In July 2006, the San Francisco Board of Supervisors unanimously passed the San Francisco Health Care Security Ordinance, and the mayor signed it into law. The Ordinance is codified at Sections 14.1 to 14.8 of the City and County of San Francisco Administrative Code. The Ordinance has two primary components: the Health Access Plan (”HAP”), and the employer spending requirements. The HAP is a City-administered health care program. It went into effect in the summer of 2007.
In funding the HAP, the City “prioritize[s] services for low and moderate income persons.” S.F. Admin. Code § 14.2(d) (2007). According to the City’s web page, as of August 9, 2008, 27,395 persons had enrolled in the HAP. Persons who already have health insurance or who live outside of San Francisco are not eligible for the HAP. Instead, such persons may be entitled to establish medical reimbursement accounts with the City.
As we will explain in detail below, the Ordinance also requires all covered employers to make a certain level of health care expenditures on behalf of their covered employees. The Association does not challenge the HAP. It challenges only the employer spending requirement.
Golden Gate Rest. Ass’n v. City & County of San Francisco, 2008 U.S. App. LEXIS 20574 (9th Cir. Cal. Sept. 30, 2008)
The Ninth Circuit took a novel step in upholding a San Francisco health care ordinance. A local restaurant association challenged the law and the dispute expanded to include various intervenors and, on appeal, amici, including the Secretary of Labor.
What follows is a summary of the proceedings.
The Procedural History
The opinion succinctly relates the procedural history as follows:
The Association filed a complaint against the City on November 8, 2006, asking the district court to declare that ERISA preempts the employer spending requirements, and seeking a permanent injunction against enforcement of the provisions of the Ordinance relating to those requirements. The San Francisco Central Labor Council, Service Employees International Union (SEIU) Local 1021, SEIU United Healthcare Workers-West, [*5] and UNITE-HERE! Local 2 (collectively, “Intervenors”), successfully moved to intervene as defendants.
On April 2, 2007, the City deferred implementation of the employer spending requirements until January 1, 2008. On July 13, 2007, the parties filed cross-motions for summary judgment. On December 26, 2007, the district court entered judgment for the Association, concluding that ERISA preempts the employer spending requirements. See Golden Gate Rest. Ass’n, 535 F. Supp. 2d at 979-80.
On December 27, 2007, the City and Intervenors asked the district court to stay its judgment pending appeal. The district court denied the motion. On January 9, 2008, this court filed a published order granting the City’s motion for a stay of the district court’s judgment pending resolution of the City’s appeal. Golden Gate, 512 F.3d at 1127. Since that date, covered employers have been required to make quarterly health care expenditures.
On February 7, 2008, the Association filed an application with Justice Kennedy, as Circuit Justice for the Ninth Circuit, for an order vacating our stay of the district court’s judgment. On February 21, after receiving the City’s response, Justice Kennedy denied the application. [*6] The United States Secretary of Labor subsequently filed an amicus brief in this court in support of the Association.
On April 17, 2008, we heard oral argument on the merits of the City’s appeal. We now reverse the judgment of the district court and remand with instructions to enter summary judgment in favor of the City and Intervenors.
Summary Of Holdings
1. The Court Begins With A Presumption Against Preemption Of State Law
a. We begin by noting that state and local laws enjoy a presumption against preemption when they “clearly operate[ ] in a field that has been traditionally occupied by the States.” (citing De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806, 814 (1997) (internal quotation marks omitted).
b. The presumption against preemption applies in ERISA cases. “[N]othing in the language of [ERISA] or the context of its passage indicates that Congress chose to displace [*18] general health care regulation, which historically has been a matter of local concern.” (citing N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 661 (1995)).
c. The field in which the Ordinance operates is the provision of health care services to persons with low or moderate incomes. State and local governments have traditionally provided health care services to such persons.
2. The City-Payment Option Does Not Create an ERISA “Plan”, De Facto Or Otherwise
a. ERISA is concerned with “benefit plans,” rather than simply “benefits,” because “[o]nly ‘plans’ involve administrative activity potentially subject to employer abuse.” (citing, Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 16 (1987)).
b. Under the Ordinance, employers make the payments on a regular periodic basis and calculate those payments based on the number of hours worked by the employee. Further, employers make the payments on a regular basis from their general assets.
c. For employers who choose to make payments to the City, their obligation ceases as soon as they make the required payments.
d. The Ordinance does not guarantees that a certain level or kind of “intended benefits” will be provided by the HAP, or that a particular group of “intended . . . beneficiaries” will be included in the HAP.
e. Thus, the administrative burden on the covered employers does not create an ERISA plan and the no plan is created on the view that ‘a reasonable person could ascertain the intended benefits, beneficiaries, source of financing, and procedures for receiving benefits.
