California Senate Bill 2 (2003)

By Sarah Heck Griffin and Brian T. Holmen

California Senate Bill 2, 2003 Cal. Stat. 673, or the Health Insurance Act of 2003 (the "Act"), mandates that medium employers (those with 20 to 199 employees in California) and large employers (those with 200 or more employees in California) either offer a minimum level of health care coverage to their employees or pay a "Fee" to the State to fund a state-run health insurance program, designated the State Health Purchasing Program (the "Program"). Signed into law on October 5, 2003 by a beleaguered Governor Gray Davis, the Act was criticized by many business groups that immediately mobilized to work for its repeal. The California Chamber of Commerce and other business groups have been successful in qualifying a referendum that will ask California voters to rescind the Act. Because this referendum will be placed on the California ballot in November of 2004, this Commentaries will review the sweeping mandates of the Act.

The Act adds Sections 2120-2210 to the California Labor Code and also amends the California Health and Safety Code, Insurance Code, Unemployment Insurance Code, and Welfare and Institutions Code. If the referendum is not successful in effecting its repeal, the Act will apply to large employers on January 1, 2006 and to medium employers on January 1, 2007. However, medium employers with 20-49 employees will not be required to comply with the Act unless the State first adopts a 20 percent tax credit to help offset the Fee. Small employers (those with 2 to 19 employees in California) are exempt from the Act.

The Program will be managed by the Managed Risk Medical Insurance Board (the "Board"), which will contract with health insurers and health care service plans to provide health benefits to employees. The Act forbids the Board from self-insuring the Program. The Board will set the applicable Fee for the Program and will also establish the required deductibles, coinsurance and co-payment levels, and annual out-of-pocket costs under the Program.

The term "employer" under the Act encompasses most public and private entities that have 20 or more employees within California. The Act treats a group of corporations that are under common control as a single employer. For purposes of this rule, "control" is defined as more than 50 percent of the voting power or stock ownership in the corporation. Thus, if a parent corporation and its 51-percent-owned subsidiary have 10 and 40 employees, respectively, they will be treated as a single employer with 50 employees, subjecting both corporations to the Act effective as of January 1. 2007. Curiously, the law contains no analogous rule relating to noncorporate entities under common control. Also noteworthy is that nothing in the Act requires an employer to have a presence within California beyond employing the requisite number of employees located within the State.

Under the Act, employers are required to provide health care coverage to eligible "enrollees," which are defined in the Act as employees who work at least 100 hours per month and who have worked for the employer for at least three months. The term "employee" also includes sole proprietors and partners of a partnership, if they are actively engaged at least 100 hours per month...