• California's Health Insurance Act of 2003 -- Just What Is Mandated?
  • November 7, 2003 | Authors: Robert A. Blum; Constance M. Hiatt
  • Law Firm: Hanson Bridgett LLP - San Francisco Office
  • The Governor has signed SB 2, the Health Insurance Act of 2003, which is the most ambitious and far reaching attempt to provide health care coverage in any state but Hawaii.1 Politicians, business owners, unions, and ordinary citizens have praised and vilified this new legislation. But what does it really mean and what will be its likely practical effects?

    Here are some possible effects of SB 2:

    • SB 2 could have no impact at all on private sector employers and their employees because there is a substantial chance that the courts will rule that SB 2 is preempted by federal law -- ERISA.

    • For public sector employers, the PERS health care program may become a magnet because that program apparently automatically complies with SB 2. Of course, there are some downsides to the PERS program, including the fact that the PERS program is struggling with costs.

    • However, if the administrator of SB 2 -- the Managed Risk Medical Insurance Board or "MRMIB" -- is able to provide a moderate cost health plan, some employers might drop their current health care plans and move to MRMIB's plan on a voluntary basis. Private sector employers would do this because in many ways they play a losing game by providing health care and would like to get out of this business. Public employers also would do this if MRMIB provides a more cost effective program than PERS. However, there is no statutory mandate for MRMIB to provide cost effective health coverage.

    • SB 2 may give a substantial boost to collectively bargained health care programs because they apparently automatically comply with SB 2. This could lead to the ironic situation where some unions -- particularly those made up of primarily low wage earners -- would negotiate health benefit programs that provide lower benefits than MRMIB in order to obtain higher cash wages.

    • It is also possible that SB 2 could be interpreted to mean that any union negotiated health care program will be exempt. If that occurs, then most public employers' existing health care programs will be exempt from SB 2.

    • Not much attention has been paid to the companion bill, AB 1528. That bill has the goal "to make available valid performance information to encourage hospitals and physicians to provide care that is safe, medically effective, patient-centered, timely, efficient, and equitable." If valid performance information were to be readily available, it could effect major changes in many parts of the health care delivery system. Whatever happens with SB 2, it appears that AB 1528 will be implemented. 2

    • If SB 2 is in fact implemented, then health care costs for some employers could go up substantially because of requirements for covering dependents, part timers, etc. This could drive employers to change their employment practices, bringing consequences that were probably not intended by the authors of SB 2.

    A very short summary of what SB 2 provides

    Health coverage provided -- Starting on January 1, 2006, MRMIB must arrange health coverage for employees and dependents of employers with 200 or more employees in this State. 3 The effective date is January 1, 2007 for employers with 20 or more employees in this State. Coverage is for each person who works at least 100 hours/month for a single employer and who has worked for that employer for three months. MRMIB will buy coverage from HMO's and insurance carriers and will not provide a self funded program.

    MRMIB will establish deductibles, copays, and total out of pocket costs. MRMIB is directed to consider both the impact on employees receiving health care and the ability of employers to pay the fee.

    Required fee -- Starting January 1, 2006, employers with 200 or more employees must pay a fee to the state for health care coverage for all of their employees who work at least 100 hours/month and have worked with the employer for 3 months. 4 The effective date is January 1, 2007 for employers with 20 or more employees.

    Employers with 20-49 employees don't have to comply until there is a tax credit to offset 20% of their coverage costs. (It is not clear whether the coverage arranged by MRMIB must cover employees and dependents of employers with 20-49 employees until this credit is created.) A fee must be paid for each eligible employee (called "enrollees") and dependent of covered employers. 5 The fee is based on the number of enrollees and dependents of the employer. Employers can require employees to pay up to 20% of the fee for the employee and dependents. There are caps on the fees charged to very low wage earners.

