Cost containment methods in managed care vary widely, and state regulatory activities are equally varied in scope and intensity. For example, some states do not regulate PPOs that do not assume risk. To protect the public against insolvency, undertreatment, and poor quality care, state regulators rely upon initial licensing and ongoing supervision that address these concerns. Typically, state laws prohibit any person from offering or establishing an HMO or risk-assuming PPO without obtaining a license.24 Some regulation of HMOs and PPOs has, historically, been intended to protect conventional health care providers and discourage prepaid group practices and network health plans. (See Chapter 2 of this report.)

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Employment and Health Benefits: A Connection at Risk Both HMOs and PPOs in many states are also subject to some degree of ongoing supervision, although the degree varies from state to state. This supervision may involve periodic reporting of financial information and utilization experience. In the case of HMOs, subsequent setting of premiums is subject to ongoing review and approval, as are the rates paid to providers. Beyond HMOs and PPOs, managed care has spawned an array of other entities that have become involved in managing the cost of health benefits and health care services. State regulation of utilization review organizations, third-party administrators, and related vendors of information systems is increasing. Many of these entities are vendors who market their services specifically to the health benefit plans of large employers. Again, some state regulation has been hostile to these organizations and activities. In response to the growth and diversification of managed care, state legislators have increased their oversight through legislation. Industry sources report that legislatures considered 306 bills in 1991 that dealt with managed care. Seventy bills aimed to regulate such utilization review activities, which are now regulated in 24 states.25 Again, the extent of this regulatory trend varies greatly from state to state. Many managed care laws attempt to balance enrollee choice and access against certain cost containment strategies. They may regulate provider selection and participation in PPO networks or the selection of reviewers and hours of operation of utilization review organizations.26 The proliferation of state managed care laws has faced opposition. Especially when employment-based health benefits are involved, such laws have been challenged on the grounds that state regulators are encroaching upon the activities that under federal law must be left to federal regulation.27 Practical Consequences of Opting for a Fully Insured Health Benefits Plan When an employer provides a fully insured employee benefit plan (i.e., transfers risk to a commercial insurer or Blue Cross and Blue Shield plan), the insured benefits are regulated by the applicable state insurance laws. Thus, they are subject to state benefit mandates, state premium taxes, and state managed care and utilization review laws, as well as laws intended to protect consumers. The number of applicable state laws may be multiplied by the number of states in which the employer does business or its employees reside. The practical consequences of opting for self-insured employee health benefits are discussed in the next section of this paper.

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Employment and Health Benefits: A Connection at Risk FEDERAL REGULATION OF HEALTH BENEFITS Federal law affects private employment-based health benefits in ways that are fundamentally different from those arising from state regulation. Federal law addresses the contractual aspects of health benefits provided as part of a benefits package in the context of a private employer-employee relationship; state health benefits regulation focuses on benefits in the context of an insurance arrangement. For example, the provision of health benefits in the employer-employee context is affected by the Labor Management Relations Act of 1947 (LMRA).28 LMRA bans broadly most payments by employers to labor organizations, but it permits labor and management to establish jointly administered health and welfare trusts, sometimes called Taft-Hartley trusts.29 Foreshadowing ERISA, LMRA has never included any substantive requirement on the amount of health benefits to be provided. In addition to LMRA, several other federal laws regulate health benefits. These laws, which are briefly discussed at the end of this paper, include the following: Federal tax law, which generally makes the economic value of conferring health benefits a largely nontaxable event and provides separate rules for certain specific types of plans, including medical spending accounts and voluntary employee benefit associations (VEBAs). Antidiscrimination laws, which broadly prohibit discrimination based on race, gender, age, and disability in employee benefit plans. Federal regulation of HMOs, which includes rules applicable to employers and requires employers to offer health benefits through federally qualified HMOs. Medicare's secondary payer rules, which define when an employer's health benefit plan must pay before Medicare will pay for an otherwise eligible Medicare beneficiary covered by employment-based health benefits. ERISA, however, is the centerpiece of federal regulation of health benefit plans. It defines many specific federal roles as well as how the federal and state regulatory systems relate to each other. In general, regulation of employee health benefits under ERISA focuses on process: how employers disclose and report information about their health benefit plans; how employers and others must behave as fiduciaries of these health benefit plans; how special rules on continuation of health benefits must be applied; and how the federal regulatory effort relates to state regulation. Although the statute and associated regulations are quite detailed in many respects, ERISA does not explicitly regulate the substantive content of employee health plans nor require that such a plan be offered.

