Health care playpens

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Federal law severely limits state and local efforts to pass sweeping health care reform legislation. But a case now being reviewed by the 9th Circuit Court of Appeals, regarding a San Francisco law that forces employers to provide health insurance or pay the city an assessment, could change all of that. And in so doing, it might fundamentally change the availability of good health insurance coverage.

Unwilling to wait on federal health care reform legislation, several states have taken their own steps.

A few years ago, for example, Maryland passed legislation, over the governor's veto, requiring that large for-profit employers (more than 10,000 employees) spend at least 8 percent of payroll on health care or pay an assessment (read "tax") into a state fund to pay for the uninsured (also known as "pay-or-play" legislation). The legislation was dubbed the "Wal-Mart bill" because Wal-Mart was the only company in the state that would be affected — a fact both understood and intended.

The law was challenged based on a federal law known as the Employee Retirement Income Security Act, or ERISA, which pre-empts state efforts to micromanage certain employer benefit plans. The purpose behind the health-related portion of the 1974 legislation was clear: to allow large employers to offer a standard health insurance plan in multiple states without those states constantly trying to interfere with the design, benefits or administration of it.

In the ensuing 30-plus years, ERISA has become a bastion against state interference in employer-provided health insurance. Just imagine some of the potential problems. Each state requires health insurance to cover certain providers and benefits, known as mandates. The number of mandates vary from 15 in Idaho to 64 in Minnesota — with a total of 1,961 nationwide. Without ERISA, a large employer would have to deal with each state's health insurance laws and mandates separately, creating what could be vastly different coverage from one state to another. It would be an administrative nightmare, and employers might find it easier just to give a raise and drop the coverage.

ERISA puts a halt to those attempts by allowing employers that self-insure (i.e., the employer bears the risk of loss) to offer a uniform plan to all its employees. And the courts have consistently ruled in favor of the ERISA pre-emption when states have tried to get around it. So, when a suit was filed against the Maryland legislation, a federal judge correctly ruled that ERISA pre-empted the law.

However, state lawmakers, miffed by this limit on their abilities to make health insurance more regulated and expensive, constantly threaten to return with revised legislation that will survive an ERISA pre-emption challenge. But they never do.

Thus, no one was terribly surprised when the city of San Francisco decided to pass pay-or-play legislation, or when the Golden Gate Restaurant Association filed suit. The trial court ruled last December that the legislation violated ERISA.

What was a surprise was when on Jan. 9 the U.S. Court of Appeals for the 9th Circuit lifted the injunction, suggesting that the city just might succeed in challenging the ERISA preemption and therefore its plan should be allowed to move forward. A 9th Circuit merits panel will conduct a hearing, which is supposed to be concluded by mid-April.

Under the San Francisco law, large employers (100 or more employees) will be required to contribute $1.76 per hour for each covered employee. That's a 10 percent increase for someone making $17 per hour, or about 20 percent for someone making $8.50 an hour.

Mid-sized employers (20 to 99 employees) must contribute $1.17 per hour.

Employers that still refuse to provide health insurance will be penalized 1.5 times that amount, up to $1,000 per employee per week. (Higher paid management and supervisors are exempted.) Because the 9th Circuit differs from the Maryland ruling, there's a good chance the issue will move to the Supreme Court — which has already ruled several times in favor of ERISA.

Let's hope it does so again. States are all over the map when it comes to health care legislation; they are even more diverse when it comes to reforming the health care system. Witness Massachusetts' sweeping health care reform, which has not yet been challenged under ERISA because no one has filed a suit against it.

And if cities are also allowed to jump in — proudly boasting they have done something about the uninsured, while passing the costs over to employers — standardized benefit plans for employees would become a thing of the past.

If states really want to get into the health care reform battle, they should follow the ERISA example, which provides employers with a lot of flexibility to design good plans that are affordable.

San Francisco and the states may think that what they are doing will decrease the number of uninsured. The truth is they will almost surely undermine employers' efforts to provide good comprehensive health coverage.

Merrill Matthews is executive director of the Council for Affordable Health Insurance and a resident scholar for the Institute for Policy Innovation.