Author: Jerry Geisel

The 9th U.S. Circuit Court of Appeals’ decision this month not to review a 2008 appeals panel ruling upholding a San Francisco health care spending law brings one step closer a potential U.S. Supreme Court review and perhaps a final resolution on the legality of employer spending mandates.

In a case followed by employers nationwide due to its potential impact on the design, cost and administration of corporate health plans, a majority of appeals court members rejected a request for the full appeals court to review a unanimous ruling by a three-judge panel of the court that the law could stand.

Under the law, San Francisco employers must spend as much as $3,600 per employee annually on health care in order to avoid stiff fines. The Golden Gate Restaurant Association, a San Francisco-area employer group that brought the case, argued that the law runs afoul of a provision in the Employee Retirement Income Security Act that pre-empts state and local ordinances that relate to employee benefit plans.

Under the ordinance, which went into effect in January 2008, employers with at least 100 employees have to make health care expenditures of at least $1.85 per hour for each employee working at least eight hours per week. Employers have a variety of options to satisfy the spending mandate, including payment of health insurance premiums, contributions to health reimbursement arrangements and health savings accounts, and payments to a city fund.

Judge William Fletcher, who also wrote last year’s appeals court ruling, says ERISA pre-emption did not come into play. “Nothing in the ordinance requires the employer to establish an ERISA plan, and nothing in the ordinance interferes in any way with the uniformity of ERISA regulation,” he wrote.

In a dissent, Judge Milan D. Smith Jr. wrote that the city ordinance strikes at the heart of what ERISA pre-emption was designed to prevent: the proliferation of varying state and local benefit laws and requirements.

As it stands, the decision will “undoubtedly serve as a road map in jurisdictions across the country on how to design and enact a labyrinth of laws requiring employer compliance on health care expenditures, thereby creating the very kind of health care expenditure balkanization ERISA was designed to avoid,” he wrote.

Kevin Westlye, executive director of the Golden Gate Restaurant Association, says the group intends to seek a Supreme Court review of the case.

Legal experts say it is likely the Supreme Court will take up the case because the ruling has created a split at the appeals court level—in 2006, the 4th U.S. Circuit Court of Appeals ruled that a Maryland health care spending law was pre-empted by ERISA.

In addition, experts say, a Supreme Court review is likely given the huge impact the San Francisco ruling would have on corporate benefit plans.

“Given that there is a conflict in the courts and that this clearly is a case of national importance, one would think that the Supreme Court will take it up,” says Kathryn Wilber, senior counsel-health policy with the American Benefits Council in Washington.

It is the potential proliferation of similar laws that most concerns national employers. It would be incredibly difficult for employers to track, let alone administer, what could become a maze of spending laws, experts say.

“If ERISA pre-emption means anything, it should be that employers shouldn’t have to analyze and comply with benefit laws that could pop up in every nook and cranny of the country,” says Andy Anderson, an attorney in the Chicago office of Morgan, Lewis & Bockius.

For employers that meet the $1.85-per-hour spending mandate, the only direct impact is the ordinance’s reporting requirements.

But many employers don’t meet the spending requirement. Few employers provide health care coverage to employees working as little as eight hours a week—the trigger for the mandate.

In addition, the law generally requires a spending contribution even for those employees who have rejected coverage from their employers in favor of being covered under a spouse’s group health care plan.

Employers not meeting the spending requirements have taken a variety of approaches. Some have found that the easiest action is just to pay the required contribution to San Francisco, says Rich Stover, a principal with Buck Consultants in Secaucus, New Jersey.

Other employers have established health reimbursement arrangements for affected employees. With that approach, employers have assurance that their contributions are being used to pay for their own employees’ health care expenses rather than going to a city fund, Anderson says.

Washington’s five-year honeymoon with health savings accounts may be coming to an end, though no one envisions a divorce.

    The honeymoon began after Congress—at the urging of the Bush administration—authorized HSAs as part of broader Medicare prescription drug legislation it passed in late 2003.

    That law showered HSAs with tax breaks. Enrollees in high-deductible health insurance plans to which HSAs must be linked can make tax-deductible or pretax contributions to HSAs, while funds can be withdrawn tax-free from the accounts to pay for uncovered health care expenses.

    Eager to jump-start HSAs, the Bush administration pushed regulators to develop guidance quickly.

    “This was an important priority for the administration,” recalls Bill Sweetnam, then-benefits tax counsel for the Treasury Department and now a partner with Groom Law Group in Washington.

