Consumer Choice Matters: California Dreamin’

Published November 1, 2003

California is not only the source of wacky news about gubernatorial recalls and screwball court decisions: It is also the source of wacky legislation and screwball mandates.

The current case-in-point is the recently enacted mandate requiring all employers with more than 20 employees to provide health insurance coverage (SB 2).

Don’t get too excited. This bill doesn’t have a snowball’s chance of surviving an ERISA (Employee Retirement Security Act) challenge. Nevertheless, it is an interesting glimpse into how the political mind works in the Golden State.

The bill would require every covered employer to provide coverage to every worker employed for at least three months and working at least 100 hours a month. The employer also would be required to pay at least 80 percent of the costs of the worker. Larger employers (more than 200 workers) must also cover 80 percent of the cost of dependents (which include domestic partners).

The workers themselves would have to pay no more than 20 percent of the cost of coverage, and the state would pay that 20 percent for those who are eligible for Medicaid (“Medi-Cal” in California parlance).

Covered employers include all those with more than 20 employees–except those with between 20 and 50 employees would be included only if the state passes a tax credit to offset 20 percent of their costs.

The bill doesn’t specify benefit design, leaving it to a board to figure out, except it does say deductibles, coinsurance, and copayments shouldn’t “deter enrollees from receiving appropriate and timely care.”

Source: For a copy of the law as considered by California’s conference committee (thanks to Neil Trautwein for passing this along):

ERISA to the Rescue

State irresponsibility like this is precisely why Congress enacted ERISA in 1974. Employers said they needed predictability and consistency in their benefit programs, without having every other state forcing them to comply with some politically motivated regulation.

I know people’s eyes glaze over when ERISA is mentioned, but you need to know a few things about it to put the California law into context:

1. ERISA covers all employers except churches and governments–“any employer engaged in commerce or in any industry or activity affecting commerce … (unless) such plan is a government plan (for its own employees) (or) such plan is a church plan (for its own employees).” (Section 4 (a) and (b)). It is not confined to large employers and it is not confined to self-insured employers.

2. ERISA is unambiguous in scope. It says, “the provisions of this title shall supercede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.” (Section 514(a)). This is about as broad a preemption as is possible to write.

3. ERISA “saves” from preemption state laws regulating “the business of insurance.” And it “deems” an employee welfare benefit plan is not in the business of insurance (Section 514 (b)(2)(A and B)).

In a nutshell, California is allowed to regulate insurance companies until it is blue in the face, but it is not allowed to pass “any law relating to” how employers provide benefits. It could require insurance companies to sell policies for $10 a year, and it could require residents to buy them. But it cannot require employers to provide or pay for those benefits.

Some people suppose recent court decisions on HMO restrictions (such as a recent case upholding state laws requiring HMOs to contract with “any willing provider,” or other cases extending malpractice liability to HMOs) have weakened the ERISA preemption. They are mistaken.

HMOs are regulated insurance companies. ERISA has never prevented states from imposing requirements on them. Similarly, ERISA has never preempted the states’ authority to regulate the practice of medicine, including malpractice remedies. To the extent an HMO is practicing medicine (e.g. substituting its judgment for a physician’s), a state is free to regulate that practice.

But the courts have never wavered an inch from the core idea of ERISA, which says states are not allowed to tell employers what to do regarding the provision of health or pension benefits to their employees.

There is only one example to the contrary: Hawaii’s employer mandate. It took an act of Congress to allow that exception, and even that exception never would have been granted but for the fact Hawaii passed its mandate about the same time ERISA was being enacted, so a case could be made that Hawaii’s law should be grandfathered.

Source: For a copy of a paper I did on ERISA for the Cato Institute go to

NPR on California’s Mandate

The media has been pretty quiet about the ERISA preemption, perhaps because of wishful thinking by the reporters or because of ignorance.

An otherwise pretty fair report by Patricia Neighmond on National Public Radio doesn’t even mention ERISA. She talks about the uninsured and has a heart-wrenching tale of a woman dying because she didn’t have coverage for her blood pressure and couldn’t afford a dollar-a-day for medication (it’s not clear the California mandate would have helped her in any case).

The story balances out with an example of a man who owns some pizza shops with 65 employees. He calculates it would cost him $2,000 each to provide coverage–$130,000 per year–for which he would have to sell 130,000 more pizzas to gain the $1.3 million in gross revenues from which he could take a 10 percent mark-up to pay the health insurance bill.


San Diego Hopes Few Will Be Affected

An article by Leslie Berestein in the San Diego Union Tribune also fails to mention ERISA and minimizes the impact of the bill. “Mandated Insurance May Affect Few Here,” says the headline.

The article goes on to say “only” 4,320 companies in San Diego County are big enough to be covered by the bill, and it quotes an analyst with the Kaiser Family Foundation (KFF) as saying, “Almost everybody is already doing what the law would require.” Actually, it is doubtful very many are paying 80 percent of the coverage for dependents including domestic partners. The story says the sectors to be hit hardest are restaurants and manufacturing.


Silicon Valley Predicts $7.2 Billion in Costs

A story by Troy May in the Silicon Valley Business Journal also omits any mention of ERISA, though it is not as sanguine about the legislation.

Citing KFF figures, this article reports employers with 20 to 49 workers are currently paying an average of $2,800 for single workers and $6,786 for families. “Medium to large firms in California could pay an additional $5.7 billion in premiums and employees would have to pay an additional $1.5 billion,” according to the article. One business owner is quoted as saying she already is paying the “highest rates of workers’ comp in the country. This legislature is hostile to business.”


Greg Scandlen is director of the Galen Institute’s Center for Consumer Driven Health Care and assistant editor of Health Care News. His email address is [email protected]. The views expressed here are the opinions of the authors and do not necessarily reflect the views of the Galen Institute or its directors.