Davis Signs Employer Mandate

Published November 1, 2003

Two days before he was recalled by voters and replaced by actor Arnold Schwarzenegger, embattled California Governor Gray Davis signed a “play or pay” mandate that, if it survives court challenges, eventually would apply to all California businesses with 20 or more employees.

Many observers said SB 2, the Health Insurance Act of 2003, would never have become law if not for the recall. “It’s a shell of a bill,” Doug Hessel, a California employee benefits consultant, told the San Jose Mercury News on October 3. “Davis would never have signed this if there wasn’t a recall.”

“Great Unknowns” Remain

The measure was introduced in December 2002 by Democrats John Burton and Jackie Speier. It passed the Senate by a vote of 25-15 on September 12, and the Assembly the following day by a vote of 46-32.

The measure gives employers with 20 or more employees two options: They must provide health insurance coverage for their employees, or they must pay a fee to the state Employment Development Department. For large employers (those with 200 or more employees), the fee would be based on the number of enrollees and dependents; for medium employers (those with 20 to 199 employees), the fee would be based on the number of enrollees only.

An “enrollee” is defined as a person who works at least 100 hours per month for an employer and has worked for that employer for at least three months.

Companies would be required to pay at least 80 percent of health premiums, or fees roughly equal to that amount; employees would pay no more than 20 percent. The contribution of low-income employees would be capped at 5 percent of their wages.

The measure would go into effect on January 1, 2006 for large employers, and January 1, 2007 for medium employers. Employers with 20 to 49 employees would be exempt from the measure unless the state enacts a tax credit in the amount of 20 percent of the employer’s net cost.

The measure creates a State Health Purchasing Program through which coverage for employees and their dependents, if applicable, would be arranged.

“There are three great unknowns” about that purchasing program, wrote Sacramento Bee reporter Lisa Rapaport on September 12. “The number of insurers that decide to offer coverage through the pool, the rates those insurers offer the state, and the fees the state then charges firms to join–all of which will determine the cost of the pool and its impact on prices in the private market.”

The bill does not contain cost control provisions.

“A lot of unexpected things happen when you create a big insurance pool,” Mark Smith, president of the California Healthcare Foundation, told Rapaport. “You can start out with a noble idea and end up in a situation where what makes sense economically is not what people want to accept politically.”

Widely Denounced

SB 2 was one of 53 bills denounced as “job killers” by the California Chamber of Commerce. In a September 13 news release, the chamber cited a study conducted by the Los Angeles Area Economic Development Corporation, which put the measure’s price tag at $5.7 billion for employers and $1.5 billion for employees.

The California Lodging Industry Association also opposed the measure. “CLIA is very concerned with the financial impacts of SB 2 on the lodging industry and the California economy as employers throughout the state struggle to make ends meet,” said Rick Lawrance, the group’s president and CEO.

Even before Davis signed the measure, it was proving Lawrance’s point. In late September, according to reports in the San Jose Mercury News, a Dallas restaurant group said it would not proceed with a planned purchase of Chevy’s, a 58-restaurant chain in California, citing the cost of SB 2 as a primary reason.

The Mercury News editorialized on September 11 against the measure.

“According to the California Employment Development Department, [the bill] will have its greatest impact on the fastest growing category of business in the state, businesses with between 20 and 249 employees,” wrote the Mercury News. “The business community is right to oppose the timing of an employer-mandated health care bill in the midst of a weak economy coupled with spiraling health care costs.”

According to the California Labor Federation – AFL-CIO, more than 150 labor unions and local chapters supported the bill, as did the California Medial Association and such liberal advocacy groups as the Congress of California Seniors, Health Access California, and League of Women Voters of California.

The Mercury News and others predict the measure will face court challenges. (See Greg Scandlen’s “Consumer Choice Matters” column on page 12.) Critics say the bill violates the federal Employee Retirement Security Act (ERISA) and essentially imposes a tax that was not approved by the two-thirds majority vote required by the state constitution.

Diane Carol Bast is editor of Health Care News. Her email address is [email protected].

For more information …

The full text of SB 2, the Health Insurance Act of 2003, is available through PolicyBot. Point your Web browser to http://www.heartland.org, click on the PolicyBot icon, and search for document #13143.