California Case Impacts Colorado Amendment 56

The legality of state and local laws mandating that employers provide their workers with health insurance, like proposed Colorado Amendment 56, is uncertain. But, a rulling from the United States Court of Appeals from the 9th Circuit yesterday, in the case Golden Gate Restaurant Association v. City and County of San Francisco, upheld the legality of such a plan in San Francisco suggests that state and local governments can impose health insurance mandates on businesses. Employers had argued that such laws were pre-empted by ERISA, a national law that regulates employee benefits.

The San Francisco Plan

The opinion describes the San Francisco plan in detail (citations, statutory references in the text, and footnotes omitted):

The Ordinance has two primary components: the Health Access Plan (“HAP”), and the employer spending requirements. The HAP is a City administered health care program. It went into effect in the summer of 2007. In funding the HAP, the City “prioritize[s] services for low and moderate income persons.” According to the City’s web page, as of August 9, 2008, 27,395 persons had enrolled in the HAP.

Persons who already have health insurance or who live outside of San Francisco are not eligible for the HAP. Instead, such persons may be entitled to establish medical reimbursement accounts with the City. As we will explain in detail below, the Ordinance also requires all covered employers to make a certain level of health care expenditures on behalf of their covered employees. The Association does not challenge the HAP. It challenges only the employer spending requirements. . . .

The Ordinance mandates that covered employers make “required health care expenditures to or on behalf of” certain employees each quarter. “Covered employers” are employers engaging in business within the City that have an average of at least twenty employees performing work for compensation during a quarter, and nonprofit corporations with an average of at least fifty employees performing work for compensation during a quarter. “Covered employees” are individuals who (1) work in the City, (2) work at least ten hours per week, (3) have worked for the employer for at least ninety days, and (4) are not excluded from coverage by other provisions of the Ordinance.

The Ordinance sets the required health care expenditure for employers based on the Ordinance’s “health care expenditure rate.” For-profit employers with between twenty and ninety-nine employees and non-profit employers with fifty or more employees must make health care expenditures at a rate of $1.17 per hour. For-profit employers with one hundred or more employees must make expenditures at a rate of $1.76 per hour.

Under the Ordinance, “[t]he required health care expenditure for a covered employer shall be calculated by multiplying the total number of hours paid for each of its covered employees during the quarter . . . by the applicable health care expenditure rate.”

“A health care expenditure is any amount paid by a covered employer to its covered employees or to a third party on behalf of its covered employees for the purpose of providing health care services for covered employees or reimbursing the cost of such services for its covered employees.” A “covered employer has discretion as to the type of health care expenditure it chooses to make for its covered employees.” [T]he Ordinance specifies that the definition of health care expenditure includ[es], but [is] not limited to:

(a) contributions by [a covered] employer on behalf of its covered employees to a health savings account as defined under section 223 of the United States Internal Revenue Code or to any other account having substantially the same purpose or effect without regard to whether such contributions qualify for a tax deduction or are excludable from employee income;

(b) reimbursement by such covered employer to its covered employees for expenses incurred in the purchase of health care services;

(c) payments by a covered employer to a third party for the purpose of providing health care services for covered employees;

(d) costs incurred by a covered employer in the direct delivery of health care services to its covered employees; and

(e) payments by a covered employer to the City to be used on behalf of covered employees. The City may use these payments to: (i) fund membership in the Health Access Program for uninsured San Francisco residents; and (ii) establish and maintain reimbursement accounts for covered employees, whether or not those covered employees are San Francisco residents.

If an employer does not make required health care expenditures on behalf of employees in some other way, it may meet its spending requirement by making payments directly to the City. We refer to this option as the City-payment option. If an employer elects the City-payment option, its covered employees who satisfy age and income requirements and are “uninsured San Francisco residents” may enroll in the HAP, and its other covered employees will be eligible for medical reimbursement accounts with the City. Covered employees may enroll in the HAP free of charge or at reduced rates. The HAP provides enrollees with “medical services with an emphasis on wellness, preventive care and innovative service delivery.” A primary care provider at the enrollee’s “medical home” “develop[s] and direct[s] a plan of care for each [HAP] participant.” Enrollees pay income-based “participation fees” and “point-of-service fees.”

