If you are like me, a free-market health policy guru, one thing keeps you awake at night: Should federal laws, especially ERISA (the Employee Retirement income Secturity Act) pre-empt state laws and regulations governing health insurance?

No? You have better things to worry about?

Well, consider this: large employers, which have big enough workforces that they can self-insure (and hire insurers for administrative services only) are regulated by ERISA, which means that they are exempt from state insurance regulations.  This benefits them, because if they have employees in many states, they can all be in one plan.  Also, most state insurance regulations are out of control and drive up health insurance premiums, as noted in the Index of Health Ownership.  On the other hand, ERISA stifles state and local reforms, as discussed in today's Christian Science Monitor.

Organizations like the U.S. Chamber of Commerce are concerned that some legislators want to punch holes in ERISA.  Most of these legislators are on the wrong side of things: they are unhappy that a court found that a Maryland law that would oppress Wal-Mart's ability to freely negotiate health benefits with its workers violated ERISA.

Nevertheless, such federal intervention unsettles free-market activists.  After all, if your state government is messing up health insurance, vote them out and get better lawmakers.  If you can't do that, and Wal-Mart bails out of Maryland, go to one in Virginia or Pennsyvania.  Eventually, the state will feel the economic pain and improve its policies.

Also, what if the Congress goes wacky and starts mandating some of the same, expensive, benefits that states have?  Without federalism, there is no escape from such a runaway Congress.

Fair enough, but let's consider the current reality: 99 percent of large, ERISA-regulated employers offer health benefits, a figure constant for many years.  Amongst smaller firms, the share has declined from 65 percent to 59 percent in less than a decade.  This observation certainly tempts the conclusion that the federal regulation is superior.

What is the correct, free-market compromise?  Republican presidential candidate Rudy Giuliani suggests allowing inter-state purchase of health insurance by individuals and small businesses, a solution previously put foward by Congressman John Shadegg.

Under such a mechanism, both federalism and individuals win.  It's the right choice.