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Federal law says that state and local governments can’t force employers to change their employee benefits plans. Only Congress can. A Wal-Mart-backed trade group has twice used this well-established precedent to scuttle state and local laws aimed at setting minimum health care spending requirements in Maryland and New York. Now the San Francisco city attorney’s office is in federal court defending a law that’s intended to bring about universal health care coverage, and its lawyers insist they have found a way to overcome federal pre-emption. If U.S. District Judge Jeffrey White agrees and grants a summary judgment motion the city filed last week, some employment lawyers say the case would put San Francisco at the forefront of a movement to shift more of the nation’s spiraling health care costs onto the shoulders of business. The state of Maryland recently tried defending a law aimed at Wal-Mart by arguing that the state gave the company a choice of spending more on health benefits or paying an equivalent amount to the state. But the district court and the Fourth Circuit U.S. Court of Appeals (.pdf) have both ruled against Maryland’s law, finding that in effect, it only left one realistic choice, to boost health benefits. A federal judge in New York reached the same conclusion last week in striking down (.pdf) a law aimed at businesses in part of Long Island. Though San Francisco’s law is based on an employer-funded concept that’s similar to those in Maryland and New York, Vince Chhabria, a deputy city attorney who’s defending San Francisco’s law in federal court, said the city’s alternative is “a totally different animal.” He argues that the alternative options in the Maryland and New York laws fell short because they required businesses to pay the government without the government directly giving them anything in return. Under the San Francisco law, employers who don’t offer private insurance would still have to pay an equivalent amount to the government. But their employees would get discounted health benefits provided by the city in exchange. “In this case, it would be far from irrational for an employer to choose the government payment option,” Chhabria said. THE FINE POINTS San Francisco’s law, known as the Health Care Security Ordinance, applies to medium- and large-size businesses. If the law passes muster in the courts, companies with 20 or more employees would have to spend $1.17 or $1.76 for each hour employees work, depending on the company’s size. To meet those spending minimums, employers who don’t already offer insurance could set up their own health benefits program, or direct employees to enroll in a new city program and make insurance payments on their behalf. The city argues the benefits it provides will be cheaper than anything available on the private market.
‘In this case, it would be far from irrational for an employer to choose the government payment option.’

Deputy City Attorney Vince Chhabria

A food industry trade group called the Golden Gate Restaurant Association sued in November to stop the law from taking effect. In court papers, the group says the San Francisco law is pre-empted by a 1974 federal employee benefits statute � the same one used to knock down the health care laws in Maryland and Suffolk County, N.Y. The GGRA’s lawyer, Richard Rybicki, said he doesn’t think there’s any “functional difference” between San Francisco’s plan and the “pay-or-play” policies that came before. San Francisco’s plan “does what other pay-or-play laws already did, which is require employers to pay a certain amount or a certain percentage in order to fund employee health benefits. As noble as the city’s goals are, it’s an area that Congress intended was going to be regulated on a national basis,” said Rybicki, an attorney at Dickenson, Peatman & Fogarty in Napa. Chhabria, San Francisco’s attorney, said there’s no major disagreement about whether the federal law at issue � the Employee Retirement Income Security Act, or ERISA � prevents local governments from meddling in companies’ employee benefits plans. The dispute arises from competing arguments about how San Francisco’s health plan would work. “They seem to claim in their brief that our ordinance imposes mandates on ERISA plans, [but] the ordinance allows employers to comply however they want. They can comply by adopting an ERISA plan, or they can comply by simply writing a check to the city so the city can provide health care to their employees,” Chhabria said. INSURANCE QUACKERY? James Baker, a San Francisco partner at Jones Day, has argued against Maryland’s health care law in an amicus curiae brief for the U.S. Chamber of Commerce. While Baker said he hasn’t studied San Francisco’s plan in great detail, he thinks it looks similar to the Maryland and New York laws. “From the summaries that I’ve read, it sure walks like a duck and quacks like a duck,” he said. San Francisco’s promise of discounted health benefits doesn’t distinguish it from the previous two cases, he added. “The fact that San Francisco has described it as some kind of medical plan or insurance arrangement, I don’t think it makes a bit of difference. It’s still a mandate, and it’s still telling an employer what kind of benefits they have to provide,” he said. “And that’s not allowed under ERISA.” Deene Goodlaw, a professor at Boalt Hall School of Law who used to co-chair the employee benefits practice at what is now Pillsbury Winthrop Shaw Pittman, views San Francisco’s alternative option differently. Goodlaw said an alternative in Maryland’s law, which would have made businesses that didn’t spend money to insure employees instead pay money to the state to defray its Medicaid costs, amounted to “a generic tax.” Another alternative � deemed “utterly out of line with reality” by the Maryland district court � was for employers to build on-site first-aid facilities. But, Goodlaw said, Golden Gate Restaurant Association v. San Francisco, 06-6997, looks like a case of first impression. “I think the fact that the city is running its own health program as an alternative to an employer-based program is very different from the other ordinances,” she said, adding that the plan has “a pretty good chance under current law.” One caveat, though: Goodlaw said the federal law in this area is “absolutely unpredictable.”

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