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

Businesses argue that a federal act overrides state and local employer responsibility laws. Court rulings so far run three to one against this type of health system reform.

By Amy Lynn Sorrel — Posted April 7, 2008

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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.

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Employer mandates coast to coast

A handful of employer mandate laws are on the books. Despite legal challenges, states and municipalities continue to explore this concept as part of larger health system reform efforts. Here's a sampling across the nation.

Hawaii: Has employer mandates. A congressional waiver in 1974 exempted them from ERISA because the state's statute pre-dated the federal law.

Illinois: Exploring employer mandates. Businesses with 10 or more workers that are not already spending 4% of payroll costs on health care would face a 3% payroll assessment.

Massachusetts: Has employer mandates. Businesses with more than 10 employees not contributing to health coverage pay a $295 annual fee per full-time worker.

Michigan: Exploring employer mandates.

Minnesota: Exploring employer mandates.

New Hampshire: Exploring employer mandates. Employers with 1,500 or more employees not paying for health care would pay into a state fund to support Medicaid.

New Mexico: Exploring employer mandates.

Oregon: Exploring employer mandates.

Pennsylvania: Exploring employer mandates.

Rhode Island: Exploring employer mandates.

San Francisco: Has employer mandates. Employers with 20 or more workers must spend a certain amount per hour per employee on health coverage or pay into a health care access fund.

Vermont: Has employer mandates. Employers not paying for health coverage contribute a $365 annual fee per full-time worker.

Sources: National Conference of State Legislatures, Families USA

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Dueling decisions

Two federal courts took different approaches to the question of whether ERISA trumps states' ability to require employers to pitch in for workers' health coverage. Here are excerpts from the rulings.

4th U.S. District Court of Appeals. In his Jan. 17, 2007, ruling in Retail Industry Leaders Assn. v. James D. Fielder Jr., Judge Paul V. Niemeyer wrote for the majority:

"Because Maryland's Fair Share Health Care Act effectively requires employers in Maryland covered by the act to restructure their employee health insurance plans, it conflicts with ERISA's goal of permitting uniform nationwide administration of these plans. ...

"There is overriding evidence that the Fair Share Act's primary purpose is to regulate employers' health care spending, not to raise revenue. ... A proliferation of similar laws in other jurisdictions would force Wal-Mart or any employer like it to monitor these varying laws and manipulate its health care spending to comply with them."

9th U.S. Circuit Court of Appeals. In his Jan. 9 opinion addressing a request for an emergency order in Golden Gate Restaurant Assn. v. City and County of San Francisco, Judge William A. Fletcher wrote for a unanimous three-judge panel:

"The ordinance does not 'bind ERISA plan administrators to a particular choice of rules.' ... Employers may 'structur[e] their employee benefit plans' in a variety of ways and need not 'pay employees specific benefits.' ... The ordinance does impose an administrative burden on covered employers, for they must keep track of their obligations ... . But these burdens exist whether or not a covered employer has an ERISA plan. ...

"The city estimates that approximately 20,000 uninsured San Francisco workers will become newly eligible for health benefits if and when the employer payment mandate under the ordinance is fully implemented. ... In addition, the city will incur some otherwise avoidable financial costs if a stay [of the lower court ruling against the program] is denied, for some individuals who would otherwise be covered under the ordinance will seek emergency treatment ... . We conclude that the balance of hardships tips sharply in favor of the city."

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