Summary: As the movement for comprehensive federal health care reform has lost steam, the focus of reform has shifted to the states and private market. States remain concerned about the growing number of persons lacking health coverage and about financing health plans for poor persons. Employers have become increasingly aggressive in managing their health plans and have adopted various managed care plans and innovative funding arrangements. However, the Employee Retirement Income Security Act of 1974 (ERISA) effectively blocks states from directly regulating most employer-based health plans, although it allows states to regulate health insurers. GAO found that nearly 40 percent of enrollees in employer-based health plans- -44 million people--are in self-funded plans. The divided federal and state framework for regulating health plans produces a complex set of trade-offs for regulating health plans produces a complex set of trade-offs. Self-funded plans, which are exempt from state regulation under ERISA, provide employers greater flexibility to design a health benefits package that may have been less feasible to provide under state regulation. At the same time, however, state are unable to extend regulations, such as solvency standards, preexisting condition clause limits, and guaranteed issue and renewal requirements, even indirectly, to enrollees in these self- funded plans. GAO summarized this report in testimony before Congress; see: Employer-Base Health Plans: Issues, Trends, and Challenges Posed by ERISA, by Mark V. Nadel, Associate Director for National and Public Health Issues, before the Senate Committee on Labor and Human Resources. GAO/T-HEHS-95-223, July 25 (eight pages).