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Employment and Health Benefits: A Connection at Risk Health Benefit Plans Under ERISA Without understating the importance of other federal regulation of health benefits, ERISA30 defines the federal role in regulation of private employment-based health benefit plans. It was enacted in 1974 as an attempt at omnibus regulation of pension and welfare benefits and an effort to prevent recurrence of past abuses. The original legislation and its later amendments31 present a uniform and fairly cohesive federal policy. ERISA has its roots in the common law of trusts. Its provisions governing the establishment of trusts and the requirements for fiduciaries have been derived from trust law. This body of law has also influenced the manner in which ERISA is enforced. Consequently, courts approach violations of ERISA from the perspective of trust law, not from the perspective of tort law. ERISA is made up of four titles, of which Title I covers reporting, disclosure, and fiduciary conduct in the provision of health and other employee benefits.32  Tax aspects of pensions,33 obtaining IRS determinations,34 and termination of defined benefit pension plans35 are dealt with elsewhere in ERISA. Title I of ERISA demarcates the boundary between federal and state regulation of employee health benefits through ERISA's much litigated preemption provision. For present purposes, Title I can be subdivided into several topics for discussion. Title I begins with legislative findings and purposes. 36 It then sets forth controlling definitions,37 reporting and disclosure requirements,38 requirements for fiduciaries and fiduciary responsibilities, 39 provisions on administration and enforcement,40 and, finally, requirements dealing with continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).41 ERISA's important preemption provisions, which govern the relationship between federal and state regulation of employee benefit plans, are a part of Title I's section on administration and enforcement. Legislative Focus and Definitions The legislative history of ERISA emphasizes private pension plan reform. When considering ERISA, Congress expressed concern about whether pension contributions by working Americans would be available to sustain the workers in their retirement.42  Motivating this concern was discernible growth in the private pension system and a sense that regulation had not kept pace with the system's changes.43  To improve pension plan regulation, Congress set out to regulate vesting, assure adequate funding, and establish minimum standards for disclosure and fiduciary responsibility.44 Although mentioned in the House and Senate reports on the legislative

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Employment and Health Benefits: A Connection at Risk history of ERISA,45 welfare plans—of which health benefit plans are a subset—received far less congressional attention in the legislative process. There was concern, however, about multiple and conflicting state regulation of these plans. Under ERISA, "employee welfare benefit plans" include Any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or both, to the extent that such plan, fund or program was established or is maintained for purposes of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical or hospital care or benefits . . . .46 Except for government plans, church plans, certain educational organization plans, and excess benefit plans, all employee welfare benefit plans (including health benefit plans) are covered by ERISA.47,48 Other terms in ERISA's definitional provision include "employer," "employee," "participant," "beneficiary,'' "employee organization," and "multiple employer welfare arrangement" (MEWA).49 Nothing in the statutory definition of what is a "welfare plan" or in the required contents of a summary plan description dictates that even a barebones level of benefits must be provided under the health benefit plan. The Supreme Court's seminal statement on an employer's duty to provide health benefits, or to provide a particular mix of benefits, is direct and clear. The Court has simply stated that "ERISA does not mandate any particular benefits, and does not itself proscribe discrimination in the provision of employee benefits."50 In effect, the Supreme Court looks upon an employer's offer to provide health benefits to employees as a private contract. ERISA does not require such a contract, nor does ERISA regulate the offer, acceptance, and adequacy of consideration of the private contract between employer and employee. ERISA also does not require that health benefits vest, or become nonforfeitable by a plan participant. The basic line of reasoning followed by most courts on the question of vesting of health benefits begins with ERISA's definitional section. Under ERISA, "nonforfeitable" is defined "with respect to a pension benefit or right" (emphasis added) and excludes by omission any reference to welfare plan benefits such as health benefits.51 Other provisions of ERISA state that "vesting" does not apply to "an employee welfare benefit plan."52 Reasoning that Congress would not inadvertently omit employee health benefits (i.e., welfare plans) from the vesting provisions of the statute, the courts have repeatedly ruled that a plan participant acquires no vested or future expectation of a fixed level of health benefits unless the plan specifically provides for it. For example, a federal court has held that nonunion

