STATE OF CALIFORNIA

DEPARTMENT OF CORPORATIONS

STATEMENT OF WILLIE R. BARNES, COMMISSIONER
OF CORPORATIONS, STATE OF CALIFORNIA

BEFORE THE TASK FORCE ON WELFARE AND PENSION PLANS
OF THE SUBCOMMITTEE ON LABOR STANDARDS
OF THE HOUSE OF REPRESENTATIVES
JUNE 1, 1978

EDMUND G. BROWN JR., Governar

My name is Willie R. Barnes and I am the Commissioner of
Corporations, State of California. I was admitted to the California

State Bar in 1960. Also that year, I joined the staff of the
I served as Assistant Commissioner

Department of Corporations.

of Corporations from 1970 until my appointment as Commissioner by
Governor Brown in January, 1975. I am Vice President of the
Midwest Securities Commissioners Association; Chairman, Real Estate
Investment Committee; member of the ALI-ABA Liaison Committee;
Vice Chairman, Congressional Legislation Committee and a member of
the Securities and Banking Committee. I am also Second Vice

President of the North American Securities Commissioners Association;
Chairman, SEC Liaison Committee; member of the Oil and Gas Interest
Committee and the ALI-ABA Liaison Committee; I presently serve as

a member of the American Bar Association, Section of Corporation,
Banking and Business Law Committee on Commodities Regulation.

The Department of Corporations is charged with the responsibility of administering laws protecting California investors. Included

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among these laws are the Corporate Securities Law of 1968, the Franchise Investment Law and various laws regulating loan companies.

The Knox-Keene Health Care Service Plan Act of 1975 (California Health and Safety Code Section 1340 et seq.) charges the Department with the responsibility of regulating health care service plans which undertake to provide health care services for a prepaid charge to citizens of the State of California, encompassing those entities, plans or contracts that provide "insurance-type" coverage, including self-funded plans, as well as those which directly provide health care services. The statute provides a comprehensive regulatory scheme, emphasizing substantial protection with respect to financial viability, disclosure, sales practices and quality of health care.

I welcome the opportunity to address you today. The thrust of my remarks will convey to you my personal observations regarding the interface between ERISA and state acts regulating the provision of health care, such as the Knox-Keene Act. As will be indicated in my discussion comparing ERISA to the Knox-Keene Act, welfare plans providing health benefits to employees are treated only incidentally by ERISA. The Federal District Court in Hewlett-Packard v. Barnes, 425 F. Supp. 1294 (N.D. Cal, 1977), affirmed, _F. 2d, No. 77-1564 (9th Cir. March 14, 1978), held that California regulation of plaintiff's ERISA-defined employee welfare benefit plans under the Knox-Keene Act was expressly and validly preempted by Section 514(a) of ERISA. This decision has caused me great consternation because it presents problems by precluding the Department from carrying out the California Legislature's mandate to promote the delivery of low-cost, quality health care through financially sound plans to participants well-informed of the benefits of the various plans

available when a health care service plan is subject to the provisions of ERISA. I will delineate the various problems emanating from Hewlett-Packard and other decisions. In addition, I will present solutions which will eliminate confrontation and will promote cooperation and coordination by state and federal agencies with the result that the intent of Congress as well as the state legislatures will be carried out in a manner not overly burdensome upon health care plans which are also employee welfare benefit plans subject to ERISA while, at the same time, promoting the health and welfare of citizens.

THE PREEMPTION PROBLEM: SECTION 514

Preliminarily, it should be observed that organizations in California have pioneered prepaid health care delivery starting with Ross-Loos in 1929 and the Kaiser-Permanente Health Plan in 1946, Currently, there are nearly 75 permanently licensed or transitionally licensed health care service plans in the state, compared with only a handful in a few other states. Therefore, it is not surprising that the Knox-Keene Health Care Service Plan Act is the most comprehensive piece of state legislation regulating health plans in the United States.

A Health Care Service Plan is defined in the Knox-Keene Act as:

"A person who undertakes to arrange for the
provision of health care services to subscribers
or enrollees, or to pay for or to reimburse

any part of the cost for such services, in return
for a prepaid or periodic charge paid by or on
behalf of such subscribers or enrollees, and who
does not substantially indemnify subscribers or
enrollees for the cost of provided services.
Calif. Health & Safety Code Section 1345(f)."

ERISA, of course, regulates employee benefit plans, including employee welfare benefit plans defined by Section 3(1), 29 USC and 1002(1) of ERISA as:

any plan, fund, or program which was heretofore

or is hereafter established or maintained by an employer
or by an employee organization, or by both, to the extent
that such plan, fund, or program was established or is
maintained for the purpose of providing for its participants
or their beneficiaries, through the purchase of insurance or
otherwise, (A) medical, surgical, or hospital care or
benefits, or benefits in the event of sickness, accident,
disability, death or unemployment. . .

With respect to the preemptive impact flowing from ERISA, the concerns of the Department of Corporations embrace only the umbrella of issues relating to employee welfare benefit plans.

The express preemption provision set forth in Section 514 of ERISA is probably one of the most unique and expansive preemption provisions Congress has enacted. The basic preemptive language provides that ERISA "shall supersede any and all state laws insofar as they. . . relate to any employee benefit plan. This brief language raises two significant interpretive issues: 1) What state laws "relate to" employee benefit plans; 2) What does the word "supersede" mean. ERISA is not helpful in ascertaining the scope of either term.

An expansive reading of the "relates to" phrase would encompass any state law which has an effect on an employee benefit plan. Although it is doubtful that Congress intended the phrase to be

so broadly interpreted, an even more practical problem arises when an employee welfare benefit plan does business with an entity which is independently regulated by state law. For example, if an employee welfare benefit plan provides medical services through an independently organized Health Maintenance Organization, the question arises whether the HMO is part of the employee welfare benefit plan and whether laws regulating the HMO would thus be laws relating to the regulation of the employee welfare benefit plan.

If the word "supersede" is read in a narrow sense, it could
mean that only those state laws which conflict with a federal
regulatory provision in ERISA are preempted. If the word is
interpreted more broadly, it could mean that all state laws which
tangentially relate to an employee benefit plan are rendered
invalid, even though such an interpretation would most likely
create a significant regulatory vacuum in the absence of a similar
federal regulatory provision.

These significant issues are further clouded because Congress attempted to save certain state laws from ERISA's preemption provision. Section 514(b)(2)(a) provides that "Except as provided in subparagraph (B), nothing in this title shall be construed to exempt or relieve any person from any law of any state which regulates insurance, banking, or securities." The subparagraph (B) limitation provides that employee benefit plans shall not be "deemed" to be insurance