In This Era of Bitter Partisanship, Politics Often Subsume Policy

In This Era of Bitter Partisanship, Politics Often Subsume Policy

Eric Paley   By Eric Paley, Partner, Nixon Peabody

 On November 7, 2009, the House of Representatives votes 220 to 215, almost entirely along party lines, in favor of a health care overhaul—the Affordable Health Care for America Act, which was championed by the Obama administration. The next morning, the New York Post reports that house Democrats "counted down the final 10 seconds of voting in unison like it was New Year’s Eve" while house Republicans broke into a rendition of Steam’s "Na Na, Hey Hey, Kiss Him Goodbye," "suggesting the legislation would lead to electoral defeat."

I’m sorry. Is this the culmination of a thoughtful debate over how best to address runaway health care costs or the cheers of a drunken crowd in the waning seconds a football game between two fierce rivals?

The sound bites and posturing aside, health care reform marches on. And while we’re a long way from knowing exactly what the final legislation might look like—the Senate has yet to consider its own bill and, even then, both Congressional houses would still be required to hammer out a compromise—it’s not too soon for employers to consider how changes in the law might affect them.

Of all the ideas being kicked around inside the D.C. Beltway these days, none would have a more significant impact on employers than the concept of a “play or pay” mandate. How does a play-or-pay mandate work? Simply put, covered employers must offer their employees a prescribed level of medical coverage (i.e., play), lest they be assessed a penalty (i.e., pay). For example, the Affordable Health Care for America Act just passed by the House of Representatives would require non-exempt employers to pay at least 72.5 percent of the single coverage premium cost and 65 percent of the family coverage premium cost for the lowest-cost plan that meets certain minimal benefits package requirements. An employer that fails to do so would be required to pay 8 percent of its payroll into a Health Insurance Exchange Trust Fund. The mandate would be phased out for employers with payrolls of between $750,000 and $500,000.

Play-or-pay laws are nothing new. In fact, 2006 saw several such laws enacted:

  • The State of Maryland enacted the Fair Share Health Care Fund Act, known colloquially as the “Wal-Mart Law” because of the law’s exclusive target. Employers with 10,000 or more employees within the state were required to spend at least 8 percent of their payrolls on employee health insurance costs or pay the state the difference. The District Court of Maryland struck down the law, and the 4th Circuit Court of Appeals upheld that ruling.
  • The Commonwealth of Massachusetts enacted the Massachusetts Health Care Reform Act, which, among its many provisions, requires employers with 10 or more employees to make a fair and reasonable contribution to the cost of health insurance for those employees. Employers who do not do this are assessed an annual penalty of up to $295 per employee, which is paid into the Commonwealth Care Trust Fund. To date, the Massachusetts Health Care Reform Act has not been challenged in court.
  • The City of San Francisco adopted the Health Care Security Ordinance, which requires covered employers to pay a prescribed tax per hour per employee to support the City’s Health Access Program for low- and moderate-income residents. Employers receive a dollar-for-dollar credit against the tax for any amount paid toward employee health care. A respected trade group, the Golden Gate Restaurant Association, has challenged the ordinance, and the parties are currently awaiting word as to whether the United States Supreme Court will hear the case during its current term.

For each of the above enactments, a common issue exists: whether federal law governing the administration of benefits—the Employee Retirement Income Security Act of 1974 (ERISA)— preempts (i.e., trumps) the state’s or locality’s imposition of a health care mandate on employers. In Maryland, ERISA preemption was the basis for the court’s decision to strike down the Wal-Mart Law. Ditto in San Francisco, where ERISA preemption is the basis for the Golden Gate Restaurant Association’s legal challenge.

If, however, Congress should ultimately approve the Affordable Health Care for America Act or a bill containing a similar play-or-pay mandate, ERISA will offer employers no protection. To the contrary, preemption would be a non-issue as a federal mandate would be specifically designed to override ERISA.

Of course, to every yin, there is a yang, and health care reform is no different. While large employers may well be subject to a mandate in one form or another, small employers will enjoy subsidization of health care costs and a more robust insurance market. By way of example, the Affordable Health Care for America Act calls for the creation of a Health Insurance Exchange through which small employers can purchase health coverage. Insurers providing products to this market would be subject to special regulation, and small employers would receive tax credits to offset the costs of providing coverage.

Of course, by establishing a bright line between large employers and small ones, Congress potentially leaves the door open for gamesmanship (e.g., a large employer seeking to avoid the mandate might cut its payroll to become a small employer). That, in turn, could well lead to the introduction of regulatory initiatives to close such loopholes.

No one knows exactly what health care reform will look like at the end of the day. However, it seems pretty likely that a play-or-pay mandate on large employers, a bag of goodies for small employers, and increased regulation for all will be a part of the equation.

Additional information is available from the Nixon Peabody website.