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Employment and Health Benefits: A Connection at Risk retirees of a large industrial manufacturer could not rely on ERISA for substantive protection of the health and other welfare benefits that the company terminated in bankruptcy.53 Likewise, the parents of a hospitalized child could not acquire a vested expectation to full payment for the hospital admission if health plan trustees properly reduced coverage and payment levels during the course of the admission. 54 In sum, the federal courts look at the private contract between employer and employee to provide health benefits and conclude that nothing in ERISA regulates the terms of that contract with respect to its modification or termination. Reporting and Disclosure Requirements ERISA articulates detailed reporting and disclosure requirements for employee benefits. These requirements apply unevenly to welfare plans and pension plans because the latter are required to furnish to the Secretary of Labor considerable additional information.55 With respect to welfare plans, three basic requirements sum up ERISA's disclosure and reporting provisions, although the details may be quite complex and vary for different kinds of plans. First, welfare plans must periodically furnish to participants and beneficiaries a summary plan description.56 The Secretary of Labor has added by regulation a requirement that the description explain what medical benefits are covered by the plan.57 Second, the administrator of a welfare plan must file with the Secretary of Labor the summary plan description and must also file material modifications to the plan.58 Third, plan participants must be furnished with a summary annual report.59 In addition, plans with more than 100 participants, and certain others, must file an annual return (form 5500), which may include detailed financial information, with the Internal Revenue Service. The summary plan description is the primary disclosure document about the plan that is made available to participants and their beneficiaries. Reflecting congressional concern, ERISA states that the summary plan description "shall be written in a manner calculated to be understood by the average plan participant, and shall be sufficiently accurate and comprehensive to reasonably apprise such participants of their rights and obligations under the plan."60 Plans that are fully insured and have fewer than 100 participants are exempt by regulation from the annual reporting requirements. Depending on their financing arrangements, other plans face reporting requirements of varying complexity. The procedural character of the reporting and disclosure requirements in ERISA is apparent from the text of the statute and implementing regulations. ERISA requires that the following information be included in the summary plan description:

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Employment and Health Benefits: A Connection at Risk (e.g., coverage of premature newborns); ERISA has no benefit mandates for health benefit plans. states prohibit unfair underwriting practices such as permanent exclusion of preexisting conditions; ERISA has no such restrictions. states prohibit unilateral reduction or termination of benefits by a carrier during the effective period of a policy; apart from coverage required under 1985 amendments to ERISA (for which the enrollee must pay), ERISA permits unilateral reduction or termination of benefits during the plan year unless the terms of the plan itself or some contractual arrangement provides otherwise. states can review premium rates and reject them if they are inadequate; ERISA requires no review of the adequacy of an employer's funding commitment to pay for benefits. ERISA's burden of regulation on a self-funded health benefit plan appears to be much lighter in terms of organization, substance, and administration than the burden of state regulation on insurance companies. Some observers may see ERISA's lack of substantive regulatory safeguards for beneficiaries of health benefit plans as troublesome. However, as the following comparisons show, de facto deregulation of employee health benefit plans under ERISA yields many advantages for employers. For example, ERISA limits beneficiary claims to the value of lost benefits; state judicial proceedings routinely target insurers as deep-pocket defendants who must pay punitive damages for bad faith denial of claims. ERISA permits cost containment incentives in terms of precertification and copayments; states frequently prohibit such practices with anti-managed-care laws. ERISA permits rapid design of innovative health plans such as employer-sponsored point-of-service HMOs; states have been less flexible in allowing state-regulated HMOs to diversify into similar lines of business. ERISA allows employers to determine the subrogation and coordination of benefit priorities for their health benefit plans; states frequently favor other types of accident and health insurance through antisubrogation laws. ERISA does not tax the employer's contribution to a self-funded health benefit plan; states tax health insurance premiums. For many of the foregoing reasons, ERISA offers apparent incentives to large employers to self-fund their health benefit plans. Self-funded plans are not subject to state mandates,112 and ERISA requires no minimum benefits.113 Plan managers are free to design cost containment features such as copayments114 and to reduce payments to providers who frustrate cost containment techniques.115 In the case of legal disputes, ERISA makes the

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Employment and Health Benefits: A Connection at Risk award of lawyer's fees discretionary, which is advantageous to plan sponsors. As explained above, under recent Supreme Court decisions, plan sponsors can also avoid the ruinous costs of exemplary damages in litigation about denied claims for benefits. From 1985 to the present, the courts have hammered out the foregoing legal environment under ERISA for self-funded health benefit plans. During this same period, premiums for conventional health insurance have escalated. Many employers have opted out of insured funding of health benefits and state regulation of insurers and into self-funding and the system of federal regulation of health benefits described above. COBRA Continuation Coverage In 1985, Congress amended ERISA and the Internal Revenue Code to allow qualified health plan participants and beneficiaries who would otherwise lose their benefits due to certain defined events to elect continued coverage.116 These provisions are widely referred to as COBRA continuation coverage, or simply COBRA coverage, an abbreviation of the Consolidated Omnibus Reconciliation Act of 1985. The coverage continuation requirements apply to employers with 20 or more employees. 117 COBRA requires that the continuation coverage must be "identical118 to what is provided to similarly situated plan participants. Modifications of the plan must also be uniform and identical as to active employees and persons covered by COBRA.119 COBRA coverage also prohibits eligibility based upon evidence of insurability.120 COBRA caps the premium that can be charged for continuation coverage at 102 percent of the applicable premium under the plan.121 Eligibility under COBRA's continuation coverage provisions arises when certain qualifying events take place that would otherwise result in a loss of coverage for a qualified beneficiary or participant. Qualifying events include:122 Death of a covered employee. A termination or reduction in hours for a covered employee. A divorce or separation of a covered employee from his or her spouse. A dependent child ceasing to be dependent under the terms of the plan. A reorganization and bankruptcy by the employer of a retired employee. To inform eligible participants and beneficiaries of their options, COBRA relies upon detailed notice and election requirements. To begin, COBRA requires that a general notice of COBRA continuation coverage must

