A Look at Employee Health Care Legislation
On October 5th California's outgoing Governor, Gray Davis, signed Senate Bill 2, which places California alongside Hawaii as the only two states mandating that employers must pay for medical insurance for their employees; depending on the size of the company, employers may have to pay for employee dependents as well.
Most employers recognize that there are problems with the current health care system. The hospitals, clinics, and trauma centers we rely on for medical care are under financial distress, which is compounded by the fact that there is a shortage of skilled nurses. At the same time, medical insurance premiums, which are largely subsidized by employers, have been climbing at double-digit rates for the past several years, and can be expected to rise 10 percent for the next year or two. Add into the equation the fact that workers' compensation rates are skyrocketing, and it's easy to see that something needs to be done.
I do not know if this legislation is the right answer, and given the fact that Governor Davis has been recalled, there is a possibility the law will be repealed before it ever goes into effect. However, I thought it would be a good idea to review the highlights of the legislation so as to give you an idea of the impact it could have on your company in the future.
Beginning in January 2006, employers will be required to pay a user fee into a state health-purchasing fund, which will then purchase health insurance for eligible workers and their dependents. The state fund must charge "market rates" and no portion of the state fund can be self-insured or subsidized by the State. The goal of the legislature was to insure that the State's plan doesn't cost the taxpayers anything, and that employers would not have a price advantage in going into the state plan instead of private health plans.
Those employers who choose to provide coverage themselves will receive a credit against this fee. Employers will be able to select any plan that is currently approved for sale in California.
However, not every employer is covered by this legislation, and many companies that will eventually be pulled into the program will remain exempt until a tax credit is available to subsidize the cost.
The first step in understanding how this legislation will effect your company is to determine which group you belong to. Employers will be broken into three distinct groups based on the number of employees they have. "Large Group" employers are defined as those with 200 or more employees. "Medium Group" employers are defined as those with 20 to 199 employees, and "Small Group" employers are those with 19 or fewer employees.
Here is how the law affects each group:
Large Group1. Effective Jan. 1, 2006, employers with 200 or more employees will have to pay at least 80 percent of the cost of medical insurance for their employees and their employees' dependents.
2. The health insurance must cover basic health care procedures and include prescription drug coverage.
3. Employees can pay no more than 20 percent of the premium, and the share of the premium that must be paid by lower wage-earners (defined as 200 percent of the Federal Poverty Level) is capped at 5 percent of their wages.
4. Any employee who is covered by a collective bargaining agreement is exempt from this legislation.
Medium Group1. The "Medium Group" is actually broken down into two sub-groups. The first sub-group will consist of those employers with 20-49 employees. They will be exempt from SB2 until a tax credit is implemented. The tax credit is expected to be implemented by 2007. Once the tax credit is implemented, they will be required to pay at least 80 percent of the cost of their employee's medical insurance. They will not have to pay for dependent coverage.
2. The second sub-group will consist of those employers with 50-199 employees. Effective January 2007, this group will have to pay for at least 80 percent of the cost of the employee's medical insurance premium. They will not have to pay for dependent coverage.
Small GroupThe "Small Group" will consist of employers with 19 or fewer employees. These employers will be exempt from the plan. However, these employers will still have guaranteed access to health insurance for their employees and the maximum premium an insurance company can charge will still be 10 percent more then the insurance company's standard rate. Similarly, the maximum discount will be 10 percent less than the standard rate.
In order to be eligible, an employee cannot be covered by another insurance plan; he or she must work at least 100 hours per month, and must have been employed for 3 months. If an employer lowers the hours of a full-time employee to less than 100 hours per month in order to get around offering that employee insurance, the employer will be subject to a fine equal to 200 percent of the amount of the premium that should have been paid on the worker's behalf. If an employer recharacterizes the employee's status to sub-contractor, they will again be subject to a fine equal to 200 percent of the premium that should have been paid on the employee's behalf.
Lastly, all controlled groups will be looked at as one entity. For example, if an employer were to set up a separate company in four separate counties in order to keep every company below 20 employees, he would be deemed to have 80 employees.
I do not know what effect this will have on California businesses. There are currently 6 million uninsured people in California, which is about 20 percent of the population. Every time they use medical services they can't pay for, it impacts the rates those with insurance have to pay. By reducing the number of uninsured people, we may see insurance rates fall. Most of the businesses that do not offer insurance (such as retail and restaurants) will not be able to move out-of-state, so I do not think the job loss will be huge. Most of the businesses that can move out (like manufacturing) already offer medical benefits to their employees, and they may actually see some decrease in costs if premiums do fall.
However, the impact on contractors is less clear. Most of you do offer medical insurance for your employees, but many do not subsidize the cost of the dependents. Having to insure dependents could add $3,000 or more, per employee, to your annual costs, which is obviously a huge negative. On the positive side, worker's compensation rates will probably go down, and the fly-by-night contractors who operate without insurance will have another set of penalties which should help keep them on the sidelines.