Governor's health plan may face legal hurdles

Gov. Arnold Schwarzenegger's universal health care plan requiring most employers to contribute to their workers' coverage could face two major legal obstacles.

Under the governor's plan, all employers with more than 10 workers would be required to offer insurance or pay the equivalent of 4 percent of their payroll into a state fund.

Legal experts say such assessments may run afoul of the federal Employee Retirement Income Security Act (ERISA), which pre-empts state laws dealing with employee benefit plans.

Earlier this month, a federal appeals court cited the law when it invalidated a Maryland law requiring employers with more than 10,000 workers in the state to spend more on health care.

Wal-Mart Stores Inc., the only company in Maryland with that many workers, would have been required to spend at least 8 percent of payroll on employee health insurance or pay the shortfall to the state.

Schwarzenegger administration officials say the case should have not any bearing on the governor's plan, which does not single out one company or mandate specific health benefits.

The governor also insists the 4 percent payroll levy is not a tax. But fellow Republicans in the Legislature and business groups disagree and say the tax is subject to a two-thirds vote of the Legislature.

"The dilemma faced by any health care reform proposal in California is this: If it proposes an employer mandate, it risks running afoul of ERISA," said Allan Zaremberg, president of the California Chamber of Commerce.

"If it contains a payroll tax alternative to address the ERISA issue, it requires a two-thirds vote in the Legislature under Proposition 13 -- and still might violate ERISA given the recent Maryland ruling."

Schwarzenegger's plan calls for spending $12 billion annually in combined state, federal and private-sector funds to provide basic health coverage for 6.5 million uninsured Californians.

The plan, which requires approval by the Legislature, would force employees to contribute to their coverage and provide subsidies for the poor. Hospitals and doctors would also face levies.

But Michael Shaw, assistant director for the National Federation of Independent Business, said the organization will go to court over any plan that includes an employer mandate.

"What we do not want to see is for proposals that are suspect on legal ground to go forward," Shaw said.

His group was instrumental in the 2004 repeal by voters of Senate Bill 2, which also included an employer mandate.

Kimberly Belshé, Schwarzenegger's secretary for health and human services, said the governor has asked his attorneys to review the Maryland decision.

Daniel Zingale, a senior administration official who worked on the governor's health plan, said there's an important distinction between Maryland and California.

"In Maryland, the law was aimed at one retailer and there was no choice," Zingale said. "In the governor's proposal, (there's) an option for businesses not to offer coverage at all, but simply to pay the 4 percent."

Christopher Renz, a principal in the San Francisco office of Mercer Health & Benefits, which represents employers, believes the issue will not be settled until the U.S. Supreme Court weighs in.

The 9th U.S. Circuit Court of Appeals in San Francisco, which would likely handle a challenge to the governor's plan, has a more liberal bent than the 4th Circuit Court that decided the Maryland case.

"I don't think we can automatically conclude how the governor's proposal would be viewed by the appeals courts out here," Renz said.

The administration, he said, will be able to better assess its legal chances when the 9th Circuit rules on a challenge to a San Francisco ordinance.

That law would require businesses with 20 or more employees to pay for the cost of each worker's health care. It is being challenged by the Golden Gate Restaurant Association.

ERISA pre-empts state laws that affect employer benefit plans so that employers can design one plan for their national work forces.

ERISA expert Mark Johnson does not believe the Schwarzenegger payroll tax would survive a court challenge.

"If you're telling an employer who is already offering an ERISA health plan that you have to spend X number of dollars -- or X percentage of payroll, however it's termed -- or pay a tax, that clearly is not going to pass (legal) muster," Johnson said.

But forcing employers who do not offer health coverage to do so is a separate issue that needs further legal review, Johnson said.

State Sen. Sheila Kuehl, D-Santa Monica, said the Maryland ruling makes it clear federal courts "don't want states messing with benefit arrangements that employers give their employees."

Kuehl plans to introduce a "single-payer" universal health care plan run by the state. The legislation will be similar to one that Schwarzenegger vetoed last year.

It would have been financed by taxes on individuals and businesses that would have replaced the health premiums that both now pay to private insurers. Doctors and hospitals would remain private.

"If you're looking at a long-term solution ... single-payer is the only one that pencils out and provides comprehensive benefits to everyone that are affordable," Kuehl said.

About the writer:

• The Bee's Aurelio Rojas can be reached at (916) 326-5545 or arojas@sacbee.com.