An In-Depth Analysis Of “Pay or Play” Initiatives

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Over 61% of Americans get their health insurance from their employers. In CT, it is estimated that 2/3 of residents get their health insurance from their employers (OHCA 2004 Small Employer Health Insurance Survey, 2004). Additionally, the majority of the uninsured in CT today have at least one person in the family working (79%), and 51% have family members who work full time all year (CT Economic Digest, DOL).

In CT, according to OHCA, 39% of the state’s smaller firms did not provide health insurance primarily because it was not affordable. However, those who provide the coverage tend to make it available to more of their employees. And finally, according to the Commonwealth Fund’s 2003 Report, “The Growing Share of Uninsured Workers by Larger Firms,” there is a growing trend of even large companies becoming less likely to provide benefits.

Because such large numbers of people get their health insurance through their employers, building on that system can be a promising way to insure more people. “Pay or play” refers to a type of program whereby employers either “pay” a fee to the state to fund an insurance purchasing program that buys private insurance or they “play” by directly offering coverage to workers and their dependents. Because this type of plan generally exempts small employers, it is not a threat to their ability to stay in business.

It is hoped but needs to be further researched that increasing the numbers of insured overall will help small employers by increasing the number of overall employers providing health benefits and subsequently lowering the premiums.

An analysis of “pay or play” programs in other states follows with information about Hawaii’s Prepaid Healthcare Act of 1974, California’s SB2 Health Insurance Act of 2003 (signed into law by former Governor Gray Davis and repealed by referendum on 11/2/2004), New York’s Health Care Security Act, Massachusetts Health Security Act of 1988 which was repealed before taking effect, and Nevada’s referendum on a living wage which ties the minimum wage to the provision of health care coverage by employers.

Hawaii Prepaid Healthcare Act of 1974

The first state to have any form of employer-mandated health insurance was Hawaii. While this legislation is primarily credited with significantly increasing the number of insured workers in Hawaii, reducing overall medical costs in the state, and making Hawaii the state with the second-highest rate (82%) of employer healthcare coverage, Hawaii’s prepaid model is no longer a plausible model for expanding employer-based healthcare coverage.

At the same time, Hawaii passed its Prepaid program, ERISA was established. ERISA was initially created and designed to safeguard employee pension programs by superseding or preempting state laws related to employee benefits. However, with the creation of ERISA, states cannot require employers to provide health insurance for their workers. Hawaii was able to get a Congressional exemption, and most experts agree that such an exemption would be neither probable nor possible today.

Basic Tenets of Hawaii Prepaid program:

1. Employers provide health insurance to employees who work 20 plus hours per week for significant consecutive weeks and make 87% of the state’s minimum wage;
2. The law exempts those working fewer than 20 hours per week;
3. The coverage is mandatory unless the employee has other health insurance coverage;
4. Minimum plan benefits must meet “prevailing plan standards” or the same standards of the largest number of subscribers in Hawaii at the time;
5. The program appoints a Prepaid Healthcare Advisory Council that reviews plans and makes recommendations to the director of Hawaii’s Department of Labor and Industrial Relations;
6. This program stipulates that employees pay the lower of half the cost of the plan or 1/5% of their monthly wage – the argument being that most employees have to pay something, and 1/5% is probably a reasonable estimate of what they would have to pay out of pocket anyway.

Benefits of Hawaii Prepaid Program:

1. Superior health of Hawaii residents;
2. Highest life expectancy in the U.S.;
3. Lower rates of cancer and lower mortality rates caused by heart disease, breast, and lung cancer;
4. ER visits are well below the national average;
5. One of the lowest costs in the country for employer-sponsored health coverage, most likely due to large numbers of insured individuals resulting in lower costs, early medical intervention leading to less costly long term medical intervention, and cost containment pressure led by employers who are carrying the bulk of rising health insurance costs;

Problems of Hawaii Prepaid Program:

1. Because employees can only pay 1.5% of their monthly income, employers shoulder the entire cost of rising health insurance costs;
2. Critics have cited a growing number of employers hiring part-time workers to bypass the program entirely;
3. Because Hawaii’s economy has dramatically shifted from agriculture to tourism, there is increased reliance upon part-time workers in general, leading to more uninsured.

California’s SB2 Health Insurance Act of 2003

California is the first state to successfully pass a “pay or play” program designed to insure more workers. The bill was passed and signed into law by then-Governor Gray Davis days before being voted out of the office and then repealed in a referendum on November 2, 2004. While the law was repealed, it was only beaten by about a 2% margin. Many advocates see this as a near victory and indeed a stepping-off point for such legislation in other states.