An employer is exempt from making payments to the City if it makes health care expenditures of at least $1.17 or $1.76 per hour (depending on the nonprofit or for-profit status of the employer, and on the number of employees), and it is partially exempt to the extent that it makes lesser expenditures.

The Ordinance requires covered employers to “maintain accurate records of health care expenditures, required health care expenditures, and proof of such expenditures made each quarter each year,” but it does not require them “to maintain such records in any particular form.” Employers must provide the City with “reasonable access to such records.” If an employer fails to comply with these requirements, the City will “presume[ ] that the employer did not make the required health expenditures for the quarter for which records are lacking, absent clear and convincing evidence otherwise.”

The Ordinance includes a special provision for employers with self-insured health plans. An employer providing “health coverage to some or all of its covered employees through a self-funded/self-insured plan” will “comply with the spending requirement . . . if the preceding year’s average expenditure rate per employee meets or exceeds the applicable expendi ture rate” for the employer. Such employers do not need to keep track of their actual expenditures for each employee. . . .

[T]here are five categories of employers under the Ordinance. First are employers that have no ERISA plans (“No Coverage Employers”). Second are employers that have ERISA plans for all employees, and that spend at least as much as the Ordinance’s required health care expenditure per employee (“Full High Coverage Employers”). Third are employers that have ERISA plans for some, but not all, employees, and that spend at least as much as the Ordinance’s required health care expenditure per employee for employees under the ERISA plan (“Selective High Coverage Employers”). Fourth are employers that have ERISA plans for all employees, but that spend less than the Ordinance’s required health care expenditure per employee (“Full Low Coverage Employers”). Fifth are employers that have ERISA plans for some, but not all, employees, and that spend less than the Ordinance’s required health care expenditure per employee for employees under the ERISA plan (“Selective Low Coverage Employers”).

No Coverage Employers may choose to continue without any ERISA plans. In that event, they can make their required health care expenditures directly to the City. If these employers choose, instead, to establish an ERISA plan, the Ordinance requires only that they make the required level of health care expenditures. They can do so by paying the full amount to the plan, or by paying part to the plan and part to the City. The Ordinance does not dictate which employees must be eligible for the plan, or what benefits a plan must provide. Full High Coverage Employers may choose to leave their ERISA plans intact and unaltered. So long as they maintain records to show that they are making the required health care expenditures, they comply with the Ordinance.

Selective High Coverage Employers may choose to leave their ERISA plans intact and unaltered. In that event, for employees not covered by their ERISA plans, they can comply with the Ordinance by making the required health care expenditures to the City. “An employer may . . . choose to purchase health insurance for its full-time employees, but make payment to the City to fund part-time employees’ membership in the Health Access Program[.]”

Full Low Coverage Employers may choose to leave their ERISA plans intact and unaltered. In that event, they can comply with the Ordinance by making payments to the City in an amount equal to the difference between their expenditures for the ERISA plans and the required health care expenditures under the Ordinance. “[A]n employer who purchases a health insurance program with premiums that are less than the required expenditure . . . may choose to pay the remainder to the City to establish and maintain medical reimbursement accounts for such employees.”

Selective Low Coverage Employers may choose to leave their ERISA plans intact and unaltered. In that event, they can comply with the Ordinance for employees enrolled in their ERISA plans by paying to the City the difference between their expenditures for the plans and the required health care expenditures under the Ordinance, and for employees not enrolled in their ERISA plans by paying to the City the full amount of the required health care expenditures.

I include the details of the plan at length, because I think it is a good interim model for achieving near universal health care.

This plan is also notable because it is economically sustainable even though it only applies in San Francisco. Many critics of state and local approaches to universal health care have assumed that only a national single payer plan can avoid race to the bottom pressures in a national economy. This plan, which is conceptually similar to a minimum wage requirement from a distributive perspective, works notwithstanding the fact that it is exceptional (as do different plans in several other states like Massachusetts, Hawaii and Vermont). Admittedly, however, San Francisco has long had a high wage economy (where most high wage employees already have health insurance and are unaffected), wedded to a low wage local service economy, so it doesn't have to worry too much about losing jobs as employers consider operating elsewhere. It simply has to prevent local services businesses that don't provide health insurance from undercutting their local competition from a cost perspective.