    The first batch of Internal Revenue Service guidance came a little more than three months after HSAs became available, which was lightning speed compared with action on other employee benefit issues. The guidance laid out which health care services are preventive and, thus, under the law authorizing HSAs, fully covered by linked health insurance plans.

    The guidance kept coming at a rapid clip, with the most recent batch issued in June. The latest direction, among other things, describes services that onsite corporate medical clinics can offer at little or no cost without employees losing their eligibility to participate in an HSA.

    Since passage of the authorization legislation, regulators have had company in giving HSAs special treatment. Three years after first blessing HSAs, Congress further sweetened the arrangements.

    In late 2006, lawmakers approved and President Bush signed a bill that allows employees to make bigger HSA contributions and clarified an interaction problem between HSAs and so-called grace periods for flexible spending accounts. This made it easier for employers to move from first-generation consumer-driven health plans linked to health reimbursement arrangements to plans linked to HSAs.

    All that activity helped accelerate HSA adoption, says Gregg Larson, national HSA product leader with Affiliated Computer Services Inc. in Minneapolis.

    As of January 1, 6.1 million people were enrolled in high-deductible health insurance plans linked to HSAs, a number that nearly doubled in just two years, according to a survey by America’s Health Insurance Plans, a Washington-based industry trade group.

    Now, however, there are signs that the honeymoon may be coming to an end among lawmakers and, depending on the outcome of the November presidential election, at the White House.

    One sign came in April when the House of Representatives passed legislation to require banks and other financial institutions that administer HSAs to substantiate that account distributions are for health care-related expenses, such as prescription drug co-payments.

    With a health care substantiation requirement, account holders in some cases would have to file a claim form and provide a receipt to the bank where they established their HSAs to receive reimbursement.

    To handle that, many banks would have to acquire new administrative systems and those costs would be passed on to account holders. Those added costs and complexity might result in some banks withdrawing from what already is a low-profit business, experts say.

    At the same time the substantiation legislation was being considered, several legislators blasted HSAs.

    Rep. Pete Stark, D-California, who chairs the House Ways and Means health subcommittee, said HSAs over the long term would lead to higher health care costs because enrollees may delay getting needed care, resulting in more expensive treatment later.

    Another panel member, Rep. Xavier Becerra, D-California, labeled HSAs as tax shelters for the wealthy.

    Indeed, Bush administration officials warned of a presidential veto if the substantiation legislation, which the Senate has yet to consider, received final congressional approval.

    But whoever becomes the next president might not take the same line.

    Sen. Barack Obama, D-Illinois, the presumptive Democratic presidential candidate, is at best lukewarm about HSAs. Responding earlier this year to questions posed by the American Academy of Family Physicians, Obama described HSAs as a helpful way of saving taxpayers money “in the current health care environment. But the current health care environment is unsustainable and health saving accounts don’t do enough.”

    By contrast, Sen. John McCain, R-Arizona, the presumptive Republican presidential candidate, has been more supportive. While offering no specifics, he says that if elected he would work to encourage and expand HSAs. The accounts “take an important step in the direction of putting families in charge of what they pay,” McCain says on his Web site.

    The contrasting views means the future of HSAs could depend on the outcome of the November election, says Grace-Marie Turner, president of the Galen Institute, a health policy organization based in Alexandria, Virginia.

    Others say that regardless of the election results, HSAs are here to stay, simply because millions of people already have coverage through them.

    “There are too many to wipe them out. It would be very difficult to reverse course at this point,” says Ted Nussbaum, a principal with Watson Wyatt Worldwide in Stamford, Connecticut.

    Other Washington observers agree, but say that if Obama is elected and the Democrats continue to control Congress, there could be a drive to limit HSA availability.

    “I don’t think HSAs will be taken away, but I also don’t expect them to be improved. Depending on the political climate, there could be an effort to pare back the tax breaks for those above certain income levels,” says Frank McArdle, a consultant in the Washington office of Hewitt Associates.

    There are numerous precedents in the benefits realm of linking tax breaks to income. For example, tax credits for dependent care expenses and adoption expenses are linked to income. In addition, employees covered by corporate pension and savings plans can make full tax-deductible contributions to individual retirement accounts only if their incomes are below certain levels.

    Still, McArdle says, attempts to link HSA eligibility to income would be strongly resisted by congressional Republicans.

    McCain would be likely to offer proposals to further sweeten HSAs, but if Democrats continue to control Congress, such proposals would have little chance of passage, observers say.

    Indeed, proposals the Bush administration has made during the past two years to boost maximum contributions that can be made to HSAs have received scant attention from lawmakers.