Basic Tenets of CA SB2

1. Large employers are defined as 200+ employees. The law would take effect 1/1/06 for these employees and dependents. Medium employers are 50-199, and the law would take effect 1/1/07 for these employees only. Small employers are 20-49 and only have to pay the fee if a tax credit is s enacted to help them absorb the cost of providing the coverage, and businesses with fewer than 19 employees are exempt;
2. Sets up the Managed Risk Medical Insurance Board to oversee the program and create a purchasing pool financed by employers and contributions of employees;
3. The employer fee is the total amount a company would have to pay for all potential enrollees and dependents as applicable plus administrative and enforcement fees;
4. The Employment Development Department tells employers what they have to pay into the purchasing fund – the fee is waived if the employer is entitled to credit;
5. The employer fee is based on workforce data provided the department by the employer on an annual basis;
6. An employee is not penalized if the employer does not pay the fee – employers will get a fine of 200% of what is owed;
7. Employee contributions cannot exceed 20% of the fee to the employer and are collected by the employer and paid with the employer fee. If the employee’s wages are below 200% of FPL, their contribution cannot exceed 5% of wages;
8. The Board is responsible for finding the best health plan to offer enrollees and establishes the deductible, co-pays, and other out-of-pocket costs charged to employees. The Board must look at deterrence’s to enrollment as part of their analysis;
9. Employers that can provide proof of coverage that meets the minimum requirements of the Health and Safety Code will not have to pay the fee. SB2 identifies those plans that are adequate and inadequate;
10. SB2 specifies that it is unlawful for employers to make employees independent contractors or temporary to avoid the fee;
11. SB2 includes a premium assistance component whereby those eligible for public health programs can enroll on the applicable public program and have their portion of the public health program premium plus other out-of-pocket costs (so-called wrap-around services) paid for that public program. In contrast, the purchasing fund pays the state’s portion for such coverage. This program is designed to save the state money and increase the number of people getting insurance through public programs. However, it is an administrative nightmare, severely jeopardizes efforts in CT to expand HUSKY coverage for parents, and can be viewed as a subsidy to corporations since their feel to the purchasing fund for these individuals will be only the state’s portion of the premium rather than the entire premium amount for that enrollee;
12. The CA State Treasury is responsible for administering the State Health Purchasing Fund and can set up two funds for enrollees not on the public program and one for those on a public program.

Benefits of SB2

1. SB2, if it had not been beaten, was expected to reduce the number of uninsured Californians by 1 million while significantly expanding coverage to Latinos. Additionally, supporters indicate it would safeguard that already receiving employer-sponsored healthcare;
2. Much of the groundwork had been laid in CA due to their years of experience with health insurance purchasing pools and other public programs designed to help small employers;

Problems with SB2:

1. The premium assistance portion of this legislation is not something we should include in CT as it is administratively cumbersome, reduces the likelihood that advocates will be successful in expanding HUSKY to parents, and gives legislators an “out” in restoring coverage to the 16,000 HUSKY recipients that have lost coverage under the guise of trying a new “cutting edge” program;
2. Administratively this program is an enormous project;
3. Opposition by big-box retailers such as Wal-Mart is significant and well funded;

New York City Health Care Security Act (NYCHCSA)

The city council of New York City has been reviewing the NYCHCSA, with the most recent rally being held on December 9 to rally support for the proposal. In NYC, responsible businesses are struggling with out-of-control health care costs. These businesses face unfair competition from owners who lower their costs by not offering health insurance. This, in turn, forces responsible businesses to cut benefits to remain competitive (www.nyhealthsecurity.org). NYCHCSA is designed to help responsible businesses in NYC continue to offer health care coverage, expand access to tens of thousands of working New Yorkers, and indirectly save taxpayers’ money.

Basic Tenets of NYCHCSA:

1. The law covers employers in the building services, grocery, hotel, industrial laundry, and construction industries. Historically, these are the businesses where the standard industry practice has been to provide worker’s health insurance;
2. These employers will choose to offer their workers their industry’s overall level of health care or contribute to a citywide fund to provide workers with family health coverage. Details of this law have been difficult to locate. However, it is designed after CA’s SB2;

Massachusetts “Pay or Play”

MA is unique in many ways. It has one of the most advanced health care systems in the U.S., its purchasers of insurance are organized and aggressive in holding down HMO costs, there are more specialists than primary care providers making the typical HMO model problematic at times, and its health care is more expensive than any other state. In 1988, a pay or play bill was passed and subsequently repealed.

Basic Tenets of MA Health Security Act

Required that companies with more than five employees either provide health insurance or deposit $1680 per employee per year into a state insurance fund;

The fee paid by employers was considered a payroll tax designed to finance a public health coverage program while providing a credit for the costs of any employee health benefits the employer-funded up to the limit of the tax liability.

It was repealed and never took effect.

The Nevada Referendum

This proposed amendment, if passed, would create a new section to Nevada’s state Constitution requiring employers to pay employers $5.15 per hour if the employer provides health benefits and $6.15 per hour if they do not provide health benefits. The rates will be adjusted by the number of increases in the federal minimum wage over $5.15 per hour or, if greater, by the cumulative increase in the cost of living measured by the CPI.

Why support this referendum:

1. Nevadans will benefit from a long-overdue increase in the state’s minimum wage;
2. Low-income workers will benefit;
3. Taxpayers will benefit because low-income workers will be more self-sufficient;

Why not support this referendum?