    There are yet no specifics on the amount of the fee, but it will be based on the "total amount necessary to pay for health care for all enrollees, and . . . their dependents eligible for the program." The fee is collected by the Employment Development Department ("EDD"). But EDD must "waive the fee" of "any employer that is entitled to a credit." The fees also have to cover the costs of administering and enforcing the program. In other words, employers and employees who contribute to the program will bear the entire cost of the program.

    The way out of the state fee is through a credit. SB 2 has a number of ways to get this credit, all of which are labeled as "providing proof of coverage."

    Providing "proof of coverage"

    If an employer can provide sufficient "proof of coverage" for its employees then it is exempt from paying a fee to the state under SB 2. There are a number of ways to provide proof. The major ways are to provide health care coverage from one of the following:

    • An employer sponsored group health plan that meets the requirements of ERISA and that provides the minimum benefits required under California's health insurance or HMO laws.

    • Any collectively bargained health and welfare coverage (including Taft Hartley funds) for enrollees and dependents. There are no minimum benefit requirements here. It is not clear whether public employers that "meet and confer" are covered by this exemption. Most public employers in California are unionized, so if this exemption applies to them SB 2's mandate would exclude most public employers. 6

    • Any coverage under PERS (also called PEMHCA) as long as PERS provides the minimum benefits required for ERISA plans. 7 We understand that PERS expects that its health benefits will meet the minimum standards.

    Here are some potentially costly features of SB 2

    Part time and seasonal employees will be covered; employers often exclude these employees.

    The employer's fee for dependent coverage will be 80% of the total. Many employers pay much less than this for dependent coverage.

    "Dependents" are defined more broadly than often occurs. It includes minor children as well as children who are 18 or over (with no school requirement). Dependents also include domestic partners. 8

    There are some major unanswered questions about SB 2

    The exact coverage requirements to avoid the fee, and the amount of the fee that will be charged, are unknown.

    The fee structure is not known. SB 2 does not indicate whether the fee will be a uniform amount, statewide (as PERS) or whether it will be geographically based. This is a hot issue. If it is uniform, then employers in lower cost areas will have a strong incentive to drop out of the program, so the net fee for employers who remain will be high. But if it is not uniform, then the employers in high cost areas -- mainly rural, small population counties -- will be hit with a higher cost at the outset. And these employers are often smaller, in counties in difficult economic circumstances. The choice for MRMIB on this score may be difficult.

    Implementation probably will be very messy. SB 2 will be challenged quickly in the courts. While it is challenged, MRMIB and EDD will have to gear up to administer this statute. This could create a large waste of money at a time of very tight state budgets, if SB 2 is ruled invalid. Furthermore, there is a substantial chance that the courts will not finish their work ruling on the validity of SB 2 before January 1, 2006. What happens then?

    What about ERISA preemption? 9

    SB 2 exempts from the mandated fee ERISA plans that provide minimum benefits, but the "minimum benefits" requirement is the rub. This is the vulnerable point for SB 2.

    Preemption is a wonderfully complex area of law. Wonderful for lawyers, that is. The statute is vague, and the courts -- especially the U.S. Supreme Court -- have spent much time and effort over many years trying to set standards that work well. So far they have not succeeded and the standards keep "evolving," using the lawyers' phrase. That means, of course, that the standards for preemption keep changing, which makes predictions about what the courts will do a bit chancy.

    Here is what the basic arguments probably will be. To a large extent, the lawyers will argue about whether the cases dealing with the Hawaii health care law or the ones dealing with the New York health care law govern SB 2. Hawaiian law requires that employers provide specific health care to their employees. New York law requires that patients who are not insured by Blue Cross or Blue Shield pay a surcharge to hospitals, which is paid over to the state. In New York, therefore, every ERISA plan that is not insured by the Blues must pay this amount, increasing their cost of providing benefits. Both the Hawaiian and New York laws were challenged as being preempted by ERISA. The Hawaiian law was struck down 10 (but later saved by the Congress 11) and the New York law was upheld. 12

    The Hawaiian law was struck down because it was a direct regulation of employee benefits provided by the employer and therefore clearly was invalid under the preemption rules. The New York law was upheld because it did not directly regulate health care plans provided by the employers and was a "revenue raising measure" which is a traditional area of state law and regulation. So the lawyers will argue whether SB 2 is closer to Hawaii or to New York.

