The encyclopedia · Strategy & Leadership · Strategic decision · 1975
Employers self-funded health plans to escape state mandates
Large employers stopped buying insurance and self-funded their health plans, so ERISA preemption made all state benefit mandates stop applying at once.
US self-funded employers
the move
Once a large employer offered its workforce health coverage by purchasing a group insurance policy, that policy fell under the insurance regulations of every state where it was sold. States steadily piled on their own mandated-benefit requirements — coverage for specific treatments, specific providers, specific conditions — and because each state legislated independently, a national employer's insured plan had to satisfy an ever-growing, ever-diverging patchwork of fifty separate rulebooks, each one raising the plan's cost for every employer subject to it.
Congress passed the Employee Retirement Income Security Act (ERISA) in 1974, primarily to set uniform federal standards for pension plans after a string of scandals, and gave it a sweeping preemption clause overriding state laws that "relate to" an employee benefit plan. ERISA also included a savings clause preserving states' authority to regulate insurance itself — meaning an employer who purchased a state-regulated insurance policy stayed subject to that state's mandates regardless of ERISA's preemption.
why it works
- ERISA preempts state laws relating to employee benefit plans, but not insurance.
- Self-funded plans are not insurance, so the savings clause doesn't apply.
- Thus, self-funding removes the plan from state mandate jurisdiction entirely.
- One structural change replaced fifty separate legislative battles.
what transfers
When regulation attaches to a legal category, restructuring to avoid that category can bypass the whole patchwork at once.
what came after
Self-funded coverage rose from 44% of covered workers in 1999 to roughly 63-67% by the 2020s, mostly among large employers. Self-funding became the dominant health coverage structure among large US employers and remains the central reason state-level health insurance mandates and reforms — including many state responses to the Affordable Care Act — cannot reach a majority of privately insured American workers, a limitation regularly cited in state health-policy debates.
references
- Health Plan Liability and ERISA: The Expanding Scope of State Legislation
- 2024 Employer Health Benefits Survey
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