State and city healthcare reforms collide with a U.S. law

Many efforts to expand coverage have been blocked in court. More legal tests are likely, starting in San Francisco.

The biggest name in healthcare reform isn't Hillary, or Mitt, or Arnold – it's ERISA. That's the name of a federal law that could invalidate many of the budding efforts by states and cities to expand access to healthcare.

ERISA, which stands for the Employee Retirement Income Security Act, shields businesses from state and local regulation of the benefits they offer workers, including health insurance. Without the law, national companies in particular could achieve little uniformity in their benefit plans.

But that uniformity comes at a cost: The law limits the abilities of state legislatures to serve as laboratories for healthcare solutions. Courts have already applied ERISA to strike down efforts in Maryland and Suffolk County, N.Y., that would compel employers to cover more people.

In coming weeks, San Francisco will have its go in court over ERISA. And if the California legislature and Gov. Arnold Schwarzenegger (R) can seal a much-anticipated healthcare deal, they, too, will be girding for a legal challenge.

The healthcare plans in California and Massachusetts have been crafted with an eye to previous ERISA rulings, and other states are watching to see if the innovations will hit upon a legally acceptable formula – or hit another brick wall in court.

"Many states are watching ... to see how this is panning out," says Joel Miller with the National Coalition on Health Care in Washington. "What a lot of ... people who follow this hope for is that the states will try to thread this needle."

Twenty-one states have put forth universal coverage bills this year, according to the National Conference of State Legislatures (NCSL). But Maryland's court losses dealt a blow to these efforts. The state's plan targeted large employers – in effect, Wal-Mart only – and stipulated that their employees must be given health insurance or the state would assess a fee per worker.

A federal appeals court found early this year that this so-called "play or pay" approach constituted a benefit mandate by the state of the sort outlawed by ERISA. Because Wal-Mart would be the only company in Maryland affected, the court found that the state was not really offering the company a choice to pay; it was simply creating a mechanism to force the retailer to extend health benefits.

Tapping employers to cover more workers, or to contribute to a healthcare pool, is one of the most attractive means for cash-strapped cities and states to reduce the ranks of the uninsured. After the ruling in the Maryland case, adding businesses to the equation looked a lot harder.

National reforms exempt from ERISA

National healthcare plans wouldn't have to clear an ERISA hurdle. Partly for this reason, the problem could be tackled more aggressively at the national level, but it hasn't been, says Marian Mulkey of the California HealthCare Foundation, an independent organization based in Oakland working to improve the state's healthcare system.

A consensus may be emerging that the system needs to change, a sentiment expressed Tuesday by Health and Human Services Secretary Michael Leavitt, who, in a Harvard address, said "the healthcare system is fundamentally broken," the Harvard Crimson reported.

For the time being, however, states and localities must find creative ways to work within the law, in some cases giving national leaders some new ideas. Sen. Hillary Rodham Clinton's recent proposal bears some resemblance to the Massachusetts health plan approved in 2006 under former Massachusetts Gov. Mitt Romney.

No suit against Massachusetts plan – yet

The Bay State plan has so far avoided provoking an ERISA legal challenge, restoring some optimism among reformers in California, Illinois, and other states. "Massachusetts gave hope in the sense of not just ERISA, but the ability to have bipartisan consensus," says Richard Cauchi, health program director at the NCSL. "The insurers, employers, and the providers all were saying positive things."

The Massachusetts play-or-pay model has avoided a lawsuit so far, suggest experts, because all the stakeholders were involved in the negotiations, and, crucially, because the pay option for employers is less than under $300 per worker.

It could yet be challenged, of course. "Even in Massachusetts, the ERISA preemption still hangs over the head of the policymakers trying to hammer out details of the plan," says Mr. Miller of the National Coalition on Health Care.

In California, Governor Schwarzenegger has followed Mr. Romney's consensus-building approach. The plans floating around the capitol call for businesses to pony up more money, however, raising the risk that a deal will be undone in court. The National Federation of Independent Businesses says it needs to see the outcome, but the group is weighing a lawsuit.

San Francisco already faces an ERISA challenge to its new Healthy San Francisco program. It offers reduced-cost medical care within city limits to 82,000 uninsured residents. Much of the funding comes from public sources, but there's also a play-or-pay component for employers in the city. Businesses with 20 or more workers must spend a minimum dollar amount per hour on healthcare for their employees. City officials say the mandate on employers allows them many options for meeting the requirement, therefore skirting ERISA.

But a restaurant association has taken the issue to court, arguing that the spending amount isn't optional and that the program forces their members to administer benefits. The cost would put some restaurants out of business, they say. The city could cover the expenses by raising the sales tax one-quarter of a cent, they suggest.

"When there is an affordable, legal funding mechanism, why would we have to break the back of businesses when we don't have to hurt anybody?" says Kevin Westlye of the Golden Gate Restaurant Association, which filed suit.

If the California plans ultimately are rejected by the courts, pressure could build on Congress to clarify the law or issue waivers to states trying to expand health coverage. But experts say any changes to ERISA are unlikely.

"I've been looking at this issue for the last 32 years, and any attempts have been thwarted by employers and other stakeholders," says Miller. Healthcare reform, he adds, "has to happen at the federal level."