All of the health care reform proposals in Congress promise to substantially increase the number of people who get their insurance from sources other than an employer. This shift opens the door to an increase in civil litigation because existing federal laws, specifically the Employee Retirement Income Security Act (ERISA), protect the employer-sponsored health care system from tort damages arising from claim denials.

A rise in tort damages, in turn, would increase the risk of higher insurance costs as third party payers make benefits decisions in a more defensive manner – approving more claims to avoid being sued. This is a significant problem that needs to be explicitly addressed as the health reform bills move closer to a vote.

ERISA is an extremely complex federal law that regulates employer-sponsored benefits such as pensions and health care. It was drafted in the 1970s to protect employees. In addition to its myriad technical requirements, it defines the fiduciary obligation that employers have to their employees as a group when the employer offers a benefit.

It also contains a broad preemption of state laws, leaving the enforcement of rights that spring from an ERISA plan to the federal courts. No damages are allowed to be awarded for an ERISA claim beyond the cost of the medical care that was denied, even if real, measurable damages occur and even if state laws would allow for these damages to be recovered.

The rationale for ERISA is quite simple. If one has a limited pool of resources that must be spent for the benefit of all contributors, draining this pool to pay damages to any individual is unfair to the rest. Furthermore, for the federal courts to overturn a decision made by an ERISA plan, the decision must be found to be “arbitrary and capricious.” It is very hard for a patient to win under this level of review.

By allowing benefits decisions to be made in a protected environment, the ERISA pre-emption has created one of the few cost-saving mechanisms we have and, for better or worse, its continued effectiveness is at risk.

The increase in the number of insurance policies that are not subject to ERISA will come from two sources. First of all, removing pre-existing conditions and other limitations to coverage in the private market will make it easier for people currently without coverage to get it. In addition, controlling the cost of policies will make it easier for people to keep coverage. Coupled with proposed mandates that would require people to purchase insurance, it is logical to envision millions of people entering the state-regulated private insurance market, getting consistent insurance coverage for the first time.

At the same time as some people become newly insured, an additional group may enter the individual market because their employers will stop offering coverage. Many proposals being debated consider taxing some of the employer contributions to health plans, making them more expensive to provide.

The health care industry has changed radically since the 1970s, when ERISA was enacted, and a dominant concern is controlling cost. By protecting employer-sponsored health insurance plans from liability for their benefit decisions, ERISA allows plans to adopt far more aggressive cost-saving approaches in their decisions than they could possibly risk were they subject to liability. In state court cases for wrongful denials that are not subject to ERISA, jury awards can reach tens of millions of dollars.

The legal analysis in benefits decisions is based on the language of the benefits contracts. If excessive cost was explicitly allowed as a basis for coverage decisions, liability would not be a large-scale problem. However, these contracts do not allow explicit cost-based rationing decisions to be made by the plan administrator and instead rely on a more amorphous “medical necessity” standard for their decisions.

The sudden influx of many people into health plans that do not have the ERISA pre-emption will alter the dynamics of millions of benefit determinations. A sudden expansion in liability exposure will probably change their behavior, leading these plans to pay more claims to reduce the risk of litigation. 

The ultimate impact of the different proposed public option plans on this problem of increased litigation depends on three factors. 1) How many people enroll, 2) whether the plan is run by the federal government, which would give it the limited protection that the federal government currently has from tort liability, and 3) whether Congress crafts tort claims statutes that prove sufficient to protect it from any claims for damages. 

It is not at all clear that the ERISA pre-emption is a good way of controlling health care costs, either from an ethical standpoint or in terms of guaranteeing the most rational use of scarce resources. However, it is one of the few ways of controlling costs that we currently have. 

Our steadfast failure to create a system that can transparently focus on the problem of cost makes us dependent on the existing methods we have managed to eke out. It is important to address the unintended consequence of the current reform proposals – to undermine the ERISA pre-emption, one of our society’s few tools to control health care costs.

Jacqueline R. Fox, J.D., is an assistant professor at the University of South Carolina School of Law. Her scholarship interests are in health law, primarily the relationship between justice, ethics, regulatory structures, and markets. foxjr@​law.​sc.​edu; 803–777-8192.