Special Report: The Uninsured

California implements pay-or-play’ policy

One of the possible solutions to the nation’s problem with lack of health insurance coverage for all is a "pay-or-play" program that puts the burden on employers to provide employees with health insurance or pay for insurance provided by the state. California will be implementing such a program as created in Senate Bill 2, which passed the legislature Sept. 12 and was signed by former Gov. Gray Davis Oct. 5, about six weeks before he left office.

A California Healthcare Foundation analysis of the bill showed the requirements will be phased in over several years. Eligible employees are those who have worked for an employer for three months and work at least 100 hours per month, meaning that many part-time workers will be covered. Firms with 200 or more California employees are to participate by providing coverage for both workers and their dependents beginning Jan. 1, 2006. Firms with 50 to 199 California employees join the system Jan. 1, 2007, providing coverage for workers but not for dependents. Firms with 20 to 49 employees are exempt unless the state provides a tax credit equal to 20% of the employer’s net cost of the fee, and firms with fewer than 20 employees are completely exempt.

Under the bill, firms will be required to pay a fee to a state fund for each eligible worker. Those firms that offer coverage that meets the minimum requirements of the bill will receive a credit against their fee.

A new State Health Purchasing Fund will be administered by the Managed Risk Medical Insurance Board, the group that already manages California’s Healthy Families program. That board will set the fee and establish enrollee cost-sharing requirements such as deductibles, coinsurance, and copays.

Employers that want to offer their own coverage (the "play" in pay or play), can apply to the Employment Development Department for a credit against their fee. Coverage offered through the state Department of Managed Health Care will meet the requirement, as will coverage offered through the Department of Insurance, as long as the maximum out-of-pocket costs to participants don’t exceed those offered through preferred provider organizations regulated by the Department of Managed Health Care. Accident-only, hospital indemnity, and other limited benefit plans will not qualify.

Employers and employees are required by law to share the coverage, with employers required to contribute at least 80%, and workers contributing the remaining share up to 20%. Worker contributions are capped at 5% of wages for low-income workers (up to 200% of the federal poverty level).

A 2002 survey of California firms by the Kaiser Family Foundation/ Health Research Educational Trust found that 94% of companies with 50 to 199 workers and 99% of those with 200 or more workers already offer health insurance coverage. The remaining firms will be required to pay the fee if they don’t start to offer their own coverage.

Some other firms already offer health insurance, the researchers found, but will be required to increase their contributions to meet the 80% requirement. About 80% of firms with more than 50 workers contribute at least 80% of the premium for worker coverage. Under SB 2, the remaining 20% of companies would have to upgrade their contribution to 80%. Only about half the companies with 200 or more workers pay the required 80% premium share for family coverage. The other half would have to increase their premium share.

There are conflicting estimates of the cost to California firms as a result of this law, ranging from $1.3 billion, from the California Medical Association, to $11.3 billion, from the Employment Policies Institute. The California Healthcare Foundation said that labor market effects are uncertain, with opponents of the plan predicting that many employers not currently offering health insurance will lay off workers or leave the state, while proponents say that the majority of such employers are in locally based service industries and that the new requirements level the playing field for firms already offering coverage.

While state agencies are working toward implementation of the program, opponents may challenge it on a variety of fronts:

1. a state lawsuit that claims the fee actually is a tax that did not receive the required two-thirds majority vote in the legislature;

2. a federal lawsuit that claims the law violates the Employee Retirement Income Security Act of 1974, a federal law that pre-empts states from regulating employer benefit plans;

3. a referendum to repeal the law being considered by the California Chamber of Commerce, which would need about 375,000 signatures to get on a ballot.

Also not known at this point is how Arnold Schwarzenegger, the new Republican governor, views the program’s impact on his goal to revitalize the California economy.

[For copies of the legislation and links to other resources, go to: www.chcf.org. Call the foundation at (510) 238-1040.]