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In 1993, the state of Washington adopted a health care reform package that required insurance companies to sell policies at a uniform "community rate." In practice, this means that people who are younger and healthier will pay higher premiums, while people who are older or in poor health will pay less.

Officials delayed implementing the program, however, when they discovered that more than half of the state's work force -- including Boeing -- could opt out of participation by invoking the federal Employee Retirement Income Security Act, better known as ERISA.

"If we can't get a waiver from the federal government on ERISA, we're going to have to rethink our effort," says Sue Crystal, health policy adviser to Washington Gov. Mike Lowry.

Adoptedin 1974 to help guarantee union pension benefits, ERISA is having an enormous impact on health care costs in America. In fact, many people argue that ERISA is the nation's health care crisis because it allows large corporations and their employees -- about two-thirds of the nation's work force -- to choose not to participate in state mandates and national insurance pools. In the process, it leaves small businesses, the self-employed and the unemployed to bear added costs.

"In a market already distorted beyond recognition by government intervention, ERISA probably plays the biggest role in making health insurance far too cheap for some people and far too expensive for others," says Gerald Musgrave, coauthor of Patient Power.

Gary Claxton, a former senior analyst at the National Association of State Insurance Commissioners who now works in the Department of Health and Human Services, adds to Musgrave's diagnosis: "ERISA has created a privileged class of health care consumers. Neither the state nor the federal government is going to be able to deal with the concerns of medically indigent people as long ashalf the population can walk away, saying |It's not my problem.'"

Private companies have benefited enormously from ERISA. H&H Music Company in Texas, for example, discovered that one of its employees had AIDS. Although the company's self-funded health program guaranteed lifetime benefits up to million, the company changed the rules and elected to provide the employee with only ,000. The employee sued for breach of contract, taking his case to the U.S. Supreme Court. The high court ruled that, under ERISA, the company could change its health benefits at any time.

How has this relatively obscure act played such an enormous role in health care without attracting much attention? It came about almost accidentally.

In 1974, several private pension plans folded when their parent companies declared bankruptcy. To prevent further insolvencies, labor unions lobbied Congress to adopt ERISA. The centerpiece of the bill was the Pension Benefits Guarantee Corp., which insures company pensions the sameway the Federal Deposit Insurance Corp. insures individual bank deposits. (The guarantee corporation incurred a .7 billion deficit in 1992 and currently covers billion in underfunded private pensions. As a result, a debacle similar to the savings and loan crisis may lie ahead.)

Now responsible for private pensions, Congress also became involved in their regulation. To ensure that pension funds would be used only "for the exclusive purpose of ... providing benefits to participants," ERISA exempted employee benefit plans from state taxation and regulation. This exemption also was extended to health benefits -- if the company formedits own insurance pool (self-insurance) rather than buying coverage from a private insurer. Remarkably, the protection was extended even though the guarantee corporation does not secure employee health plans.

"We're not sure why health plans were included," says a top-ranking Labor Department official who didn't want to be named. "We think it's just because the large companies didn't want their health insurance regulated by the state." In fact, corporations already understood the cost advantages of self insurance. ERISA just made the deal sweeter.

Health insurance, like all insurance, is a matter of pooling risk. People infected with the AIDS virus or people who smoke, for example, are unwelcome in insurance pools because they are more likely to require expensive medical care, which drives up premiums for healthy people.

Generally, the majority of working people are healthy. Although some will need major surgery and others will have spouses or children who suffer from chronic conditions, employees are a relatively low-risk pool -- which is the reason insurance providers long have offered group rates to large companies. Eventually, corporations figured out that they could insure themselves at even lower costs. (Actually, few companies go it completely alone. Most buy "stop-loss" coverage -- a kind of reinsurance -- from a large carrier. But under ERISA rules, these companies still can call themselves "self-insured.")

However, the real advantages of self-insurance come from sidestepping state governments. Most states dictate what premiums private insurers can charge, what benefits they must provide and even whom they must insure. Self-insured companies not only escape this oversight, but they also are able to exclude themselves from welfare programs designed to underwrite health care for the poor and uninsured.

"In effect, ERISA has allowed the employees of larger corporations to opt out of the welfare state as it applies to state health programs," says Merrill Matthews, director of the National Center for Policy Analysis in Dallas. "They have been given an absolute property right to their health benefits. The unfairness is that only two-thirds of the working population gets to doit."

What are the state requirements that major corporations have been able to dodge? Generally, they fall into three categories: mandated benefits, premium taxes and high-risk pools.

Here's how they work:

* Mandated coverage. In an attempt to "improve" health insurance, legislators in most states have decided that certain illnesses and conditions must be covered by all insurance policies. This forces consumers to buy coverage they don't want, driving up premiums. "Senior citizens are required to buy maternity coverage and young people are forced to buy coverage for hip replacements," says Elizabeth McCaughey, senior fellow at the Manhattan Institute for Public Policy.

The process is further distorted by provider groups, which lobby legislatures to cover their specialties. Chiropractors, for example, are tireless lobbyists who have managed to gain coverage for chiropractic care in nearly all 50 states. Health crusaders haven't helped either. If President Clinton's "basic benefits package" is stacked with mandated mental health benefits, it's because of enthusiasts such as Tipper Gore.

Self-insured companies, however, offer members cheaper coverage by dodging these mandates (and leaving unexempted companieswith even higher costs). And it's a privilege many companies seem to think they deserve. "When Sens. Patrick Leahy [a Democrat from Vermont] and David Pryor [a Democrat from Arkansas ] proposed a law in 1991 that would have curtailed the ERISA exemption, the business community went crazy," says Alicia Smith-Pelrine, former director of human resources for the National Governors' Association who is now with Entquest-Pelrine Health Consultants in Washington. "They did not want to be subjected to state-mandated benefits, particularly those in mental health and substance abuse treatment. Their lobbying was so intense that Congress finally decided the whole thing was too hot to handle."

* Premium taxes. Medicare and Medicaid compensate hospitals for only about 75 to 80 percent of the costs of treating most illnesses. In addition, hospitals are losing money treating the poor and the uninsured.

In an effort to help hospitals remain solvent, many states haveset aside money to reimburse them for these expenses. The funds are gleaned from surcharges placed on insurance premiums and hospital bills -- hidden from the general tax rolls. But large corporations and their employees avoid these taxes under ERISA. Their health plan contributions cannot be used to pay someone else's bills.

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