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The San Francisco Chronicle

Insurance bill has hefty price tag;

Measure may violate federal regulations

by Victoria Colliver, Bernadette Tansey
September 16, 2003

A landmark bill that would require many California businesses to provide health insurance to their workers could be headed for a legal challenge as employers complain about the scope and cost of the legislation.

Both houses of the California legislature on Friday and early Saturday passed Senate Bill 2, authored by Senate President Pro Tem John Burton, D-San Francisco. It is expected to cover more than a million uninsured employees and make California the first state in three decades to mandate employer health coverage.

But many in the business community are outraged by the cost. Backers of the bill peg the annual cost at $1.3 billion to businesses. Opponents, however, claim the tab will be $5.7 billion to employers, who pick up 80 percent of the cost. Add in the 20 percent that is to be paid by workers, and the bill comes to $7 billion a year, according to the California Chamber of Commerce, which opposes the measure.

"The politicians say out of one side of their mouths that small businesses are the engines of the economy," said Kim King, president of King Security Services in San Francisco. "But then they always look to us to just fork over more dollars that we don't have."

King said the new health care bill would cost her company $1.49 million a year. That's 15 percent of the firm's annual revenues in an industry where profit margins run 5 percent or less, she said. King's not sure how much of the extra costs she could recover by raising rates for the guard services she provides to Union Square retailers like Cartier's and other customers.

Even the bill's supporters say the bill, if it becomes law, could land in court.

"This is going to be a tough legal challenge," said Jamie Court, head of the Foundation for Taxpayer and Consumer Rights, a consumer watchdog group. "States are allowed to regulate insurance, but this mandates benefits for a whole class of large employers with businesses in other states."

Court said it's fortunate the law doesn't go into effect immediately: "Overall it's good news because it creates a deadline to fix things."

Dubbed "pay or play," the Health Insurance Act of 2003 requires employers to provide coverage or pay a fee into a state health fund purchasing pool.

Businesses with more than 200 employees will have to provide coverage for the workers and their families by Jan. 1, 2006 and those with 50 to 199 employees will be phased in the next year. Employers with 20 to 50 workers are exempted from the law until a tax credit is created to help offset their costs. Businesses with fewer than 20 employees are exempt.

"This is a remarkable achievement," said Ron Pollack, head of Families USA, a liberal lobbying group, of the bill. "It will very significantly expand coverage ..... ." But businesses say the burden of the mandate will be unmanageable. In fact, some businesses may keep their workforces below the threshold number that triggers the coverage requirement by subcontracting part
of their work instead of hiring new employees.

"I think we're going to see a whole new kind of underground economy," King said.

The law applies to both full-time and part-time workers, as long as they work at least 100 hours a month or 23 hours a week. But people who are unemployed, work for very small businesses or for themselves are not covered under the bill.

The level of coverage must meet standards set by the Knox-Keene Act, a 1975 state law that establishes the rules that managed-care organizations must follow to keep their licenses. SB2 added in prescription drug coverage, which is currently not part of the law.

The law would require employers to pay at least 80 percent of the premium, leaving workers to pick up the balance. Contributions for low-wage workers, however, will be capped at 5 percent of their wages. Limits on how much workers will have to pay in deductibles and co-payments will be determined by the state's Managed Risk Medical Insurance Board.

The bill could have a major impact on large companies that do business in California. Wal-Mart Stores Inc., which labor groups say offers inadequate coverage, would have to make some big changes because its benefits do not meet the bill's standards.

"Our plan is geared more toward serious illness or catastrophic injury, not day-to-day going to the doctor," said Wal-Mart spokesman Bob McAdam. He could not provide the exact amount of the deductible employees must currently pay, but estimated it to be about $1,000.

Wal-Mart, based in Bentonville, Ark., hasn't done a full analysis of the additional costs it would bear in California, where it operates 163 Wal-Mart and Sam's Club outlets and employs 53,000 workers. McAdam said 78 percent of its California workers are full time. But that percentage could change if the company finds the additional health care costs too onerous, he said.

The bill still has to jump a few hurdles before it goes into effect.

Gov. Davis has 30 days to decide whether to sign the bill.

One of the major legal obstacles to the bill may well be the federal Employee Retirement Income and Security Act (ERISA) of 1974. It says that states have the right to regulate the health insurance industry but they can't regulate employee benefits, including health coverage.

Hawaii, the only state that currently requires employers to provide health insurance, approved its health mandate before the passage of ERISA. Hawaii got around ERISA by obtaining a waiver that allowed the state to grandfather in its health mandate.

"We've watched other states try it and nobody else has been successful," said Pat Schoeni, executive director of the National Coalition on Health Care, a non-partisan alliance of businesses, unions, and others supporting health care reform.

Schoeni and other health care experts also questioned whether the bill has strong enough language to control the rising costs of health care. Daniel Zingale, the governor's Cabinet secretary and former head of the HMO regulatory agency, said a proposal was added that establishes a commission to evaluate cost containment strategies.

"We're hoping we can sit down with the business community and convince them this is not a bad thing for California businesses," said Steven Thompson, vice president of government relations for the California Medical Association, which joined the California Labor Federation as one of the bill's major sponsors.

If that's not successful, Thompson expects the bill to be challenged in court. "We think we have a strong case that here's a state that wants to solve the problem of the uninsured, at least in part," he said.
Health Insurance Act of 2003 (SB 2)

Who's covered: At least a million people who work in companies with 20 employees or more. The bill would require employers to pay for 80 percent of health care coverage.

When does it take effect: Jan. 1, 2006 for companies with 200 or more employees; Jan. 1, 2007 for companies with 50 to 199 employees.

What would it cost: Estimates range from $1.3 billion to $7 billion annually for California businesses. Businesses would have the option to provide health coverage or pay a fee to the state, which would obtain coverage.

What's next: Possible legal challenge from business groups.
E-mail Victoria Colliver at [email protected] and Bernadette Tansey
at [email protected]