Employer mandates hit legal snag, states continue to search for options

An integral part of some state and local health system reform efforts has hit a major stumbling block. The business community has taken employer mandates to court.

These state and local laws require businesses to spend a certain amount on workers' health care coverage or put that money into a fund to provide access for the uninsured. U.S. courts in Maryland, New York and California have sided with the business community and ruled that the federal Employee Retirement Income Security Act trumps these efforts.

They found that the measures interfere with the act's core purpose of allowing employers to provide and maintain benefits uniformly without having to deal with a maze of different state or local laws.

But the 9th U.S. Circuit Court of Appeals recently turned that reasoning on its head when it temporarily allowed San Francisco's employer mandate to stand. Judges suggested that as long as businesses have a choice, without specific restrictions on how they provide the benefits, ERISA isn't an obstacle.

The conflict may set the stage for a U.S. Supreme Court battle. Meanwhile, the legal tangle raises the question of whether such mandates are a viable component of larger health reform efforts.

Despite the ERISA hurdle, lawmakers -- frustrated with the strain of rising costs associated with the uninsured -- continue to explore employer mandate legislation. According to the National Conference of State Legislatures, at least nine states are currently exploring employer responsibility proposals.

Three states already have reform laws that include employer mandates on the books. The statutes in Massachusetts and Vermont have not been challenged. However, Hawaii is the only state to require employer-sponsored health insurance without fear of preemption. Congress granted Hawaii a waiver because its law pre-dates ERISA, passed in 1974.

"It's clear that what the framers of ERISA intended is that states should not be in the business of telling employers they have to have a [benefit] plan and what the plan should look like," said Phyllis Borzi, a research professor in Health Policy at George Washington University's School of Public Health and Health Services. "The question is whether requiring employers to spend money [on health coverage], in or out of a plan, or pay into a government pool, is the same thing as telling them they have to provide benefits."

Split views

Employers say it is and that ERISA gives them the protection and incentive they need to be able to offer health coverage.

"ERISA allows employers to provide the same benefits to employees [everywhere] and have only one set of costs," said Helen Darling, president of the National Business Group on Health, an organization of large employers that studies health care issues. The group supports expanded access, but contends mandating coverage through various state and local rules would increase expenses without adding value.

Echoing concerns from the 4th U.S. Circuit Court of Appeals, Darling said allowing such laws to stand would set a dangerous precedent that could disrupt existing benefit plans.

In January 2006, the 4th Circuit struck down Maryland's Fair Share Health Care Fund Act. The law required companies with more than 10,000 employees to spend at least 8% of payroll costs on health benefits or to pay into a pool to boost Medicaid programs. Judges said the law violated ERISA by forcing businesses to restructure their health plans.

In New York, a federal trial court in July 2007 also cited ERISA concerns when it ruled against a similar measure targeting large grocery retailers in Suffolk County.

But some consumer advocates say employer responsibility is crucial to health reform and suggest that there are ways to make it work.

"This is not off the table," said Kathleen Stoll, director of health policy for Families USA, a nonprofit consumer health advocacy group that supports employer mandates. "The notion of shared responsibility is important from the perspective of what is fair."

As courts continue to weigh in, they offer states a road map on how to draft employer mandates that withstand legal scrutiny, Stoll said. For example, states can structure laws to act as a tax to fund public programs, while exempting businesses that provide coverage.

San Francisco's ordinance is the latest test. In January, the 9th Circuit issued an emergency order allowing the employer mandate to remain in effect while the city appeals a December 2007 trial court ruling that rejected the provision. Oral arguments are scheduled to begin April 17. A full decision in favor of the reform law could propel the issue to the U.S. Supreme Court.

The city measure requires employers with 20 or more workers to spend $1.17 per hour per employee on health coverage. Companies with more than 100 employees must spend $1.76 per hour per worker. Businesses that don't meet this requirement must pay the equivalent to a universal access fund for a primary and preventive care program called Healthy San Francisco. The 9th Circuit found an ERISA preemption unlikely because employers have options and can comply without a significant impact on their benefit structures.

