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POLICY: California Policy Update By John Irvine

With support apparently growing for the Schwarzenegger plan in California, opponents are already laying the groundwork for a legal challenge. The Financial Times (UK) quotes business sources as saying lawsuits are  "all but inevitable" if the plan passes in Sacramento. That could tie the effort up in court "for years" — perhaps even until after the 2008 elections. According to the newspaper, challengers are likely to use a strategy based on the one used to overturn Maryland’s "Wal-Mart law" last month. 

"Jack Bovender, chairman and chief executive of HCA, the big hospital group, underlines the legal problems faced by such state efforts. "we’re pleased that some states have recognized the gravity of the issue of the uninsured. However, a patchwork of state plans is problematic because of potential problems with ERISA (The Federal benefits law.) That 1974 statute, the Employee Retirement Income Security Act, in effect nationalized employer health plans to spare companies the cost of complying with conflicting state benefits.

"Legal challengers are (also) likely to claim that the plan imposes a disguised tax and so should require a two thirds vote of the  legislature, since California law mandates a super-majority for tax increases. Alternatively, opponents will try to use the Erisa law."

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5 replies »

  1. jd,
    That’s a good point. I wonder if states could specifically exempt employers who are governed by ERISA regulations. Under an employer mandate approach, multi-state employers would be providing coverage which is the prime objective of the effort. As to whether it would meet minimum standards or not, this is a tough balancing act, especially for an individual state. As Massachusetts is finding out with bids for minimum creditable coverage (MCC) averaging $380 per month vs initial expectations of closer to $200 (for single coverage) combined with the need for significant subsidies up to at least 300% of the FPL, states have to be careful not to create more problems than they solve if taxes are raised too much.
    I think it would be helpful if states specifically addressed the dual issues of (1) how high up the income spectrum should subsidies apply and (2) what is the maximum percentage of income that states should expect individuals to spend for health insurance plus their share of healthcare expenses (if any). At the low end, states should probably push Medicaid as far as they can since federal taxpayers cover half of that cost. Since money is the constraining resource, they should probably answer these two questions first before designing a benefits package for insurers to bid on. It might also be useful to examine benefit mandates to see which, if any, can be eliminated.

  2. Barry,
    You write “Bottom line: employers providing coverage under ERISA would already be mandate compliant, and the fee that might have to be paid into a state fund by employers not currently offering health insurance is probably not a tax.
    I’m not sure that employers offering coverage under ERISA (namely, by self-insuring) are necessarily compliant with the California law. The reason is that the CA law may stipulate a floor on what counts as adequate coverage, and so a self-insuring employer could offer coverage which does not meet these minimal requirements. I would assume that any state aiming for universal coverage would stipulate some minimum adequate level, or else universal coverage is trivialized.
    That said, I think that CA and other states (MA for sure) may run afoul of ERISA, because ERISA forbids state regulation of the benefits for self-insured employer health plans.
    To those with more ERISA knowledge than I, does this sound right? If so, how can ERISA be circumvented? By getting a judge to rule that a tax penalty for below-standard benefits does not count as state regulation of an ERISA plan?

  3. Mandating that employers provide health benefits would violate ERISA. A payroll tax probably wouldn’t. In fact, as a legal strategy I would recommend that California institute community rating, enact a payroll tax on ALL companies and then give people vouchers to buy health insurance. This would destroy the employer-based system– because anyone currently providing insurance would still have to pay the tax, and, for that very reason, it might be a good policy. I think that it would be a no-go politically.

  4. Under any state approach that is either an individual mandate or imposes a play or pay requirement on employers, any employer already providing health insurance to its employees is likely to be in compliance with the mandate. In that case, it’s academic or moot from those employers’ perspective. As to whether an employer payment into a state fund as an alternative to offering health insurance is a tax or not, it seems closer to a fee for a drivers license or car registration. Are those taxes or fees? Even if you argue, in the case of healthcare, that the fee is a function of payroll as opposed to a flat fee for every similarly situated employee (single coverage or family coverage), it represents a payment for an identifiable product or service (health insurance in this case). That’s very different from attempts to raise revenue to finance a state’s general, non-specified obligations.
    Bottom line: employers providing coverage under ERISA would already be mandate compliant, and the fee that might have to be paid into a state fund by employers not currently offering health insurance is probably not a tax. FICA taxes, by contrast, are paid by today’s workers to finance Social Security and Medicare (Part A) for today’s retirees. That’s a critical difference.

  5. This is kinda like a legal challenge on the Titanic over which passangers should board the life boats first. I’m for a single national solution, maybe this will get us closer.

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