The Regulation Of Insurance

Both individual state governments and the federal government regulate insurance. The states regulate rates, financial examination, formation of the company, qualification of officers, licensing, and taxing. The federal government provides for regulation as noted above, in addition to the activity of the Federal Insurance Administrator, the Interstate Commerce Commission, and the Federal Trade Commission.

A growing concern exists over which level of government is the most appropriate for the regulation of insurance. Many contend that there should be greater federal involvement. Advocates of federal regulation argue that state regulation lacks uniformity and that multiple state regulation is more costly than federal regulation, that the state insurance commissioners are unqualified, and that the states cannot effectively regulate interstate companies. Those who favor state regulation argue that the states are more responsive to local conditions and needs, that state regulation encourages innovation and experimentation, and that the decentralization of power is advantageous.

At present there exists an ongoing disagreement between the states and the federal government over the extent to which state laws are preempted by ERISA. The federal government believes it could move toward greater regulation without legal difficulty. This is based upon the federal ability to regulate interstate commerce, to provide for the general welfare, and to tax. Section 514(a) of ERISA states that it shall supersede any and all state laws insofar as they may now or later relate to any employee benefit plan. The preemption does not apply to any state law that regulates insurance. But a question remains: To what extent does ERISA preempt laws enacted under the insurance codes of the states, when such laws are designed specifically to apply to the insurance-type functions of employee benefit plans?

The Department of Labor advocated a broad interpretation of Section 514, which would preempt most state statutes even if the laws deal with areas not explicitly covered by ERISA, such as the content of health benefit plans. The federal courts have not been so consistent in their interpretation of the statute. In one case, Fleck v. Spannaus, the court decided ERISA does not preempt causes of action occurring before January 1, 1975. But in another case, Azzaro v. Harnett, the court held that Congress intended absolute preemption in the field of employee benefits. Even the insurance exception found in Section 514 is subject to limitations: "No employee benefit plan shall be deemed to be an insurance company or engaged in the business of insurance for the purpose of any law of any state purporting to regulate an insurance company."

In general, the courts, including the Supreme Court, have tended to preempt state regulation that relates to employee pension and retirement plans. This stems from the broad-based protections incorporated in ERISA for pension plan participants. The courts are less inclined to preempt state laws that apply to employee health and insurance plans. ERISA has had a more limited application to welfare plans and a more narrow view of the preemptive effect in the health and welfare plan area. When health insurance benefits are mandated in traditional insurance contracts, rather than through comprehensive health care legislation, claims of federal preemption will not hold. However, when an employer's prepaid health care plan satisfies the ERISA definition, state regulation is preempted.

Where the line will eventually be drawn between state and federal regulation of health and welfare plans continues to be uncertain. The debate centers on the degree to which arrangements have insurance versus noninsurance characteristics, with states arguing that even stop-loss coverage makes the underlying plan "insured," and thus subject to state regulation. The courts continue to be heavily involved but are increasingly reaching decisions that reinforce the strength and breadth of ERISA preemption.

The ongoing debate over national health policy will ensure legislative consideration of where the state-federal regulatory line should be drawn. The more limited the future federal role, the more likely ERISA will be modified. The debate surrounding patient's protection initiatives has continued to highlight differences between insured and ERISA plans.

The U.S. Department of Labor issued significant health benefits claim regulations in late 2000, and the U.S. Department of Health and Human Services has issued significant regulations on health data privacy and confidentiality in later years.