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Employment and Health Benefits: A Connection at Risk be provided when benefit coverage first begins.123 Typically, a summary plan description includes a recitation of COBRA coverage qualifying events, employer obligations, and employee obligations. Notice of a qualifying event must be provided to the plan administrator by an employer when a qualifying event involves an employee's death, termination or reduction in hours, or entitlement to Medicare or the employer's bankruptcy.124 A covered employee must notify the plan administrator in the event of a divorce, legal separation, or the end of a child's dependency status.125 Once a plan administrator has been notified of a qualifying event, the plan administrator must give notice to any qualified beneficiary affected by the qualifying event.126 Upon receipt of notice, COBRA requires that a qualified beneficiary be given at least a 60-day period to elect coverage. If coverage is elected, COBRA then prohibits the plan from requiring payment of any premium for another 45 days.127 Properly elected coverage must extend from the date of the qualifying event until the end of the prescribed period, which generally ranges from 18 to 36 months. In the case of a termination or reduction in hours, the required period is 18 months. COBRA requires a maximum of 36 months of dependent coverage for the death of a covered employee, a divorce or legal separation, entitlement to Medicare by the covered employee, and loss of dependent child status.128 COBRA coverage is not unconditional, and it may be lost by the occurrence of a so-called terminating event. Terminating events include failure by the qualifying beneficiary to pay premiums, commencement of actual coverage under another plan, and entitlement to Medicare.129 Continuation coverage also ends if the employer terminates the health benefit plan. Since its enactment in 1986, COBRA coverage has undergone minor amendments. Essentially, these amendments have attempted to clarify objectives that have been part of the statutory scheme since 1986. Some amendments have been added to broaden and add qualifying events under which continuation coverage will apply.130 THE MEWA PROBLEM One current jurisdictional problem in the regulation of health benefits that perplexes regulators involves multiple employer welfare arrangements (MEWAs).131 As defined in ERISA, a MEWA is an employee welfare benefit plan or other arrangement that is established to offer benefits to the employees of two or more employers. Conversely, a MEWA cannot be established pursuant to one or more collective bargaining agreements, a characteristic that usually distinguishes MEWAs from Taft-Hartley trusts. Also, a MEWA cannot be an aggregation of a group of trades or businesses

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Employment and Health Benefits: A Connection at Risk under common control.132 In practice, these rules have generally made MEWAs a health benefit vehicle for small employers. For those entities that are MEWAs, ERISA's preemption provisions do not prescribe preemption of state laws as ERISA does for other employee welfare benefit plans. Specifically, the preemption provisions applicable to MEWAs declare that fully insured MEWAs must comply with state insurance laws that set standards for reserves. Self-funded MEWAs must also comply with state insurance laws to the extent not inconsistent with Title I—unless exempted by the Secretary of Labor in accordance with regulations.133 To date, the Secretary of Labor has not promulgated regulation to exempt self-funded MEWAs from state law. MEWAs have presented at least two problems for regulators that have prompted considerable attention from both state and federal regulators. First, fraudulent MEWAs have tried to avoid regulation by manipulating their circumstances to escape classification as a MEWA or by erroneously arguing that they are not subject to state regulation because of ERISA. Second, because MEWAs tend to serve pools of small employers, their sponsors frequently lack the time or sophistication to investigate the solvency of the MEWA. To redress the shortcomings of current regulation, some propose that MEWAs be subject entirely to federal jurisdiction and be required to obtain federal certification, but other proposals are also pending. FEDERAL LAWS SUPPLEMENTING ERISA This discussion emphasizes ERISA and the nexus between federal and state regulation of health benefits. The scope of federal regulation also includes other important laws that affect employment-based health benefits but do not profoundly limit state regulation of health insurance. Much simplified, these laws can be summarized as follows: Taxation Topic: Taxation on the value of employee health benefits. Source: Internal Revenue Code, Sec. 162, 106, and 105. Features: Sec. 162 allows an employer to deduct the cost of health benefits; Sec. 106 excludes employer contributions to a plan from an employee's income; Sec. 105 excludes payments from a plan from a employee's income. Effect: Encourages higher contributions for health benefits and insulates employees from the cost of health coverage. Comment: Policy concerns focus on the growth of tax expenditures and on equity on health benefits.134

