Court gives temporary OK to San Francisco "pay or play" law

In what may prove to be a bellwether for the viability of employer-mandated health insurance, a federal appeals court allowed San Francisco's plan requiring businesses to provide benefits or pitch in for uninsured coverage to remain in place -- for now.

The city ordinance, which took effect Jan. 1, requires employers with 20 or more workers to spend a certain amount on health coverage or put that money into a city fund for "Healthy San Francisco." The program offers primary and preventive care to the city's estimated 82,000 uninsured residents through a system of clinics. Businesses with 20 to 99 workers must spend $1.17 per hour per employee, while those with 100 or more employees must pitch in $1.76 per hour per worker.

The Jan. 9 decision by the 9th U.S. Circuit Court of Appeals comes on the heels of a trial court ruling striking down the employer-spending provision. The trial judge, on Dec. 26, 2007, said the mandate is preempted by the federal Employee Retirement Income Security Act because it interferes with employers' ability to provide and maintain uniform health benefits without facing a patchwork of regulations within each state.

However, the three-judge appeals panel disagreed with that interpretation and issued an emergency order keeping the program in full effect while the city appeals the trial court decision. Siding with the city, the 9th Circuit said an ERISA violation is unlikely because the ordinance gives businesses the option of how to comply without making any changes, whether by paying into an existing health plan or the city fund.

The appeals court panel's decision differs from what other jurisdictions have said on the issue and could be precedent-setting if upheld by the full court. In 2007, courts in Maryland and New York struck down other "pay or play" laws for violating ERISA.

California lawmakers are watching the San Francisco case closely because a statewide health system reform proposal developed by Gov. Arnold Schwarzenegger and the Assembly includes a similar spending mandate.

Meanwhile, San Francisco city officials remain confident in their appeal. City Attorney Dennis J. Herrera argued the city mandate was carefully crafted to avoid ERISA preemption by giving employers "complete autonomy" in deciding how to meet the spending requirements.

"ERISA was designed to prevent private companies from mismanaging employee benefits. It was never intended to prevent cities like San Francisco from enacting programs to protect the health and welfare of its people," Herrera said in a statement following the Golden Gate Restaurant Assn.'s legal challenge.

Without a court order, "tens of thousands of San Francisco residents and workers [would be] deprived of critically necessary health care services -- and [would] suffer the health-related and financial consequences," Herrera said just before seeking the order to keep the program running.

Golden Gate Restaurant Assn. Executive Director Kevin Westlye emphasized the 9th Circuit's order is just one step in the legal process and said the appeals court judges misread the law.

"The administration [of the Healthy San Francisco employer mandate] is onerous," Westlye said. It imposes on employers new and confusing burdens that conflict with ERISA standards, he added. For example, businesses would have to differentiate hours worked by employees inside and outside the city, and possibly create waivers to track workers' health care contributions or decisions to opt out of employer-provided benefits.

Westlye said the restaurant association supports expanded access to care. But he suggested it could be accomplished through less-burdensome funding alternatives, such as a proposed quarter-penny sales tax that the city and county board turned down.

But city officials worry that without the mandate, some businesses will drop their existing benefits.

Westlye said city officials' fears that health reform lacking an employer mandate would encourage businesses to drop coverage are unwarranted. "Employers, as long as they can afford to pay the rising health care premiums, will not dump employees into the city and county clinic program," he said.

The San Francisco Medical Society supports universal access to health coverage but has not taken a position on Healthy San Francisco or the employer mandate. Still, some doctors want to see it tested, said Steve Heilig, the medical society's director of public health and education, speaking on his own behalf.

Heilig, who served on the mayor-appointed council that developed Healthy San Francisco, said the panel strove to use existing resources to make the plan work without overtaxing any one component. For example, the city already had a strong network of community clinics it tapped into, and most employers already offered health coverage, he said.

"We want to give people a medical home where they can get consistent care," Heilig said. Rather than spending money on legal challenges, "let's give it a chance to work, and if the data shows it to be too onerous for businesses, it can be adjusted."

American Medical Association policy does not address employer mandates. The AMA supports expanding access to health coverage through tax credits, insurance reforms and individual responsibility.