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UPDATE:  SAN FRANCISCO HEALTH CARE SECURITY ORDINANCE AND HEALTHY SAN FRANCISCO

On July 12, 2007, San Francisco finalized regulations implementing the San Francisco Health Care Security Ordinance (HCSO). Originally passed by the San Francisco Board of Supervisors in July, 2006, the HCSO mandates eligible employers spend a minimum amount per covered employee on health care. 

Mandated Employer Contributions

HCSO requires most businesses with 20 or more employees to fund a minimum level of health care for their employees or pay into a City fund. All companies with employees working within City boundaries more than a minimum number of hours per week must comply with the ordinance. The funding level and effective date are determined by the total number of employees, regardless of where the employees work or reside. An employer’s maximum contribution per covered employee is based on a 40-hour work week and a 172-hour work month; overtime hours are exempt.

Who are Covered Employees?

“Covered employees” are defined as part-time, full-time, seasonal, permanent, temporary (including temp agency), contracted and commissioned employees. Special rules also apply to leased employees. Covered employees must be employed at least 90 days and work in San Francisco at least 10 hours per week, regardless of where the employee lives. The minimum hours requirement drops to 8 hours in 2009. The 90 day eligibility period does not have to be continuous, consecutive, nor completed in the same calendar year. Managerial, supervisory, and confidential employees who earn over $74,558 annually (in 2007) are exempt, as are employees who are eligible for government health care programs including Medicare and CHAMPUS/TRICARE. 

Covered employees can be exempt from the funding requirement if they are already covered by a health care plan through an employer or as a dependent of a covered employee and the employer obtains their voluntary written waiver. Individuals may revoke this waiver at any time. 

Employers Have Several Options to Comply with the Health Care Security Ordinance

The ordinance requires employers spend a minimum amount in providing health care to employees. Funding can be provided to employees in several ways:

• Pay into the City fund
• Spend the minimum required amount on health insurance (including medical, dental, vision and EAP insurance premiums)
• Contribute the minimum required amount into health accounts (FSA, HSA, HRA)
• Direct reimbursement of health care services

Administrative costs paid to a third party are included in fulfilling the minimum funding requirement.

Of the compliance alternatives outlined, it is likely that paying into the City fund and contributing to an FSA will be the most common strategies.

Employer Payments and Recordkeeping

Employers’ payments into the City fund will be due quarterly. Employers will be responsible for maintaining accurate quarterly records of health care expenditures and for providing an annual report to the City’s Office of Labor Standards Enforcement (OLSE). 

The City plans to develop an education program to assist employers with compliance. Administrative penalties for not complying may include up to 1.5 times the required health care expenditure, plus interest.

The City Fund and Healthy San Francisco

Dollars paid to the City by employers will primarily fund Healthy San Francisco, a program intended to provide health care services to uninsured San Franciscans. The program emphasizes preventive care and covers only medical treatment received by residents inside the City limits. Services will be provided through a network of public health clinics and San Francisco General Hospital. Although the provider network is currently under development, the plan began accepting enrollees on July 2, 2007. Participant fees will be tied to income level. Covered services include comprehensive preventive and catastrophic health care, prescription drugs, urgent and emergency care, acute inpatient mental health services, substance abuse services, and home health care. Services not covered include dental, vision, infertility, cosmetic procedures, and care received outside City limits. 

The program will be administered by the San Francisco Health Plan (SFHP), a governmental entity that is part of the San Francisco Health Authority and currently administers a number of public health programs. 

Overall, mandatory employer contributions are expected to total $28 million annually. The estimated first year cost to provide health services through Healthy San Francisco is $200 million. Other sources of funding will include a combination of participant contributions, federal, state and local funds, and repurposing City funding for public health services.

Who is Eligible for Healthy San Francisco? 

• Healthy San Francisco covers only adults. Children currently have access to health services through other public assistance programs such as Healthy Families and Healthy Kids. 
• Only San Francisco residents are eligible for health coverage, regardless of employment or immigration status, or pre-existing conditions. Nonresident workers whose employers choose Healthy San Francisco will receive flexible spending accounts to cover some health care costs.
• Individuals who do not qualify for other government-subsidized health programs, such as Medicare or Medi-Cal, are also eligible for coverage. 

Legal Challenges

The HCSO is currently being disputed in federal court. The lead opponent, the Golden Gate Restaurant Association, is suing the City, seeking to have the ordinance overturned on ERISA preemption grounds. A preliminary hearing is scheduled for August 31, 2007. 

Other states and local governments have experienced similar legal challenges to universal health care legislation:

• In 2006, Maryland enacted a law requiring large employers spend a certain percentage of payroll on employee health benefits. The act was ruled illegal by a federal judge on July 19, 2006. The judge’s ruling decreed that ERISA supersedes Maryland law. The judge also ruled that the Maryland Act violates the Equal Protection Clause of the US Constitution because only one company in Maryland, Wal-Mart, meets the all the criteria for the law, causing Wal-Mart to object that it had been singled out unfairly. 
• On July 19, 2007, a federal judge struck down a 2005 employer fair share law in Suffolk County, NY on the grounds that it conflicted with New York’s Minimum Wage Age and was preempted by ERISA. The judge called alternatives to compliance “unrealistic” and cited the Maryland decision as part of the ruling.

Unanswered Questions

If the San Francisco health care ordinance overcomes the legal challenges, there are a number of unanswered questions facing both employers and the City of San Francisco. Some of the questions include:

• What happens if an employee revokes a waiver mid-year but does not meet IRS qualifying event standards that would allow them to join the employer-sponsored plan mid-year? 
• How are employees treated who are eligible for benefits but choose to not enroll in the employer-sponsored plan?
• Under what scenarios can employer contributions be “averaged” and how does the term “covered employee” apply to the calculation of averages when determining employer funding levels?
• How will the flexible spending accounts through Healthy San Francisco be administered for non-resident employees? 
• Will FSA balances forfeited by covered employees be offset against an employer’s calculation of health care spending?

For more information: 

• OLSE Regulations Implementing the Employer Spending Requirement of the San Francisco Health Care Security Ordinance (HCSO)
  
  
• Healthy San Francisco website
  
  
• San Francisco Chronicle, You can't call San Francisco 'sicko'; City's universal health care initiative signs up its first applicants in Chinatown, Heather Knight, July 3, 2007
  
  
• California Healthline, San Francisco Moves Ahead With Health Coverage Expansion, David Tuller, May 29, 2007
  
  
• Golden Gate Restaurant Association's Lawsuit Update
  
  
• San Francisco Health Plan, Mayor Newsom Announces That San Francisco Health Plan Will Administer Health Access Program, July 2006 
  
  
• San Francisco Council of District Merchant Associations, Setting the Record Straight: Compulsory Healthcare in San Francisco, July 2006 
  
  
• National Conference of State Legislatures, Maryland's Fair Share Health Care Fund Act Overturned in ERISA Challenge, July 20, 2006

This document is not intended to provide any legal advice or analysis. Please consult your own legal counsel for further information on the topics discussed in this issue of Insight.