3. The HAP Is Not An ERISA Plan
a. The first element of an employee welfare benefit plan is the existence of a “plan, fund or program.” Patelco Credit Union, 262 F.3d at 907.
b. The HAP, administered by the City, is not an ERISA plan but rather, a government entitlement program available to low- and moderate-income residents of San Francisco, regardless of employment status.
c. Since the City, rather than the employer, establishes and maintains the HAP, and the City is free to change the kind and level of benefits as it sees fit, the HAP does not meet the requirements for existence of a plan.
4. The Ordinance Does Not Relate To ERISA Plans
a. The purpose of ERISA’s preemption provision is to “ensure[ ] that the administrative practices of a benefit plan will be governed by only a single set of regulations.”
b. New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645, 655 (1995), the Court acknowledged the difficulty of interpreting § 514(a) and narrowed ERISA preemption.
c. In this light, we employ a “holistic analysis guided by congressional intent.” (citing Dishman v. UNUM Life Ins. Co. of Am., 269 F.3d 974, 981 n.15 (9th Cir. 2001).
d. The Ordinance does not require any employer to adopt an ERISA plan or other health plan. Nor does it require any employer to provide specific benefits through an existing ERISA plan or other health plan.
e. Any employer covered by the Ordinance may fully discharge its expenditure obligations by making the required level of employee health care expenditures, whether those expenditures are made in whole or in part to an ERISA plan, or in whole or in part to the City.
f. The Ordinance does not “bind[ ] ERISA plan administrators to a particular choice of rules” for determining plan eligibility or entitlement to particular benefits.
g. The Ordinance does not impose on plan administrators any “administrative [or] financial burden of complying with conflicting directives” relating to benefits law. (citing Ingersoll-Rand Co., 498 U.S. at 142.)
h. Thus, the Ordinance thus preserves ERISA’s “uniform regulatory regime.”
5. The Ordinance Does Not Refer To ERISA Plans
a. To determine whether a law has a forbidden “reference to” ERISA plans, we ask whether (1) the law “acts immediately and exclusively upon ERISA plans,” or (2) “the existence of ERISA plans is essential to the law’s operation.” (citing Dillingham, 519 U.S. at 325.)
b. Mackey v. Lanier Collection Agency & Service, Inc., 486 U.S. 825 (1988) upheld those aspects of the state statute that did “not single out or specially mention ERISA plans of any kind,” even though they would potentially subject ERISA plans to “substantial administrative burdens and costs.” Id. at 831.
c. District of Columbia v. Greater Washington Board of Trade (”Greater Washington”), 506 U.S. 125 (1992) is distinguishable.
d. Under the ordinance in Greater Washington, obligations were measured by reference to the level [*49] of benefits provided by the ERISA plan to the employee.
e. Under the Ordinance in our case, by contrast, an employer’s obligations to the City are measured by reference to the payments provided by the employer to an ERISA plan or to another entity specified in the Ordinance, including the City. The employer calculates its required payments based on the hours worked by its employees, rather than on the value or nature of the benefits available to ERISA plan participants.
f. Thus, unlike the ordinance in Greater Washington, the Ordinance in this case is not determined, in the words of § 514(a), by “reference to” an ERISA plan.
g. Rather, the case is conceptually similar to a prevailing wage case. Here, as in WSB Electric, employers need not have any ERISA plan at all; and if they do have such a plan, they need not make any changes to it.
h. Where a law is fully functional even in the absence of a single ERISA plan, as it was in WSB Electric and as it is in this case, it does not make an impermissible reference to ERISA plans. Cf. Travelers Ins. Co., 514 U.S. at 656 (”The surcharges are imposed upon patients and HMO’s, regardless of whether the commercial coverage or membership, respectively, is ultimately secured by an ERISA plan, private purchase, or otherwise, with the consequence that the surcharge statutes cannot be said to make ‘reference to’ ERISA plans in any manner.”).
