ERISA Reflux

One foggy evening last fall, San Francisco Supervisor Tom Ammiano and a friend were walking through the Mission District in search of an after-dinner drink. Fresh from a festive but alcohol-free party for his daughter's 28th birthday, Ammiano certainly wasn't thinking about the Health Care Security Ordinance, the legislation he authored a year earlier to create the nation's first municipal program for universal health care access.

But, soon enough, thoughts of the ordinance would come to dominate the evening. The program it created, called Healthy San Francisco, was hailed as a major breakthrough in health care policy even though some employers--particularly restaurant owners--objected to what it would cost them. And that's where the trouble lay.

After scouting several blocks of Valencia Street, Ammiano chose a family-run restaurant he used to frequent for tapas. Declining an offer for a table, he and his companion went straight to the bar, and Ammiano ordered a Manhattan. As he put a twenty-dollar bill on the counter and stirred his drink, one of the restaurant's owners recognized him and walked right over.

"You're going to have to leave," she said.

"I beg your pardon?!" he shot back.

"You're not welcome here," she responded.

Ammiano--who during more than four decades in San Francisco has been a schoolteacher, a board of education president, a stand-up comic, a gay-rights activist, and twice a mayoral candidate--knew immediately what the problem was. But all those years of experience as a public figure had also taught him there was no use in making a scene. Abandoning his twenty on the bar, Ammiano turned and left. "I didn't even get to finish my drink," he sighs.

Welcome to the legal contest that is pitting liberal San Francisco politicians like Ammiano (who says he now chooses his restaurants more carefully) against business owners incensed over the skyrocketing cost of turning a profit in San Francisco.

Targeting San Francisco's 73,000 uninsured residents between the ages of 18 and 64, the city-run program promises to provide universal health care coverage on an annual budget of about $200 million. But as parochial as the squabble over this program is, it has quickly turned into a federal court battle that could, in the absence of decisive action from Congress, determine the direction of health care reform in the country.

The litigation has followed a winding path. Federal district Judge Jeffrey S. White ruled in late 2007 that the city's health care ordinance was preempted by federal law, and he enjoined the city from enforcing the ordinance. In January a panel of the Ninth U.S. Circuit Court of Appeal granted a stay and allowed the program to take effect pending the appeal (Golden Gate Rest. Assoc. v. City and County of San Francisco (512 F.3d 1112 (2008)). In April the same Ninth Circuit panel heard oral argument on the case's merits. A decision could come at any time.

"The context of this case is momentous," Curtis A. Cole told the three-judge panel of the Ninth Circuit at the April hearing. "We are talking about universal health care."

Cole, a partner at Pasadena-based Cole Pedroza who represents the Golden Gate Restaurant Association (GGRA), said a ruling on the case will "guide the rest of the country."

Small wonder, then, that groups as diverse and powerful as the U.S. Chamber of Commerce, the AARP, the National Federation of Independent Businesses, and the Service Employees International Union have all weighed in with amicus briefs. (See "Choosing Sides," right.)

Opinions about what will decide the case vary widely, but at George Washington University's School of Public Health Policy, ERISA legislation expert Phyllis Borzi distills the legal dispute in San Francisco down to a simple question of semantics: What, exactly, distinguishes a new fee from a new benefit?

If the judges decide that the city is simply imposing a fee on restaurants and other businesses to fund Healthy San Francisco, the ordinance's funding scheme will probably pass muster, she suggests. However, if they determine that the city is really mandating new employee benefits, then ERISA, a federal pension-reform bill from the 1970s, will likely apply, and the city will no longer be able to force employers to fund their portion of Healthy San Francisco.

The grip that the 1974 Employee Retirement Income Security Act, or ERISA, has on American health care today is formidable--and longstanding. It all began when Congress was on the homestretch to getting ERISA passed. The act was designed to crack down on the mismanagement and abuse of workers' pensions. But to promote its passage, the drafters slipped in a preemption provision on other employee-welfare issues as well (such as life insurance and health care). What they didn't include was a blueprint for enforcing that provision.

As the relevant section reads, ERISA preempts "any and all state laws insofar as they ... relate to any employee benefit plan covered" by ERISA (29 U.S.C. § 1144 (a)). So, what does this mean for health care reform?

It's a difficult question, because Congress failed to prescribe any employer requirements--such as funding levels--when it came to health care benefits. (At the time, this didn't seem like a big deal, because it was widely assumed that national health care reform was just around the corner.)

"They didn't legislate any substantive regulations for health plan benefits, and so we were left with a great void," explains Jeff Lewis, whose Oakland law firm--Lewis, Feinberg, Lee, Renaker & Jackson--has helped San Francisco defend its ordinance against the claim of ERISA preemption.

