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California Considers 'Fair-Share' Insurance Initiative

California Governor Arnold Schwarzenegger is forging ahead with a universal health care initiative that opponents contend is a ticking legal time bomb. He unveiled a package of proposals Jan. 8 aimed at securing health care for 4 million uninsured Californians.

The proposal places some of the burden of funding that health care on employers with 10 or more employees that do not already offer health insurance to their workers. Those companies, estimated to be 7.5 percent of businesses employing 5.7 percent of California workers, would be required to pay the equivalent of 4 percent of their payroll into a state fund--an estimated annual contribution of about $1 billion.

Needless to say, businesses aren't happy about the idea. They argue that the proposal forces employers to provide health benefits since few companies would opt to subsidize the state rather than insure their own employees. That violates the 1974 Employee Retirement Income Security Act (ERISA), which bars states from telling companies how to run their benefits programs.

That argument got a huge boost Jan. 17, when the 4th Circuit affirmed a district court ruling that ERISA preempts Maryland's Fair Share Health Care Fund Act, which is structurally similar to Schwarzenegger's proposal.

"In effect, the only rational choice employers have under the Fair Share Act is to structure their ERISA health care benefit plans so as to meet the minimum spending threshold," the 4th Circuit wrote. This "conflicts with ERISA's goal of permitting uniform nationwide administration of these plans."

Dampening Effect

Passed in 2006, Maryland's law required employers with more than 10,000 employees in the state to spend at least 8 percent of their total payroll on employees' health insurance costs or pay the shortfall to the government.

The Retail Industry Leaders Association (RILA) went to federal court to challenge the law on behalf of its member Wal-Mart, aiming to set a strong precedent that will be persuasive outside the 4th Circuit. It achieved just that. The 4th Circuit invalidated the law because it undermined ERISA's goal of harmonizing state and federal administration of employee benefit plans and placed undue administrative and financial burdens on Maryland businesses.

In the wake of RILA v. Fielder, "any time that a proposal essentially would force an employer to, as a practical matter, change its plan as governed by ERISA, then you would have to say there is a compelling argument that it would in fact be pre-empted by ERISA," says W. Stephen Cannon, the partner with Constantine Cannon, who represents RILA.

California's proposal, which has yet to be translated into a bill, differs from Maryland's law, insists Schwarzenegger's spokesperson Sabrina Lockhart. "We feel strongly that the proposal passes ERISA scrutiny because it doesn't dictate what level of benefit a company must have," she explains. "We are optimistic that when the plan takes its final shape it will have strong legal footing."

Yet the 4th Circuit's decision makes it clear that the majority judges viewed Maryland as the thin edge of the legal wedge for "fair share" initiatives.

"Were we to approve Maryland's enactment solely for its noble purpose, we would be leading a charge against the foundational policy of ERISA, and surely other states and local governments would follow," the majority wrote. "This is precisely the regulatory balkanization that Congress sought to avoid by enacting ERISA's preemption provision."

ERISA experts tend to agree. "It's hard to conclude that Congress intended for ERISA to be the subject of multiple tax regimes across 50 states to support publicly financed health care," says Roy Harmon III, principal with Harmon & Major in Greenville, S.C.

Going to Court

Therefore, California's proposal is certain to face a courtroom challenge if enacted. Lara Dunbar, senior legislative director of the California Restaurant Association, says her group is prepared to fight mandated employer health spending.

"That is a slippery slope," she remarks. "If you allow a health care mandate that violates ERISA to pass unchallenged, then other states might follow."

The National Federation of Independent Business Legal Foundation (NFIBLF), a nationwide lobbying group for small business, takes a similar stand.

"Our guys are just trying to provide health care," explains Karen Harned, an attorney and executive director of NFIBLF. "We need to do something about cost, not mandating something that we can't afford."

Meanwhile the AFL-CIO, which launched its "Fair Share Health Care" campaign in 2006 to push for pay-or-play bills in all states, has acknowledged the need to revisit the legal drawing board in the aftermath of RILA v. Fielder.

Still the ERISA argument is not necessarily a "slam-dunk," argues Thomas Greene, a partner at Mintz Levin. He points to the 4th Circuit's divided decision for evidence that pay-or-play laws could pass muster in some courts.

Greene anticipates future intercircuit conflict that will inevitably propel the issue of the legality of state pay-or-play initiatives to the U.S. Supreme Court.

"No one can ever . . . predict what the Supreme Court is going to do on an ERISA preemption case," he observes. "It's always a crap shoot."

staff Writer

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