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Employment and Health Benefits: A Connection at Risk Medicare Secondary Payor Topic: Coordination of large employer health benefits with Medicare. Source: Sec. 1862, Social Security Act; 42 U.S.C.A. 1395y. Features: Requires employers with 20 or more employees to provide primary coverage for certain otherwise eligible Medicare beneficiaries (e.g., workers aged 65 to 69 and those with end-stage renal disease). Individuals and government may enforce this by lawsuit and obtain double damages. Effect: Subordinates Medicare payment to employers' plans and reduces outlays by Medicare. Comment: Subject of current nationwide recoupment effort; topic of past investigations. 135 The Civil Rights Act Topic: Discrimination in employment practices. Source: Civil Rights Act of 1964, Title VII; 42 U.S.C.A. 2000e-2. Features: Employment practices include health benefits. Protected classes for race, color, sex, religion, and national origin. Effect: Bans discrimination in health benefits based on a suspect classification. Comment: Few cases have been reported based on race discrimination; more cases arise under the Pregnancy Discrimination Act of 1978, an amendment. 136 The Age Discrimination in Employment Act Topic: Discrimination in employment practices. Source: 29 U.S.C.A. 621 et seq. Features: Employment practices include health benefits. Protects workers who are at least 40 years of age. Age-based distinctions are allowed pursuant to a "bona fide" benefits plan, provided that the distinctions are not a "subterfuge." Effect: Provides equal access to health benefits for older workers. Comment: Older Workers Benefit Protection Act137 codified the "equal benefits/equal cost" rule from EEOC regulations,138 which allows employers to either provide the same amount of benefits or to spend an equal amount to provide reduced coverage to older workers The Americans with Disabilities Act Topic: Discrimination in employment practices. Source: 42 U.S.C.A. 12101.

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Employment and Health Benefits: A Connection at Risk Features: Employment practices include health benefits. Protects physically or mentally impaired persons working for employers with 25 or more employees after July 26, 1992. Effect: Protects general access to health benefits in the employment of impaired individuals. Does not affect most insurance underwriting practices. Comment: Sec. 501(c) of ADA was not intended to change underwriting practices as permitted by state insurance regulation or the regulatory structure of self-insured plans.139 Plans must base distinctions on "sound actuarial principles" and plan provisions cannot be used as "subterfuges" for prohibited discrimination.140 As the courts begin to interpret this last piece of legislation, which became effective in 1992, their judgments about which health plan practices constitute sound distinctions and which constitute subterfuges for discrimination may limit plan discretion in ways that ERISA does not. For example, although federal courts held, in McGann v. H&H Mitsic,141 that ERISA did not preclude an employer from reducing coverage for AIDS-related medical expenses after an employee had begun to submit claims, the result might have been different if the disability act had been in effect when the case first arose. CONCLUSION Under current state regulation of health insurance and federal regulation of health benefits, the states continue to exercise regulatory control over those core activities that are recognized as the business of insurance. Through ERISA and other federal laws, the federal government retains jurisdiction over employee health benefit plans. The intersection of these competing regulatory schemes is defined by the ERISA preemption clause, a circumstance that, in the eyes of some, leaves important aspects of employee health benefits insufficiently defined in law. NOTES 1.   Paul v. Virginia, 75 U.S. 168 (1868). In this case, the Supreme Court upheld the conviction and $50 fine of Samuel Paul for writing a contract of fire insurance for a New York insurance company that was not licensed as a foreign insurance company under an 1866 Virginia statute. Paul challenged his conviction and the statute by arguing that the Commerce Clause of the U.S. Constitution reserved exclusively to Congress the regulation of commerce among the states. The Supreme Court acknowledged that the Commerce Clause regulated interstate commerce but held that an insurance contract was not an "article of commerce in any proper meaning of the word."