1. Poverty would increase in Nevada, with single mothers being the hardest hit;
2. Discriminates against non-union companies, which are most of the small businesses in Nevada.

Health Security Taxes

This is a “special tax” on both corporations and other businesses doing business in CT. It would apply to businesses with total gross receipts of more than a particular threshold amount, i.e., $1,000,000 per year.

Gross receipts as defined here would mean any business receipts regardless of whether or not they were generated in CT. To calculate this tax, you would multiply the gross receipts by a “healthcare security tax” percent, probably around 5%. From this number, you subtract the amount that the business paid (not employees) in the previous year for employee healthcare coverage.

This number is the business’s total healthcare coverage expenditure multiplied by their apportionment fraction. There is a rather complicated apportionment fraction calculation one would go through. The fraction would be the same for all corporations with no exemptions granted under the current CT corporate tax code.

The result of these calculations is the healthcare security tax the business must pay. It can be structured so that those companies already providing healthcare coverage do not have to pay the tax based upon the calculation for HST. The revenue generated from such a tax would expand HUSKY coverage to cover uninsured people. Tim O’Brien has developed several calculations for discussion.

Advantages to This model

1. It is not a direct penalty for employers who don’t provide health insurance;
2. It is a tax on gross revenues, not a fee on employment;
3. It applies to all companies doing business in CT:
4. The credit applies to all workers, not just those in CT;
5. The credit does not require any particular health plan, which may help avoid future ERISA issues;

Other State Initiatives Considered but not Enacted:

In 1998, as part of a minimum wage increase, the Washington state legislature permitted employers to pay a lower minimum wage if they financed an acceptable level of health coverage. In 2000, the Tennessee legislature had a bill that declared that “the primary source of health insurance for employed individuals should be an employer-sponsored health insurance plan” and would have imposed a tax on the gross revenue of employers that did not cover their workers.

In Maryland, in 2000, a legislative proposal would have created a universal coverage program, financed in part by a payroll tax but allowing employers to opt-out by continuing to cover their employees with benefits prescribed by state law. (Revisiting Pay or Play: A Briefing Paper)

Things to Consider in CT

Premium Assistance Programs: (Information provided by CT Health Policy Project, Ellen Andrews)

California’s SB2 included the provision for a premium assistance component. A premium assistance program allows the state to subsidize health coverage for low-income residents whose employers offer health insurance. In CA, this means that those employees, where information was available, which raises privacy issues, who are eligible, could be enrolled in the applicable public health program. The public program would only pay the employee’s portion of the cost, while the purchasing fund would pay the state’s portion.

Healthcare advocates in CT do not support such a proposal for several reasons, including the damage it could do to efforts to restore coverage to Husky parents. It has not met with much success in states where it has been tried, it is administratively burdensome, and it can erode an already faltering Medicaid system. CT should not include a premium assistance component to any pay or play proposals.

ERISA Challenges

The federal Employee Retirement Income Security Act of 1974 (ERISA) was initially designed to safeguard employee pension programs from mismanagement and fraud. The law also applies to other employee benefit programs, including health coverage offered through insurance. ERISA provides that the federal law supersedes all state laws that “relate to” employee benefit plans sponsored by private-sector employers or unions. However, there are also exceptions to the preemption, including the authority for states to regulate insurance. The preemption provisions distinguish between self-insured health coverage plans that cannot be regulated by states and insured health coverage plans that states can indirectly affect by regulating insurance.

The result of a 1995 Supreme Court decision regarding Travelers Insurance, ERISA’s reach in its preemption provisions for states was narrowed, leaving the door open to broader interpretation and defensibility of today’s pay or play plans.

To keep in mind when designing state pay or play plans (Revisiting pay or play: A Briefing Paper):

1. Do not require employers to offer health coverage to their workers – such employer mandates would be preempted under the precedent of the case that invalidated Hawaii’s law.
2. Establish a universal coverage program funded in part with employer taxes. The state should establish a publicly financed health coverage program funded partially with taxes on all types of employers. The law should not refer to objectives such as assuring that employers cover their workers.
3. Do not refer to ERISA plans. State laws are easily invalidated by referring specifically to private-sector employer-sponsored (ERISA) health plans. The tax should be imposed on employers, not on employer-sponsored plans.
4. Remain neutral regarding whether employers offer health coverage or pay the tax. If the state’s objective is to assure universal coverage, it should be neutral concerning whether an employer pays the tax or covers its workers. The justification for a tax credit is to permit employers to cover workers, but the law and its sponsors should not express a preference for either option.
5. Impose no conditions on employer coverage to qualify for the tax credit. Conditioning the tax credit on meeting specific state qualifications will affect ERISA plan benefits and raise preemption problems.
6. Minimize administrative impacts on ERISA plans. States cannot tax ERISA plans – the pay or play tax must be imposed on the employer. Designing the pay or play program like other state tax laws can overcome arguments that the state law interferes with interstate employer benefits design and administration because employers are already subject to varying state tax systems.