6. Retail Industry Leaders Association v. Fielder, 475 F.3d 180, 183 (4th Cir. 2007) Is Consistent With This Holding.
a. In stark contrast to the Maryland law in Fielder, the City-payment option under the San Francisco Ordinance offers employers a meaningful alternative that allows them to preserve the existing structure of their ERISA plans.
b. If an employer elects to pay the City, that employer’s employees are eligible for free or discounted enrollment in the HAP, or for medical reimbursement accounts. In contrast to the Maryland law, the San Francisco Ordinance provides tangible benefits to employees when their employers choose to pay the City rather than to establish or alter ERISA plans.
c. In its motion for summary judgment, the Association provided no evidence to demonstrate that San Francisco employers are, in practical fact, compelled to alter or establish ERISA plans rather than to make payments to the City.
d. Because the City-payment option offers San Francisco employers a realistic alternative to creating or altering ERISA plans, the Ordinance does not “effectively mandate[ ] that employers structure their employee healthcare plans to provide a certain level of benefits.”
Note: The Ordinance follows the advice developed by state coalitions in recent years as to how best to design a pay or play health care reform bill in view the risk of ERISA preemption. In fact, a comparison of the opinion with white papers on the issue is quite instructive.
The Required Expenditure – The expenditure varies based upon employer size:
The Ordinance sets the required health care expenditure for employers based on the Ordinance’s “health care expenditure rate.” Id. §§ 14.1(b)(8), 14.3(a). For-profit employers with between twenty and ninety-nine employees and non-profit employers with fifty or more employees must make health care expenditures at a rate of $ 1.17 per hour. For-profit employers with one hundred or more employees must make expenditures at a rate of $ 1.76 per hour. See City & County of San Francisco, Office of Labor Standards Enforcement, Regulations Implementing the Employer Spending Requirement of the San Francisco Health Care Security Ordinance (”ESR”), Reg. 5.2(A) (2007). Under the Ordinance, “[t]he required health care expenditure for a covered employer shall be calculated by multiplying the total number of hours paid for each of its covered employees during the quarter . . . by the applicable health care expenditure rate.” S.F. Admin. Code § 14.3(a).
So, it’s something like this: #hrs paid x #covered ee’s x surcharge rate = required expenditure.
Satisfying The Requirement – The regulations provide several options for satisfying the requirement, including a payment to the City, which will then entitle the employees to care under the HAP. As for self-funded plans:
The Ordinance includes a special provision for employers with self-insured health plans. An employer providing “health coverage to some or all of its covered employees through a self-funded/self-insured plan” will “comply with the spending requirement . . . if the preceding year’s average expenditure rate per employee meets or exceeds the applicable expenditure rate” for the employer. ESR Reg. 6.2(B)(2). Such employers do not need to keep track of their actual expenditures for each employee.
The Employer Categories – There are five categories of employers under the Ordinance.
First are employers that have no ERISA plans (”No Coverage Employers”).
Second are employers that have ERISA plans for all employees, and that spend at least as much as the Ordinance’s required health care expenditure per employee (”Full High Coverage Employers”).
Third are employers that have ERISA plans for some, but not all, employees, and that spend at least as much as the Ordinance’s required health care expenditure per employee for employees under the ERISA plan (”Selective High Coverage Employers”).
Fourth are employers that have ERISA plans for all employees, but that spend less than the Ordinance’s required health care expenditure per employee (”Full Low Coverage Employers”).
Fifth are employers that have ERISA plans for some, but not all, employees, and that spend less than the Ordinance’s required health care expenditure per employee for employees under the ERISA plan (”Selective Low Coverage Employers”).
The Big Picture – The Court’s perpective was principally shaped the these observations:
We make two observations about the Ordinance. First, the Ordinance does not require employers to establish their own ERISA plans or to make any changes to any existing ERISA plans. Employers may choose to make up the difference between their existing health care expenditures and the minimum expenditures required by the Ordinance either by altering existing ERISA plans or by establishing new ERISA plans. However, they need not do so. The City-payment option allows employers to make payments directly to the City, if they so choose, without requiring them to establish, or to alter existing, ERISA plans. If employers choose to pay the City, the employees for whom those payments are made are entitled to receive either discounted enrollment in the HAP or medical reimbursement accounts with the City.
Second, the Ordinance is not concerned with the nature of the health care benefits an employer provides its employees. It is only concerned with the dollar amount of the payments an employer makes toward the provision of such benefits. An employer can satisfy its spending requirements by paying the City; it can satisfy those requirements by funding exclusively preventive care; it can satisfy those requirements by setting up an on-site clinic and reimbursing employees for the purchase of over-the-counter medications; or it can [*16] satisfy those requirements in some other manner, such as funding a traditional ERISA plan. The Ordinance does not look beyond the dollar amount spent, and it does not evaluate benefits derived from those dollars.
Additional Commentary – Additional discussion will appear in subsequent posts. For now, those following the story will find a useful contrast in Prof. Ed Zelinsky’s previous comments on the bill (with whom I agree).