State By State Shock Treatment

America's states, Justice Louis Brandeis said, are the laboratories of democracy--and Bill Clinton couldn't agree more. Arkansas' former governor may have traded the statehouse for the White House, but he still speaks wistfully of his days in Little Rock, where the issues were close at hand and the politics were low-key. That nostalgia pervades Clinton's massive Health Security Act, which gives governors and legislatures broad latitude to shape health-care reform--and to control the renovated system.

But when the states become health-care laboratories, large employers fear that they'll be the white rats. Big companies argue that state control will overturn their pioneering efforts to rein in medical costs. Those operating in many states could end up facing "a patchwork quilt of state laws regulating benefits," frets Ron Wyse, director of employee benefits for Harris Corp., based in Melbourne, Fla. And big corporations figure they'll get stuck first when legislators want to force employers to provide richer health benefits. State control of reform is "even worse" than a Washington-operated health system, complains Philip O. McNichols, who is human resources director at Storage Technology Corp. of Louisville, Colo.

REVENGE. As Congress takes on Clinton's 1,342-page bill, "employers vs. governors will be one of the top three fights on the card," predicts an aide to House Democratic leaders. It's the latest bout in a struggle for control over employee benefits sparked by the 1974 Employee Retirement Income Security Act.

ERISA was designed to preempt state pension rules. But businesses quickly discovered that the law could apply to health benefits as well. Multistate employers, weary of coping with 50 different state insurance regulators, used ERISA's federal rules to design uniform benefits plans for all their employees across the country. As smaller companies caught on, governors--including Clinton--found they were losing control over insurance and benefits.

The new health bill is Clinton's revenge. All companies with fewer than 5,000 workers would be required to buy employees' health coverage through regional "health alliances," designed by state legislatures and run by governor-appointed boards. States would certify which insurers or provider networks could sell coverage through the alliances and could pile new mandates onto the benefits package spelled out in the Health Security Act. "You could have to cover acupuncture in California and unlimited alcoholism treatment in Texas," says Libby Sartain, director of benefits at Southwest Airlines Co. in Dallas.

The 1,000 or so biggest employers can get out of the state-run alliances by forming "corporate alliances" to run their own benefit plans. But that may not exempt them from state control. Clinton's proposal doesn't bar states from adding extra benefits to health plans (table). Large companies would be required to offer traditional fee-for-service insurance that would pay doctors and hospitals on state-dictated pay scales. And some states could wipe out corporate alliances altogether by forcing large corporations to become part of a Canadian-style single-payer health plan.

State advocates argue that somebody has to oversee health alliances, and states are the natural candidates. "State government looks bad until you say, `Maybe the feds should run it,"' says Raymond C. Scheppach, executive director of the National Governors' Assn. Governors won't take on that massive responsibility, Scheppach adds, unless Washington gives them "flexibility and control to do the job right."

Congress may not rush to give states that power. "States have already made hash out of the health programs we've given them to run," says a top Democratic aide on the House Ways & Means Committee. Leaders of Congress' labor committees aren't eager to surrender ERISA's supervision of benefits plans. And politics may cut in business' favor: Democrats such as Ways & Means Chairman Dan Rostenkowski (D-Ill.) and health subcommittee Chairman Pete Stark (D-Calif.) likely won't cede control to their states' Republican governors.

Business lobbyists, however, are treading cautiously. The two leading alternatives to Clinton's bill--sponsored by Senator John H. Chafee (R-R.I.) and Representative Jim Cooper (D-Tenn.)--also give states substantial oversight. And while health interest groups are counting on Clinton's well-known willingness to compromise, no one knows how hard the President will fight for his old gubernatorial colleagues. If he decides to make a stand, employers may need all their political skills to escape the states' health laboratories.

      Under President Clinton's plan, states could:
       --Force all employers to get coverage through a government-run health plan
       --Require companies to pay for new benefits beyond those in the national plan
       --Require self-insured companies to contract with specific doctors and 
       --Refuse to certify employers' provider networks