San Francisco Health Care Mandate Inches Toward Supreme Court

The 9th U.S. Circuit Court of Appeals’ decision this month not to review a 2008 appeals panel ruling upholding a San Francisco health care spending law brings one step closer a potential U.S. Supreme Court review and perhaps a final resolution on the legality of employer spending mandates.

In a case followed by employers nationwide due to its potential impact on the design, cost and administration of corporate health plans, a majority of appeals court members rejected a request for the full appeals court to review a unanimous ruling by a three-judge panel of the court that the law could stand.

Under the law, San Francisco employers must spend as much as $3,600 per employee annually on health care in order to avoid stiff fines. The Golden Gate Restaurant Association, a San Francisco-area employer group that brought the case, argued that the law runs afoul of a provision in the Employee Retirement Income Security Act that pre-empts state and local ordinances that relate to employee benefit plans.

Under the ordinance, which went into effect in January 2008, employers with at least 100 employees have to make health care expenditures of at least $1.85 per hour for each employee working at least eight hours per week. Employers have a variety of options to satisfy the spending mandate, including payment of health insurance premiums, contributions to health reimbursement arrangements and health savings accounts, and payments to a city fund.

Judge William Fletcher, who also wrote last year’s appeals court ruling, says ERISA pre-emption did not come into play. “Nothing in the ordinance requires the employer to establish an ERISA plan, and nothing in the ordinance interferes in any way with the uniformity of ERISA regulation,” he wrote.

In a dissent, Judge Milan D. Smith Jr. wrote that the city ordinance strikes at the heart of what ERISA pre-emption was designed to prevent: the proliferation of varying state and local benefit laws and requirements.

As it stands, the decision will “undoubtedly serve as a road map in jurisdictions across the country on how to design and enact a labyrinth of laws requiring employer compliance on health care expenditures, thereby creating the very kind of health care expenditure balkanization ERISA was designed to avoid,” he wrote.

Kevin Westlye, executive director of the Golden Gate Restaurant Association, says the group intends to seek a Supreme Court review of the case.

Legal experts say it is likely the Supreme Court will take up the case because the ruling has created a split at the appeals court level—in 2006, the 4th U.S. Circuit Court of Appeals ruled that a Maryland health care spending law was pre-empted by ERISA.

In addition, experts say, a Supreme Court review is likely given the huge impact the San Francisco ruling would have on corporate benefit plans.

“Given that there is a conflict in the courts and that this clearly is a case of national importance, one would think that the Supreme Court will take it up,” says Kathryn Wilber, senior counsel-health policy with the American Benefits Council in Washington.

It is the potential proliferation of similar laws that most concerns national employers. It would be incredibly difficult for employers to track, let alone administer, what could become a maze of spending laws, experts say.

“If ERISA pre-emption means anything, it should be that employers shouldn’t have to analyze and comply with benefit laws that could pop up in every nook and cranny of the country,” says Andy Anderson, an attorney in the Chicago office of Morgan, Lewis & Bockius.

For employers that meet the $1.85-per-hour spending mandate, the only direct impact is the ordinance’s reporting requirements.

But many employers don’t meet the spending requirement. Few employers provide health care coverage to employees working as little as eight hours a week—the trigger for the mandate.

In addition, the law generally requires a spending contribution even for those employees who have rejected coverage from their employers in favor of being covered under a spouse’s group health care plan.

Employers not meeting the spending requirements have taken a variety of approaches. Some have found that the easiest action is just to pay the required contribution to San Francisco, says Rich Stover, a principal with Buck Consultants in Secaucus, New Jersey.

Other employers have established health reimbursement arrangements for affected employees. With that approach, employers have assurance that their contributions are being used to pay for their own employees’ health care expenses rather than going to a city fund, Anderson says.