On Monday, in Golden Gate Restaurant Association v. San Francisco, the U.S. Supreme Court denied review of a legal challenge to San Francisco's universal health care program (the "Healthy San Francisco Plan"). In 2006, the City and County of San Francisco created a local health care plan designed to improve health care access for low and moderate income residents. An important source of funding for the plan came from the employer spending requirements - commonly termed "pay or play" provisions. Basically, this provision requires certain employers to spend a minimum amount on health care for their employees. They can do this directly (for example, by setting up a traditional employee-based health plan, establishing an on-site clinic, or reimbursing employees for certain health care expenditures) or they can satisfy this requirement indirectly by paying into a city-based health plan which their employees can join.
The Golden Gate Restaurant Association challenged this employer spending requirement by claiming that it was preempted by the federal Employee Retirement Income Security Act of 1974 ("ERISA"). This case represents the latest in a long line of legal challenges by employers using ERISA as a shield against state and local regulation designed to improve health care access for consumers. The practical impact of the Supreme Court's denial of review is good because it preserves the Healthy San Francisco plan for now. Unfortunately, the case highlights the legal uncertainty facing states and local governments that want to craft local solutions to their health care crises. This uncertainty is unacceptable given the long history of ERISA being used to frustrate state and local reform efforts and the fact that this kind of local reform will probably still be needed even after federal health reform is implemented.
ERISA Preemption
ERISA was passed by Congress in 1974 to safeguard employees from the abuse and mismanagement of funds collected to finance employee benefits plans. State laws had been ineffective so Congress established extensive federal reporting, disclosure, and fiduciary duty requirements on employers. Congress also wanted to ensure a uniform regulatory regime for employers that operated in multiple states, so ERISA expressly preempted "any and all State laws insofar as they...related to any employee benefit plan."
While ERISA does not address issues specific to health care benefits, it does contain an express exception to preserve traditional insurance regulation by the states. In fact, the U.S. Supreme Court has repeatedly noted that ERISA was not intended to displace general health regulation, which is historically a matter of local concern. Nonetheless, employers consistently try to use ERISA to argue that state health care regulations impacting employers are preempted and thus invalid. Because the scope of ERISA preemption is not clearly defined in the statute, courts have been instrumental in defining how far states can go in regulating employers: How do we know when particular laws "relate to" an employee benefit plan and thus are preempted by ERISA or constitute the kind of health regulation saved from preemption?
Challenges to state and local health reform laws that require employers to share financial responsibility highlight this ambiguity. In 1980, in Standard Oil Co. v. Agsalud, the Ninth Circuit struck down a Hawaii statute that would have required employers to provide health care plans for their employees. The court held that it was preempted by ERISA because it regulated aspects of plan administration, such as reporting and benefits administration, that "related to" ERISA plans. However, in 2008 in Golden Gate, the Ninth Circuit upheld San Francisco's "pay or play" provision, finding that it was not preempted by ERISA. Although the plan required a minimal contribution by employers to help improve health care access for their employees, the court held that it did not "relate to" an ERISA plan for three reasons: it did not require the employer to establish a traditional employee-benefits (ERISA) plan; it did not mandate the kind of benefits that employers would have to provide; and employers had a meaningful choice between satisfying the requirement directly and paying into a city plan open to their employees.
Just one year before Golden Gate , a Maryland "pay or play" law was struck down by the Fourth Circuit in Retail Industry Leaders Ass'n v. Fielder. Like the San Francisco plan, the Maryland law required employer participation and gave employers a choice between providing benefits directly and paying money to the state of Maryland. The court found that the law was preempted by ERISA, however, because the law did not give employers a "meaningful choice" and thus effectively required an employer to establish an employee-based benefit plan. The expenditure required was significant (employers had to spend at least 8% of total payroll on employees' health insurance costs) and, unlike the San Francisco plan, the Maryland law provided nothing in return to the employer or its employees if an employer did pay money directly to the state. No reasonable employer would pay this money to the state instead of paying into an employee benefits plan.
Based on the Fourth and Ninth Circuit decisions, it seems that the law's impact on employers, flexibility in the method of compliance, and meaningful choice are critical factors in determining whether state or local reform laws will be preempted by ERISA. However, none of these factors is clearly defined and we don't know how important any one factor is to the analysis. The Supreme Court's denial means this ambiguity still exists.
Effect of PPACA
The Golden Gate case highlights another interesting unknown: the impact of the federal reform law, the Patient Protection and Affordable Care Act (PPACA), on ERISA challenges to state and local health reform. Before denying review of Golden Gate, the U.S. Supreme Court asked the federal government to weigh in on the issue of ERISA preemption. In an amicus brief, the federal government asked the Court not to review the decision, which meant letting San Francisco's plan remain in place.
First, the government asserted that "[a]lthough [PPACA] accomodates state authority over regulation of health insurance, it significantly reduces the potential that state or local governments will choose to enact health care programs like [this one]." While, this may be true to some extent, health policy experts agree that PPACA's tax "penalty" on employers is not significant enough to influence decisions to establish or keep benefit plans, a number of people will remain uninsured because they will not be able to afford insurance, and states with large numbers of undocumented immigrants will be forced to craft local solutions to improving access and reducing costs for this population. PPACA will not obviate the need for state and local reform, so more ERISA challenges are likely.
Second, the federal government admitted that it does not yet know what impact the PPACA will have on the question of ERISA preemption, and it needs more time to figure this out. In fact, in 2008, the U.S. Department of Labor had sided with the employers in Golden Gate, arguing that the employer spending requirement was preempted and indicating its intent to promulgate regulations consistent with that position. Since Obama took office and the PPACA was passed, however, the agency has decided not to issue the proposed regulations.
Although the government urged the Supreme Court to deny review of the legal challenge, it did not take a position on the question of ERISA preemption. Rather the federal government said that it needed time to determine whether the new federal requirements of PPACA have independent preemption consequences or otherwise help to define the scope of state power under ERISA. The government felt it would be premature for the Court or the Department of Labor to determine preemption before the full regulatory scope and impact of PPACA could be fleshed out -- creating even more uncertainty about the impact of ERISA on state and local health reform efforts.
In sum, while the Supreme Court's denial of review preserves the Healthy San Francisco plan for now, it also leaves unanswered two very important questions: To what extent does ERISA limit states' power to require employer participation in local health reform? And what impact, if any, will the PPACA have on the scope of this power? The Supreme Court's decision on Monday means we have to wait for the U.S. Departments of Labor and Health and Human Services to answer these questions.