The result is a coast-to-coast muddle acknowledged even by the U.S. Supreme Court, which has heard at least 20 challenges to ERISA over the years. "Our prior decisions have not succeeded in bringing clarity to the law," wrote Justice Antonin Scalia, in a concurring opinion joined by Justice Ruth Bader Ginsburg (California Div. of Labor Standards Enforcement v. Dillingham Constr., 519 U.S. 316 (1997)).

And so for decades numerous local and state attempts at health care reform--such as in Maryland and New York--have come up against ERISA. And lost.

"ERISA was a worker-protection plan for factories closing in the '60s and '70s to protect workers from having their pensions mismanaged," says Vince Chhabria, a deputy city attorney who is defending San Francisco against the restaurant owners. "Now fast-forward 30 years, and ERISA is being used as a weapon to prevent them from receiving health care coverage."

Massachusetts and Hawaii have universal health care plans in place, but Hawaii's is the only one operating under a congressionally approved exemption to ERISA, dating back to the original ERISA legislation. Massachusetts's new program is up and running--but still untested in the legal arena.

At least one health-policy expert, however, thinks San Francisco may actually have cracked the code for avoiding an ERISA preemption. George Washington University's Borzi says that unlike other reform attempts that simply alter employers' insurance obligations, the city's ordinance is part of a multifaceted health care reform scheme. Also, it gives employers the choice of either paying a specified amount toward health care coverage for their workers or paying the same amount into the city program.

"These things are very politically difficult to do," says Borzi, who is not involved in the litigation. "But the courts' decisions suggest they are looking for something that makes the employer piece part of a broader effort. And the structure San Francisco has set up allows employers to have a genuine choice. Those things help with the argument."

Whichever way the Ninth Circuit panel decides, both sides agree the case is likely to continue--either to the Ninth Circuit en banc or directly to the U.S. Supreme Court.

That the United States is in great need of health care reform is hardly in dispute. In fact, in terms of "overall health-system performance"--which takes into account factors such as infant mortality and life expectancy--the World Health Organization ranks the United States 37th on the planet. That's one slot ahead of Slovenia, but far behind Canada and every country in Western Europe. Even Morocco, Cyprus, and Colombia scored higher. Yet all of these countries spend less on health care than the United States does.

"We should be embarrassed that we're one of the wealthiest countries in the world and we have such terrible health care," says Kevin Westlye, executive director of the GGRA, which represents about 1,000 of San Francisco's 2,500 restaurants. But the Health Care Security Ordinance (HCSO) is not the answer, he says: It is too costly for employers, too difficult to administer, unlawful, and only a piecemeal solution when the country needs national reform.

The director of Healthy San Francisco herself agrees that a federal solution would be better. But Tangerine M. Brigham hastens to ask, "How long have we been waiting for national health care reform?

"Should we do nothing while we're waiting?" continues Brigham, who is also one of San Francisco's deputy directors of health. "I think not." Better to galvanize reform at the city level, she says, in the hope that it will spread to a regional, state, or even national level.

The Golden State has seen efforts to improve access to health care as far back as the 1940s. And just last year Governor Schwarzenegger introduced a sweeping health care reform bill to the state Senate, before news of the state's budget deficit--at the time estimated to be around $14 billion--effectively killed it. Locally, health care was a big issue for Willie Brown when he was the mayor of San Francisco; in an election in 1998, city voters backed a policy declaration for expanding health care access to all residents in need of it. Six years later, when Californians rejected a statewide Health Care Coverage ballot initiative by a margin of less than 1 percent, more than two-thirds of San Francisco voters favored it.

"That's always been on the books, that San Franciscans would support health care reform," says Supervisor Ammiano, who in 2005 leveraged that support to propose the original ordinance that led to the creation of Healthy San Francisco, requiring more employers to provide health insurance. By the following year, he had enlisted the support of Mayor Gavin Newsom--himself a former restaurateur--and ERISA experts such as Lewis. Newsom then appointed a Universal Healthcare Council to give voice to the interests of various city sectors, including health care, business, and labor.

GGRA's Westlye sat on that council and proposed alternate-financing mechanisms for Healthy San Francisco (a quarter-penny sales tax or an increase in the city's business-registration fee). But, he says, those suggestions were ignored.

Nonsense, counters Deputy City Attorney Chhabria. If the city had offered free or low-cost health care to residents without giving employers credit for what they already were spending, he argues, employers would have canceled health benefits for their San Francisco staff and abandoned them to the city's program.

But Westlye isn't so sure. "There's no real data to support the city's assumption," he says. "The existing clinic system services the San Francisco public, and provides virtually the same medical services existing under Healthy San Francisco. Employers could legally [have dumped] their covered employees into the existing city and nonprofit clinic system at any time over the past several years. Yet it did not happen."

Indeed, an existing network of public and private clinics has long tended to the health care needs of the poor in San Francisco: Clinics in 27 locations citywide form the backbone of Healthy San Francisco. But by emphasizing preventive and primary care and improving coordination between the clinics, the city hopes to improve access and create a more efficient and less fragmented care-delivery system for uninsured residents between the ages of 18 and 64.

