Inside SB 2: mandatory health coverage for employees.

Before the Oct. 7 recall election, Gov. Gray Davis signed into law the hotly debated SB 2 (Burton, Speier), which mandates employer-sponsored health insurance for many California businesses.

Business interests had vigorously opposed the bill, while unions and health care providers supported it. Proponents say that the mandate will provide health care coverage to more than 1 million California workers and their dependents, about 28 percent of the working uninsured according to the Kaiser Family Foundation.

Opponents estimated an increased cost to California's employers of $5.7 billion to $11.4 billion.

Unintended Consequences?

When Hawaii enacted similar legislation, many workers found that they could no longer find full-time work and had to make do with multiple part-time jobs with no benefits.

California's new health plan may result in decreased benefits for many workers and restrictions on offering coverage to dependents who are subject to their own employer-mandated coverage.

Part of the impetus for SB 2 was the increase in the number of uninsured California workers as struggling companies cut back on benefits or require employees to make larger contributions to retain health insurance. Some workers faced with feeding their family or paying health insurance premiums have chosen to go without health insurance. The measure's supporters argued that these workers were using public health care programs and the cost was being passed on to taxpayers.

After vigorous debate, employers of fewer than 20 employees were exempted and those with between 20 and 49 employees may be exempted if an offsetting tax credit of 20 percent of the cost is not enacted.

The Nitty-Gritty

Effective Jan. 1, 2006, all large employers, defined as those employing 200 or more people in California or a "controlled group of corporations" employing 200 or more individuals who work in California, are required to pay a fee to the Employment Development Department for each employee who works more than 100 hours per month.

A newly empowered board will set the fee that will cover the cost of insurance for employees, as well as enforcement and administration by the state agencies responsible for collecting the fees and administering a purchasing pool.

The requirement will apply to medium-sized employers (50 to 199 employees) Jan. 1, 2007. It also will apply to employers with 20 to 49 employees if the tax credit has been adopted.

Employers who choose to provide health insurance to employees in lieu of going with the state-contracted program may apply for a credit against the fee by providing proof of coverage for eligible enrollees and their dependents.

However, some amount may still be owed as a share of the state's administration costs. To qualify, employer-sponsored health insurance plans must meet minimum requirements and may not exceed out-of-pocket cost limits that the purchasing pool will determine.

Employee premium contributions may not exceed 20 percent of the fee the state assesses the employer and if an employee's wages are less than 200 percent of the federal poverty guidelines for a family of three, the contribution shall not exceed 5 percent of the wages.

Employers are prohibited from asking employees about their family income. Employers may not reduce hours, terminate and rehire an employee or designate employees as temporary to avoid the fee. Those who do will be penalized. New or growing businesses must comply with all applicable provisions of this law within a month of becoming subject to the mandate.

Small-Group Reforms

The bill also imposes small-group market reforms on employers of 50 to 199. This means that large employers will be subject to the same restrictions on pooling, premium calculations and increases that insurers dealing with smaller employers (two to 50) have experienced for years.

When California enacted the small-group market reforms, many association-sponsored plans were eliminated and smaller employers averaged premium increases of 30 percent with decreased benefits.

"Achieving improved health care access and affordability for all working Californians is a goal worth fighting for," said Assembly Republican Leader Dave Cox (Fair Oaks). "However, we must find a better way of doing so than at the cost of putting companies out of business. Employers are already struggling mightily under the crushing burden of exploding workers' compensation and energy costs, one of the highest tax rates in the nation, and suffocating regulations. Coming on top of all this, and at the worst possible time, SB 2 will spur an exodus of jobs from the state."

According to the republican analysis, California businesses already are besieged with skyrocketing health care costs--absorbing an average 13 percent increase last year and an additional 14 percent increase this year. Workers' compensation costs continue to shoot upward, and in January, employers will be hit with an increase in unemployment insurance costs that will total between $3 billion and $5 billion.

Some business groups have indicated that the new law will be challenged in court. Possible grounds include that it represents a tax increase, but was not treated as such since the Legislature did not adopt it by a two-thirds vote or that federal ERISA laws pre-empt such a mandate. Hawaii's law was passed prior to the ERISA pre-emption.

Bruce C. Allen is CalCPA's director of government relations.