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Employment and Health Benefits: A Connection at Risk 2.   322 U.S. 533. 64 S.Ct. 1162, 88 L.Ed. 1440 (1944). 3.   322 U.S. 533, 547. 4.   1945 U.S. Code. Cong. and Admin. News, pp. 670-673. 5.   59 Stat. 33 (1945). In the McCarran-Ferguson Act, Congress declared that "the regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States." 59 Stat. 33 (1945), 15 U.S.C. §1(1 1. 6.   Prudential Insurance Company v. Benjamin, 328 U.S. 408 (1946). The state of South Carolina was not constrained by the Commerce Clause from taxing foreign insurers. Prudential, incorporated in New Jersey, was taxed 3 percent of premiums, a rate higher than domestic carriers. 7.   59 Stat. 33 (1945). 8.   Keeton, R.E., and Widiss, A.I. Insurance Law, A Guide to Fundamental Principles, Legal Doctrines and Commercial Practices, West Pub. Co. (1988), p. 932. 9.   Anderson, O.W. Blue Cross Since 1929: Accountability as the Public Trust, Ballinger (1975), pp. 29-44. 10.   Id., pp. 45-52. 11.   Rorem, C.R. "Enabling Legislation for Nonprofit Hospital Services Plans," 6 Law and Contemp. Problems, 528 (1939). 12.   Somers, H.M., and Somers, A.R. "Private Health Insurance," 46 Calif. Law Rev., 508, pp. 510-511 (1958). 13.   Congressional Research Service, Health Insurance and the Uninsured. Background Data and Analysis (June 9, 1988), p. 119. 14.   Commerce Clearing House, State Tax Guide, para. 88-000. 15.   National Association of Insurance Commissioners (NAIC), Model Insurance Laws, Regulations and Guidelines (1989), pp. 100-1. 16.   NAIC, Model Insurance Laws, Regulations and Guidelines (1989), pp. 100-8 [Sec. 5(M)1. 17.   Dirlam, J.B., and Stelzer, I.M. "The Insurance Industry," 107 U. Pa. L. Rev. 199 (1958). 18.   NAIC, Model Insurance Laws, Regulations and Guidelines (1989), pp. 880-15 to 19. The NAIC lists cases from several jurisdictions in which courts have declined to infer a private right of action in state unfair insurance practices acts. 19.   NAIC, Model Insurance Laws, Regulations and Guidelines (1989), p. 880-2. 20.   Insurance Federation of Pennsylvania v. Foster 587 A.2d 865 (1991). 21.   Health Insurance Association of America v. Corchoran, 531 N.Y.Supp.2d 456 (Sup., 1988). 22.   Health Benefits Letter, No. 15, p. 1 (1991). 23.   Health Benefits Letter, No. 8, p. 1 (1991). 24.   The NAIC Model HMO Act, section 3 states that "no person shall establish or operate a health maintenance organization in this state, without obtaining a certificate of authority under the Act." 25.   Health Insurance Association of America, State Legislation and Litigation Report 1991, Washington, D.C. (1992), p. 3. 26.   Helvestine, W.A., "Legal Implications of Utilization Review," Controlling Costs and Changing Patient Care, Institute of Medicine (1989), p. 186. 27.   See, for example, Self-Insurance Institute of America v. Gallagher, 11 E.B.C.-2162 (N.D. Fla., 1989) involving preemption of state regulation of TPAs. 28.   The Labor Management Relations Act (LMRA) was enacted on June 23, 1947, 61 Stat.

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Employment and Health Benefits: A Connection at Risk     157. The act is frequently referred to as the Taft-Hartley Act, a reference to the sponsors of the legislation. LMRA has been amended several times since its passage. 29.   29 U.S.C.A. §186(c)(5). 30.   29 U.S.C.A. §1001 et seq., P.L. 93-406, 88 Stat. 829. 31.   ERISA has been amended on a piecemeal basis on several occasions, as follows: P.L. 96-364, Sept. 26, 1980; P.L. 97-473, Jan. 14, 1983; P.L. 99-272, Apr. 7, 1986; P.L. 99-509, Oct. 21, 1986; P.L. 101-239, Dec. 19, 1989; P.L. 101-508, Nov. 5, 1990. The amendments have generally had more impact on the regulation of pensions than on welfare plans. 32.   29 U.S.C.A. §1001-1168. 33.   26 U.S.C.A. Chap. 1, Internal Revenue Code of 1986, §401-425. 34.   29 U.S.C.A. §1201-1242. 35.   29 U.S.C.A. §1301-1461. 36.   29 U.S.C.A. §1001(a), (b), and (c). 37.   29 U.S.C.A. § 1002. 38.   29 U.S.C.A. §1021-1028. 39.   29 U.S.C.A. §1101-1113. 40.   29 U.S.C.A. §1131-1134. 41.   29 U.S.C.A. §1161-1168. 42.   In reporting S.4, the Senate Committee on Labor and Public Welfare reported: ''The provisions of S.4 are addressed to the issue of whether American working men and women shall receive private pension plan benefits which they have been led to believe would be theirs upon retirement from working lives." Sen. Rpt. No. 93-127, 1974 U.S. Code, Cong. and Admin. News, p. 4838, 93rd Cong., 2nd Sess. 43.   The House Committee on Education and Labor states that the Welfare and Pension Plans Disclosure Act was "weak in its limited disclosure requirements and wholly lacking in substantive fiduciary standards." House Rpt. No. 93-533, 1974 U.S. Code, Cong. and Admin. News, p. 4642, 93rd Cong., 2nd Sess. 44.   Id., pp. 4643-4645. 45.   House Rpt. No. 93-1280 states that the proposed reporting and disclosure requirements would apply to "all pension and welfare plans established or maintained by an employer or employee organization. . . ." 1974 U.S. Code, Cong. and Admin. News, p. 5039, 93rd Cong. 2nd Sess. 46.   29 U.S.C.A. §1002(1). 47.   29 U.S.C.A. §1002(3). 48.   29 U.S.C.A. §1003(a). 49.   29 U.S.C.A. §1002(5), (6), (7), and (8). 50.   Shaw v. Delta Air Lines, Inc., 463 U.S. 91 (1982). 51.   29 U.S.C.A. §1002(19). 52.   29 U.S.C.A. §1051(1). 53.   In White Farm Equipment Company, 788 Fed.2d 1186 (6th Cir., 1986). 54.   Coonce v. Aetna Life Insurance Company, 777 F.Supp. 759 (W.D.Mo., 1991). 55.   For example, in annual reports, only pension plans must file a statement of assets and liabilities and an actuarial statement. 29 U.S.C.A. §1023(c)(2) and (d). 56.   29 U.S.C.A. §1021(a). 57.   29 C.F.R. 2520.102-1. 58.   29 U.S.C.A. §1021(b). 59.   29 U.S.C.A. §51023(a). 60.   29 U.S.C.A. §1022(a)(11). 61.   29 U.S.C.A. §1022(b). 62.   The legislative history of ERISA shows that Congress believed that existing standards

