Last Friday, the Vermont House approved “its own version of legislation passed earlier by the Senate” that would allow the state to design “a single-payer system, in which a government agency would administer and make all payments for health care” or a public option. California passed similar legislation earlier this year, and theoretically, under a provision added to the new health care law by Sen. Ron Wyden (D-OR), both states could opt-out of the requirements of federal health care reform and establish a single-payer structure.

But there are at least two problems that could deter states from leaving national reform and developing their own initiatives. First, sates can’t implement their own “innovative solutions” until 2017, after they’ve already spent time and energy establishing the new state-based exchanges and regulating insurers. Democrats may have moved back the date to allow for a smoother and more uniform implementation process, but delaying the opt-out date will only discourage states from establishing their own systems. States that still chose to pursue their own plan, will have to reconcile their programs with the federal requirements for Medicare, Medicaid, FEHBP, Indian Health Service and, most importantly ERISA — a 1974 law that, among other things, preempts states from enacting legislation that is “related to” employee benefit plans. Under Wyden’s provision, states could easily obtain a waiver from participating in the new federal exchanges if their innovative reform meets certain requirements, but states will have to go to Congress if their reform affects the health insurance offered by large employers.

As the Center for Policy Analysis’ Ellen Shaffer suggests, this is a major set back for single-payer advocates:

Section 1332 [see text below] provides that they can apply to the Secretary of HHS to opt out of the Exchanges beginning in 2017, if they have a plan to provide comparable benefits to at least as many people as the Exchange would have been estimated to cover, at no greater cost. At that point, if the Secretary grants the waiver, the states are guaranteed the transfer of federal funds that would have gone to pay for premium subsidies through the Exchanges. However, states have to apply to coordinate funds and programs with all the other federal programs. The bill offers each state a streamlined process to coordinate its waiver requests, but the Secretary can only grant funds for those programs where she has existing authority. For example, HHS does not have jurisdiction over ERISA, which is administered by the Department of Labor, so an ERISA waiver is not possible under this legislation. Within HHS, the Secretary already has waiver authority for some programs, but not all.

During the House Education and Labor Committee’s mark-up, Rep Dennis Kucinich (D-OH) introduced an amendment that would authorize and require “the Secretary of Labor, in consultation with the Secretary of Health and Human Services” to waive the ERISA pre-emption (Sec. 514) for states that have enacted a state single payer system. The committee adopted the amendment, but it was left out of the final House bill.

Kucinich characterized health care reform as a “detour” from the single-payer cause when he publicly announced that he would support the bill; Vermont and California will soon learn that it’s certainly of no great help.

Last week, I suggested that progressives could salvage the vestiges of the national public health insurance option by including a provision in the final health care bill that provides start-up funds to states that choose to create state-based public options. But adding the provision may not be as easy as it seems. The Center for Policy Analysis reminds me that “Some state and local governments that have attempted to expand health care coverage have been successfully challenged in court under the terms of the Employee Retirement Income Security Act of 1974 (ERISA)” and if the health care bill does not grant an “ERISA waiver” to states that chose to establish a public option, they may find themselves in court.

Congress enacted ERISA in 1974 to allow companies operating across state lines to offer uniform benefit packages. ERISA preempts states from enacting legislation if it is “related to” employee benefit plans. It reserves that right to the federal government. Section 514 of ERISA states that Title V (Administration and Enforcement) and Title IV (Fiduciary Responsibility) of ERISA “shall supersede any and all State laws insofar as they may… relate to any employee benefit plan.”

Hawaii successfully won a preemption battle in 1983 that allowed the state to enact an employer mandate, but single-payer advocates have also challenged the clause. During the House Education and Labor Committee’s mark-up, Rep Dennis Kucinich (D-OH) introduced an amendment that would authorize and require “the Secretary of Labor, in consultation with the Secretary of Health and Human Services” to waive the ERISA pre-emption (Sec. 514) for states that have enacted a state single payer system. The committee adopted the amendment, but it was left out of the final House bill.

It’s unclear if progressives have the votes to pass the state-based public option in the Senate, but if they do, they should include the ERISA waiver to ensure its viability.

On September 16, Sen. Jay Rockefeller (D-WV) announced that he would not vote for the Senate Finance Committee’s health care bill unless the committee replaced the network of cooperatives with a robust public option, increased the threshold on the excise tax, restored the CHIP program (the reform bill folded it into the Exchange), improved affordability measures, and regulated self-insured plans.

This last demand may be the least understood and most complicated aspect of health care reform. The Senate Finance Committee’s legislation does not require large employers that self insure to abide by the same rules and regulations as insurers operating in the Exchange or the individual health insurance markets. As Rockefeller explained during mark-up, “you are grandfathering in an unfairness in the insurance market, where you treat 50 percent of the American people in one way…and 46 percent in a very favored way without restrictions, without discipline.” “Most people don’t know that they are treated so differently. Most people don’t know that they have these restrictions on them,” Rockefeller said. Watch it:

Self-insured plans — which are regulated by a law called ERISA — do not have to accept Americans with pre-existing conditions, or remove caps on out-of-pocket or lifetime expenses. “As many as 73 million people, or 55% of those who get insurance through private-sector jobs, are covered in self-insured plans, according to the non-partisan Employee Benefit Research Institute. Workers are often not aware their plans are self-insured because employers hire insurance companies to process claims.”

Congress enacted ERISA in 1974 to allow companies operating across state lines to offer uniform benefit packages. The law establishes minimum standards for pensions, but allows self-insured companies to elude both state and federal regulations.

The initial draft of ERISA exempt employee benefit plans for health and pension from state laws, but subject self-insured companies to existing state regulations. Large corporations would have to abide by the consumer protections of the various states, or so it seemed. Before the final floor vote, Congress folded to big-business demands and inserted the so-called “deemer” clause, barring “self-funded plans from being considered insured plans subject to state insurance regulations.” Suddenly, self-insured companies were exempt from federal and state regulations. The fix was in.

Rockefeller has offered an amendment (C1) to apply health insurance market reforms to the large group and self-insured market. Large corporations are already lining up in opposition.

On Friday, the US Chamber of Commerce chief lobbyist Bruce Josten “sent out a memo this afternoon listing three ‘dangerous amendments’ the business community should weigh in on before the committee gets back to work on Tuesday.” Rockefeller C1 is the most dangerous:

This amendment will significantly and adversely impact larger employers and self-insured plans and the millions of Americans who count on their employer provided health coverage. The federal uniformity standard under ERISA (also known as the “preemption” standard) is critical to our health care system, especially the 170 million Americans receiving coverage from the employer-based system. Its hallmark feature is that it allows employers to offer uniform benefits to their employees, retirees and families without being subject to the conflicting patchwork of mandates, restrictions and costly rules that vary from state to state….This amendment would jeopardize employers’ ability to offer uniform national plans without interference by contradicting state rules. Benefits costs could soar.

But Rockefeller’s amendment would presumably subject self-insured plans to the new federal regulations, permitting large corporations to continue offering uniform plan. The Committee is expected to consider Rockefeller’s amendment this week.