When two Chinatown clinics piloted Healthy San Francisco in mid-2007, only residents with incomes at or below the federal poverty level (FPL) were covered. (For a single adult, that amounts to no more than $867 a month.) Then, in January 2008, eligibility was extended to include people earning up to three times the FPL--in theory covering 64 percent of uninsured San Franciscans in the target age range.

As of April, however, the city's poorest people still made up the vast majority of enrollees. Some of them, such as Edwin Lee, are unemployed. The 39-year-old San Francisco native says he's been able to get medical appointments at public clinics more quickly under Healthy San Francisco. "It opens the door to give folks a chance to get back at life," he says. "I'm plugged into Healthy San Francisco now. It keeps me balanced." Other beneficiaries come from the ranks of the working poor, says Dr. Catherine James, the medical director at a Healthy San Francisco clinic in a neighborhood of housing projects. Her patients in this group include busboys, exotic dancers, and sales clerks, she says.

Only the poorest enrollees receive free care; the rest pay on a sliding scale based on their income. Eventually, the city hopes to extend coverage to all income levels to reach all uninsured adults. But government funding and sliding-scale fees alone won't be enough to do that; Healthy San Francisco will also need to keep collecting the money it gets from the city's businesses.

Any for-profit business with at least 20 employees in the city must contribute quarterly fees to Healthy San Francisco-unless the business already pays the equivalent into a variety of qualifying health carecoverage programs. Fees are based on the number of hours worked by any employee who clocks at least ten hours a week. (See "The Cost of Care," page 21.)

At Palio d'Asti, a fashionable Italian eatery in the city's Financial District one recent afternoon, Westlye enjoys a pizza primavera while he runs through the numbers. Let's say, he suggests, you have a restaurant grossing $3 million a year. On average, such a restaurant will spend an amount equivalent to 8 to 10 percent of its payroll on health care insurance. But under the HCSO, that same restaurant would pay 20 percent or more of its payroll for health care. "There is no way the restaurant can raise prices enough to accommodate that," Westlye maintains, noting that restaurant franchises may not even be allowed to adjust prices to cover the added cost. "This is about survival for our industry," he says.

Palio d'Asti's chef and owner, Dan Scherotter, agrees. "We're the only blue-collar industry left in San Francisco," fumes Scherotter, who is also the GGRA's president. "San Francisco's lefty politicians have priced [other] low-wage employees out of the market."

"This isn't about health care," continues Scherotter, the son of Gary Scherotter, Palm Springs's late, great criminal-defense lawyer. "It's about who pays for it. And Healthy San Francisco is too damn expensive. We can't afford the level of health insurance it is requiring."

Other businesses also find the ordinance problematic. Take, for example, a large, self-insured employer that assumes the financial risk of an insurance company by paying its employees' health care costs directly to providers. Depending on the health services its employees seek, an employer might have no medical outlays for a particular worker during one quarter, but then pay a very large amount the next. Under HCSO, employers cannot average costs among employees or over the course of a year. So, during some quarters, such an employer might end up paying as much into Healthy San Francisco as another that provides no private employee health benefits at all. "Large companies that are self-insured may get hit the most," says David W. Herbst, a partner at Manatt, Phelps & Phillips in Palo Alto who specializes in employee benefits.

According to Herbst, Healthy San Francisco is also likely to be a big headache for companies--including law firms--that have highly mobile employees who work in various offices. In fact, he suggests that a company's administrative costs for tracking the amount of time employees work in its San Francisco offices could exceed what it pays into the program. "We in the ERISA field who represent employers hope [the ordinance] will be preempted," he says.

Predicting how a panel of federal judges will rule on a particular case is always tricky. In this case, however, it may be significant that the same Ninth Circuit panel that stayed Judge White's ruling against the program is now deciding the case on the merits. If, in the end, the judges vote against the city, public officials promise that there is enough state and federal money available to keep Healthy San Francisco going for quite a while--albeit only at the present eligibility levels. And if the restaurants lose? Westlye says menu prices may rise, and he predicts the high price of doing business in San Francisco will chase many full-service restaurants out of town. Owners may switch to quick-service restaurants with fewer than 20 employees to skirt the ordinance altogether, forever changing the face of dining and tourism in San Francisco--and potentially jeopardizing a prime source of city revenue.

Meanwhile, the future of health care reform nationwide hangs in the balance. Says attorney Lewis: "ERISA has put serious obstacles in the way of past attempts to do anything on a state or local level to reform health care. If this case goes against the city, I am very pessimistic as to whether anyone, anywhere, can design a universal health care program with any employer-based payment."

Deputy City Attorney Chhabria agrees: "The outcome of this case will have a huge impact on the national debate. If the GGRA prevails, it's the death of universal health care at the local level." On the other hand, he says, "If we win, San Francisco will provide a road map to other jurisdictions to provide health care to their citizens."

Jeanette Borzo is a senior editor at California Lawyer.