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Employment and Health Benefits: A Connection at Risk     of conduct were inadequate, and legislation was needed to make clear who are fiduciaries and what would be their standards of accountability. House Rpt. No. 93-533, 1974 U.S. Code. Cong. and Admin. News, p. 4643, 93rd Cong., 2nd Sess. 63.   29 U.S.C.A. §1102(c). 64.   29 U.S.C.A. §1002(21)(A). 65.   Pappas v. Buck Consultants, Inc., 923 F.2d 531 (7th Cir., 1991), where the court distinguishes between nonfiduciary lawyers, accountants, and actuaries who advise trustees of a plan and the trustee fiduciaries who exercise discretion to take advice and act on it. 66.   See Eaton v. D'Amato, 581 F.Supp. 743 (D.D.C. 1980). 67.   See Eaton v. D'Amato, 581 F.Supp. 743 (D.D.C. 1980); and Baxter v. C.A. Muer Corporation, 941 F.2d 451 (6th Cir., 1991). 68.   29 U.S.C.A. §1104. 69.   Id. 70.   Id. 71.   29 U.S.C.A. §1105. 72.   29 U.S.C.A. §1109. 73.   Id. 74.   Massachusetts Mutual Life Insurance Company v. Russell, 473 U.S. 134, 105 S.Ct. 3085 (1985). 75.   109 S.Ct. 948 (1989). 76.   29 U.S.C.A. §1132. 77.   29 U.S.C.A. § 1133. 78.   29 U.S.C.A. §1135. 79.   29 U.S.C.A. §1114. 80.   29 U.S.C.A. §1114(a). 81.   Pilot Life Insurance Company v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549 (1987). 82.   Shag. v. Delta Airlines, Inc. 463 U.S. 85, 103 S.Ct. 2890 (1983). 83.   Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 101 S.Ct. 1895 (1981). 84.   Shaw v. Delta Airlines, Inc., 463 U.S. 85, 103 S.Ct. 2890 (1983). 85.   Pilot Life Insurance Company v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549 (1987). 86.   FMC Corp. v. Holliday, 1 12, S.Ct. 403 (1990). 87.   Ingersoll Rand Co. v. McClendon, 111, S.Ct. 478 (1990). 88.   Settles v. Golden Rule Insurance Co., 927 F. 2d 505 (10th Cir., 1991). 89.   Arkansas Blue Cross and Blue Shield v. St. Mary's Hospital, 947 F.2d 1341 (8th Cir., 1991). 90.   Independence HMO v. Smith, 733 F.Supp. 983 (E.D. Pa., 1990). 91.   American Telephone and Telegraph v. Mercy, 592 F.2d 118 (3rd Cir., 1979). 92.   Aetna Life Insurance Company v. Borqes, 869 F.2d 142 (2nd Cir., 1989). 93.   29 U.S.C.A. §1144(b)(2)(A). 94.   29 U.S.C.A. §1 144(b)(2)(A). 95.   471 U.S. 724, 105 S.Ct. 2380 (1985). 96.   471 U.S. at 743. 97.   471 U.S. at 743. 98.   General Motors v. California Board of Equalization, 815 F.2d 1305 (9th Cir., 1987). 99.   Hall v. Pennwalt Group Comprehensive Medical Expense Benefits Plan, 46 F.Supp. (E.D. Pa., 1988). 100.   International Resources, Inc. v. New York Life Insurance Company , 950 F.2d 294 (6th Cir., 1991). 101.   Anschultz: v. Connecticut General Life Insurance Company, 850 F.2d 1467 (11th Cir., 1988).

