Health reform comes slowly for California

California political leaders are pushing forward with a healthcare reform effort backed by the star power of Gov. Arnold Schwarzenegger despite an ominous legal ruling last week.

The city of San Francisco had tried to mandate that employers spend a certain amount of money on health programs for their employees. A district judge found that violated the Employee Retirement Income Security Act (ERISA), a 1974 federal law that has preempted healthcare initiatives from Maryland to Suffolk County in New York.

The ruling reiterates the almost Sisyphean nature of healthcare reform at anything but the national level, say legal experts. But despite Wednesday's decision, Governor Schwarzenegger and Assembly Speaker Fabian Núñez released key details late Friday of their own health plan, signaling they are still willing to try to push the boulder back up the hill.

"We knew from the outset that there will always be a risk with ERISA, but we've made a point of trying to work with two top ERISA experts," says Steven Maviglio, spokesman for Mr. Núñez, in an e-mail.

"Quite frankly, the only alternative is to do nothing and wait for the federal government, which has made it pretty clear they aren't doing anything," he wrote.

Expanding health coverage to the uninsured requires some funding mechanism. One route is a broad-based tax. That's both unpopular and risky: Employers, who are the main providers of health insurance, may decide to drop coverage and let government pick up that burden.

Instead, many plans – including San Francisco's – have tried to force employers who are not providing health insurance to shoulder some of the burden.

But that's proved to be nearly impossible given ERISA, a law preventing state and local government interference in employer-provided benefits.

In his written opinion striking down San Francisco’s employer mandate, Judge Jeffrey White suggested a workaround to lawmakers: lawmakers should tax all businesses but offer tax credits to those that already provide health coverage. [Editor's note: This paragraph was mistakenly removed from the original version of this story.]

The state's reform proposal does just that, argues Anthony Wright, executive director for Health Access California, an advocacy group that helped draft the legislation.

The California plan requires "contributions" from businesses ranging from 1 to 6.5 percent of the wages paid to employees. However, employers can deduct the money they spend on employee health insurance, wellness programs, or other types of health assistance.

"I don't think any lawyer will say this is a slam-dunk, but this is perhaps the best chance we have" at skirting ERISA, he says.

The plan also relies on a $1.75 per pack hike in cigarette taxes and new fees on hospitals. The diversity of revenue streams, as well as the fact that they must be ratified by voters through a ballot initiative, will strengthen the plan if it's challenged in court, says Mr. Wright.

But legal experts aren't so sanguine.

The plan still affects – in a direct enough way – how employers will set up and manage their benefit plans, says Paul Secunda, professor of law at the University of Mississippi. "This is a real no-no."

"ERISA preemption as currently construed by the Supreme Court is so broad that it makes state experimentation with healthcare financing and delivery almost impossible," he says.

The highest hurdle, however, remains the legal bar set by ERISA, says Michael Lotito, a lawyer with Jackson Lewis, a San Francisco firm specializing in workplace law. He says the San Francisco court decision was "somewhat predictable" and health reform discussions must get serious about the issue.

"What the politicians are ignoring is the ERISA preemption problem, and it doesn't get discussed. And for the average citizen‚ this is not something that captivates their attention," says Mr. Lotito.

While a court ruling against California would likely result in an outcry heard in Washington, he says, that outcome might take half a decade to play out – wasting precious time.

Mixed reviews on new rule that lets firms reduce retiree benefits

Companies dealing with the residual cost of retired employees have issued a sigh of relief following the Equal Employment Opportunity Commission's ruling last week that employers could cut voluntary health benefits for retirees once those retirees turn 65.

The announcement removes the threat of age-discrimination lawsuits against employers who scale back benefits when their former employees become eligible for Medicare and other government assistance.

Such practice had been commonplace when a federal court decision in 2000 ruled employers must offer parity in benefits between retirees who hadn't yet turned 65 and those who had. Businesses balked, saying the expense would force them to drastically cut benefits for younger retirees, or simply stop offering retiree health insurance altogether.

"The EEOC's ruling encourages current practices that are in place," says Michael Lotito, a lawyer with Jackson Lewis, a San Francisco firm specializing in workplace law. "A change in the regulation would have encouraged employers to give serious thoughts to dropping healthcare or making draconian changes."

The uncertainty and cost-analysis costs created by the 2000 court ruling scared off some companies from instituting benefits for younger retirees, says Kathryn Bakick, national director of healthcare compliance at The Segal Co. The decision could be a boon for workers prone to retire early, such as teachers, firefighters, and construction tradesmen, she says.

AARP, which advocates on behalf of senior citizens, lambasted the EEOC announcement, however. "This policy is a civil rights and economic fiasco," said David Certner, legislative policy director with the advocacy group for the elderly. "It is a wrong-headed move to legalize discrimination, allowing employers to back off their healthcare commitments based on nothing more than age."

Ms. Bakick notes that if employers wanted to simply eliminate health benefits to retirees they could do that before the EEOC ruling. Retiree health benefits are already rare, offered by one-third of large employers and one-tenth of small employers, according to a 2001 Government Accountability Office estimate.