Physician opinion varies

Just like the courts, physicians appear to be split on the issue. AMA policy does not address employer mandates, and state medical societies typically have not taken a position on them. The AMA advocates for expanding access to health coverage through tax credits, insurance reforms and individual responsibility.

Although employer mandates generally are not considered a stand-alone solution to covering the uninsured, some experts say such proposals can play an important part, especially since most consumers receive health coverage through work. Some doctors support state and local efforts to experiment with the mandates, in conjunction with other approaches, to find out what works.

Employer responsibility "is a necessary part of the solution ... until we get a better one," said Gordon Fung, MD, immediate past president of the San Francisco Medical Society, speaking on his own behalf. The society did not take a position.

Dr. Fung served independently on the mayor-appointed council to develop Healthy San Francisco, which is funded by city and some state dollars, as well as individual and employer contributions. Many businesses already offered coverage, but not to part-time workers, he said. That was one area that the panel found employers could pitch in.

"It was an approach that basically said the health care program needs whatever help we can give it," Dr. Fung said. "But we never said everything we are doing is locked in stone."

The Massachusetts and Vermont medical societies backed their states' multipronged approaches but took no position on the employer mandates. The AMA praised the Massachusetts plan as a positive step.

But the state's health reform effort remains a work in progress, said Massachusetts Medical Society President B. Dale Magee, MD. "Any time we make changes to this delicate system, we have the obligation to measure its success and unintended consequences so we can back up and adjust to make improvements."

Some legal and policy experts suggest that the Massachusetts and Vermont statutes -- which require roughly a $300 annual contribution per worker for certain-sized firms not offering coverage -- are not so burdensome as to warrant a challenge. The laws also combine individual and employer responsibility, which may buffer an ERISA preemption, experts say.

Other physicians agree that businesses must step in but worry that employer mandates will stifle efforts to find innovative ways to cover the uninsured.

"We don't have all the answers ... but it can't evolve when things are rigid," said Robert F. Hamilton, MD, a director and founding member of Consumers for Health Care Choices, a nonprofit consumer health care advocacy group. He said health benefit choices are best left to employers and consumers, whether in the form of traditional insurance, health savings accounts or reimbursement programs.

"But employer mandates take away options," he said. They can strain businesses financially, especially smaller ones. Not only could workers be left uninsured, they also could wind up unemployed, he said.

Some San Francisco businesses already are feeling the administrative burden of the new rules, said Kevin Westlye, executive director of the Golden Gate Restaurant Assn., which challenged the ordinance.

For example, employers have to track hours worked in and outside of the city, calculate benefit expenditures, have employees verify those numbers, train workers on the benefit contributions, and document the reports to the city. Existing insurance plans also could be disrupted, Westlye said.

"Everybody wants to improve health care delivery, but I don't think this ordinance is a step in the right direction," he said.

The 9th Circuit, however, suggested the rule imposed little added burden, since much of the record-keeping involved already is required.

Headed to the Supreme Court?

Experts say the U.S. Supreme Court has not directly addressed ERISA in relationship to the trend of employer responsibility statutes. Other high court precedents have interpreted the federal act strictly in different types of cases.

Public policy concerns may play a role when it comes to employer mandates. George Washington University professor Borzi noted that the high court has upheld states' authority to legislate areas of public concern, even in the face of ERISA, as long as the measures do not interfere with benefit administration.

She added that the 4th Circuit may have looked at Maryland's law differently if it hadn't singled out Wal-Mart as the only company that did not meet the requirements. That aspect of the measure factored largely into the 4th Circuit's decision, Borzi said.

Meanwhile, the absence of a final say from the Supreme Court could prompt congressional action, said Robert L. Schwartz, a health law professor at the University of New Mexico School of Law.

For example, some lawmakers have proposed doing away with ERISA preemption to "let the laboratory of states operate," Schwartz said. But attempts to give states the power to enact employer mandates -- similar to Hawaii's waiver -- thus far have proved unsuccessful.