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Employment and Health Benefits: A Connection at Risk 102.   Oracare DPO v. Mermin, 1991 Lexis 8732 (D.C. N.J., 1991). 103.   Brewer v. Lincoln National Life Insurance Company, 921 F.2d 150 (8th Cir., 1990). 104.   29 U.S.C.A. § 1144(b)(2)(B). 105.   471 U.S. 724, 105 S.Ct. 2380 (1985). 106.   Powell v. Chesapeake and Potomac Telephone, 780 F.2d 419 (4th Cir., 1985). 107.   United Food and Commercial Workers v. Pacyga, 801 F.2d 1157 (9th Cir., 1986). 108.   Thompson v. Talguin Building Products Company, 928 F.2d 649 (4th Cir., 1991) 109.   SIAA v. Gallagher, 11 E.B.C. 2162 (N.D. Fla., 1989). 110.   418 U.S. 41, 107 S.Ct. 1549 (1987). 111.   Eighty-five percent of large employers self-fund their health benefits. Health Care Financing Review, Sp. 1989, pp. 84-85. Recent news reports of contemporary surveys of employers state that self-insured health benefits are being used by 41 percent of employers with 500 employees or fewer. Business Insurance, January 27, 1992, p. 3. 112.   Metropolitan Life Insurance Company v. Massachusetts, 471 U.S. 724, 105 S.Ct. 2380 (1985). 113.   Shaw v. Delta Airlines, Inc., 463 U.S. 85, 103 S.Ct. 2890 (1983). 114.   Nazav v. Miller, 14 E.B.C. 1953 (3rd Cir., 1991). 115.   Kennedy v. Connecticut General Life Insurance Company, 924 F.2d 698 (7th Cir., 1991). 116.   P.L. 99-272, 100 Stat. 82 (1986). 117.   Internal Revenue Code of 1986, §4980B(d); Kidder v. H. and B. Marine, Inc., 925 F.2d 857 (5th Cir., 1991). 118.   Internal Revenue Code of 1986, §4980B(f)(2)(A). 119.   Id. 120.   Internal Revenue Code of 1986, §4980B(f)(2)(C). 121.   Internal Revenue Code of 1986, §4980B(f)(2)(C)(i). 122.   Internal Revenue Code of 1986, §4980B(f)(3). 123.   Internal Revenue Code of 1986, §4980B(f)(6)(A). 124.   Internal Revenue Code of 1986, §4980B(f)(6)(B). 125.   Internal Revenue Code of 1986, §4980B(f)(6)(C). 126.   Internal Revenue Code of 1986, §4980B(f)(6)(D). 127.   29 U.S.C.A. §602(c)(3). 128.   Internal Revenue Code of 1986, §4980B(f)(2)(B)(i)). 129.   Internal Revenue Code of 1986, §4980B(f)(2)(B)(ii-v). 130.   For example, the Tax Reform Act of 1986, P.L. 99-514, extended maximum coverage from 18 to 36 months for persons who experience a second qualifying event. OBRA 1989, P.L. 101-239, extended coverage from 18 to 29 months for disabled persons who are entitled to Social Security. 131.   The Wall Street Journal has editorialized that MEWA fraud goes unchecked because in the early 1980s Congress gave the states jurisdiction over MEWAs but MEWAs continue to argue that they are subject to federal jurisdiction only. The Wall Street Journal, p. B2, May 15, 1990. 132.   29 U.S.C.A. §1002(40). 133.   29 U.S.C.A. §114(b)(6). 134.   Steuerle, C.E. "Finance-Based Reform: The Search for Adaptable Health Policy," unpublished paper presented at American Health Policy: Critical Issues for Reform, an American Enterprise Institute conference, October 3, 1991, Washington, D.C. 135.   General Accounting Office, More Hospital Cost Should Be Paid by Other Insurers (HRD-87-43), January 1987; and General Accounting Office, Incentives Needed to Assure Private Insurers Pay Before Medicare (HRD-89-19), November 1988.

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Employment and Health Benefits: A Connection at Risk 136.   P.L. 95-555, 92 Stat. 2076. 137.   Id., 109 S.Ct. at 2866. 138.   29 C.F.R. §1625.10. 139.   House Rpt. No. 101-485(11), 1990 U.S. Code, Cong. and Admin. News, p. 419. 140.   Id., 420. The language of the legislative history is borrowed verbatim from the NAIC's Model Regulation on Unfair Discrimination in Life and Health Insurance on the Basis of Physical or Mental Impairment, §3. 141.   McGann v. H&H Music Co., 946 F.2d 401 (5th Cir. 1991).