Of course, the San Francisco plan does not achieve the focus on preventative care as a cost saving measure, plan bargaining power vis-a-vis drug companies and providers, or administrative simplifications that a single payer system would provide. It also only guarantees some benefits, not necessarily sufficient ones. But, it should dramatically reduce the bad debt incurred to treat uninsured patients that local providers must indirectly pass on to insurance companies that drive up premiums, and it should reduce the number of cases where problems get more expensive as a result of the unavailability of preventative care.

Assuming that employers make sensible choices about how to make the health care expenditures that they must under the plan, the San Francisco plan moves the discussion from who should care health care, to how can we reduce health care costs through provider and insurer efficiencies.

The Court's Analysis

Some key observations that went into the 9th Circuit decision were the following:

We make two observations about the Ordinance. First, the Ordinance does not require employers to establish their own ERISA plans or to make any changes to any existing ERISA plans. Employers may choose to make up the difference between their existing health care expenditures and the minimum expenditures required by the Ordinance either by altering existing ERISA plans or by establishing new ERISA plans. However, they need not do so. The City-payment option allows employers to make payments directly to the City, if they so choose, without requiring them to establish, or to alter existing, ERISA plans. If employers choose to pay the City, the employees for whom those payments are made are entitled to receive either discounted enrollment in the HAP or medical reimbursement accounts with the City.

Second, the Ordinance is not concerned with the nature of the health care benefits an employer provides its employees. It is only concerned with the dollar amount of the payments an employer makes toward the provision of such benefits. An employer can satisfy its spending requirements by paying the City; it can satisfy those requirements by funding exclusively preventive care; it can satisfy those requirements by setting up an on-site clinic and reimbursing employees for the purchase of over-the-counter medications; or it can satisfy those requirements in some other manner, such as funding a traditional ERISA plan. The Ordinance does not look beyond the dollar amount spent, and it does not evaluate benefits derived from those dollars. . . .

The HAP, administered by the City, is not an ERISA plan. Rather, the HAP is a government entitlement program available to low- and moderate-income residents of San Francisco, regardless of employment status. It is funded primarily by taxpayer dollars. Employer payments under the Ordinance provide only a small portion of the HAP’s funding, and, although we do not know the precise numbers, employees covered under the Ordinance comprise substantially less than half of all HAP enrollees. The fact that a minority of HAP enrollees pay a discounted enrollment fee because their employers participate in the City-payment option is not enough to make the HAP a “plan, fund or program” within the meaning of ERISA.

The core observation driving the 9th Circuit decision to validate the San Francisco Ordinance in the face of an ERISA pre-emption claim is that the "Supreme Court has emphasized that ERISA is concerned with “benefit plans,” rather than simply “benefits,” because “[o]nly ‘plans’ involve administrative activity potentially subject to employer abuse.” Since San Francisco's Ordinance governs how much is spent on employee benefits, rather than how the benefits are provided, it survives the ERISA challenge. The U.S. Supreme Court cases relied upon by the 9th Circuit are Fort Halifax which upheld a Maine statute requiring that employers pay severance benefits to laid off employees, and Massachusetts v. Morash which upheld a Massachusetts statute requiring employers to pay discharged employees for unused vacation days.

The 9th Circuit concludes by stating:

We are asked only to decide whether § 514(a) of ERISA preempts the employer spending requirements of the Ordinance. We hold that it does not. The spending requirements do not establish an ERISA plan; nor do they have an impermissible connection with employers’ ERISA plans, or make an impermissible reference to such plans.

The Bush Administration's Secretary of Labor filed an amicus brief seeking to have the law declared pre-empted by ERISA.

Colorado Impact

While the precedent is not directly binding on Colorado, which is in the 10th Circuit, the unanimous decision addressing similar legal issues would be important persausive authority in determining the validity of a Colorado plan. A trial court in the San Francisco case has invalidated the local ordinance, a decision which, if it had been upheld, would have provided a strong argument invalidating Colorado Amendment 56, if it passed, as well.

I'll more careful examine the ERISA pre-emption issue when I evaluate Amendment 56 in detail. Even if Amendment 56 didn't pass muster, the San Francisco case provides a model that allows for state and local mandates of universal health care.