    The proponents of SB 2 will say that it is only a revenue raising law and therefore is not preempted. One proponent has been quoted as saying that if the courts find for preemption, SB 2 will only be preempted as to the credit against the fee and if the employers want to give up the credit, "that's their choice." This argument wins if the courts read SB 2 to be like the statute in New York. But if the courts say that SB 2 is integrated and the effect of the credit is to push employers to specific health plan benefits, then the proponents' argument loses.

    The Supreme Court has said that a state statute is more likely to be preempted -- even a "revenue raising" statute -- when (1) it contains provisions that expressly refer to ERISA, (2) it forces an ERISA plan to adopt a "certain scheme of substantive coverage," and (3) it is more than just a tax that increases the cost of providing benefits to covered employees. 13 The opponents of SB 2 would argue that all of these criteria exist here. They would rely partly on the official summary of SB 2 that it "would require specified health benefits to be provided directly by employers or through the [new] program."

    On balance, it appears that SB 2 is more like Hawaiian law which regulates the content of health plans, than New York law which was a revenue raiser. But we would not bet the farm on this prediction. 14

    AB 1528 -- important even if SB 2 is invalid

    AB 1528 establishes the California Health Care Quality Improvement and Cost Containment Commission to report -- by January 1, 2005 -- on various health care issues including cost, quality, and "transparency." Part of the findings of AB 1528 state that "it is the intent of the Legislature to make available valid performance information to encourage hospitals and physicians to provide care that is safe, medically effective, patient-centered, timely, efficient and equitable. It is also the intent of the Legislature to strengthen the ability of the Office of Statewide Health Planning and Development to put hospital performance information into the hands of consumers, purchasers, and providers.

    If the Commission is able to make practical recommendations on these intentions, then it is possible that it could have a major effect on health care quality and cost. Generally, health care professionals can be responsive to data that show how they perform compared to their peers. Data can be tricky, and often a provider will argue that "my patients are sicker than anyone else's patients." But there are accepted ways to develop comparable data, and there are numerous examples where physicians respond rapidly when they see data that their practice methods are not in line with their peers. If this becomes widespread, and if the data is available to consumers and purchasers of health care, AB 1528 can have an important positive effect on California health care.

    1 For over three decades Hawaii has required that employers provide health coverage to employees who work 20 hours a week for 4 consecutive weeks. Hawaii's Prepaid Health Care Act of 1974.

    2 However, some have suggested that the new Governor could delay the implementation of SB 2 merely by delaying the implementation of AB 1528. Technically, that appears to be correct.

    3 SB 2 is not wholly clear on this date and for these employees, but this is the most logical reading of SB 2.

    4 There is no guidance on whether this is three consecutive months or any three months.

    5 Dependents are defined more broadly than under most existing health care insurance because there is no upper age limit for children.

    6 Of course, there will be technical questions about unrepresented employees; it is possible that they would be treated as covered by this exemption if their benefits are the same as those of union employees.

    7 Another way to provide coverage is through a regulated MEWA that provides minimum benefits or provides benefits that have been unchanged since 1/1/2004.

    8 If the domestic partner is not a "tax dependent," then the IRS says that the value of this coverage is taxable to the employee. Is the value of the state-mandated fee also taxable to the employee?

    9 SB 2 may also be challenged on the basis that it levies a new tax, which requires a 2/3's vote of both houses of the Legislature; it passed by a simple majority.

    10 Standard Oil Co. of California v. Agsalud, 633 F.2d 760 (9th Cir. 1980), aff'd 454 U.S. 801 (1981).

    11 ERISA sec. 514(b)(5).

    12 New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995).

    13 A key decision seems to be De Buono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S. 806 (1997) which explained the prior New York Travelers case.

    14 In fact, the "buzz" is that California will try to get a statutory exemption from preemption in the same way as Hawaii did.