Surcharges and Healthy San Francisco:

Recommendations 5

• R1
  Disallow employers subject to the Office of Labor Standards Enforcement regulations from adding surcharges on customers’ bill to pay for HCSO employer mandates and mandated paid sick days. Responses are requested from the Mayor, the Board of Supervisors, City Attorney, and the Golden Gate Restaurant Association.
• R2
  The Office of the Treasurer and Tax Collector investigate the under-reporting of sales taxes on surcharges. Responses are requested from the Mayor, the Board of Supervisors, and Office of the Treasurer and Tax Collector.
• R3
  The District Attorney open an investigation to review the Jury’s survey findings for possible consumer fraud. Responses are requested from the Mayor, the Board of Supervisors, City Attorney, and District Attorney. Surcharges and Healthy SF 9 City and County of San Francisco Civil Grand Jury 2011-2012 II. Employers Health Reimbursement Accounts (HRAs) The HCSO calls for an Employee Spending Requirement (ESR) on a per employee basis. This is a minimum dollar amount per covered employee. (See Table 1). An employer may spend a significant amount over the minimum required for their full-time employees by, for example, providing third-party health insurance. In addition, the same employer must still spend the minimum required for covered uninsured employees. Employers have several options as to how they spend the ESR on health care. The most common are: • Provide traditional third-party health insurance. • Pay the ERS to the City (the City Option) and the City will either enroll the employee in Healthy SF, or establish a Medical Reimbursement Account (MRA) for the employee. • The employer can earmark funds to its own HRA for individual employees, which can be administered in-house or by a third party. According to OLSE, most employers provide health care insurance for their full-time employees, which usually cost more than the ESR.10 The report states that most businesses employing part-time or temporary employees use the City Option or establish their own HRAs at a cost lower than third-party health insurance. The report concludes that the Accommodation and Food Service industries were, by far, the largest users of the HRA option. A. The City Option Employees working for an employer who has selected the City Option have one of two programs available to them, depending on whether or not they live in the City. Employees living in the City who do not have any form of health insurance are enrolled in the Healthy SF program. Employees who live in the City and do have health insurance, other than that provided by their employer (for instance, through a spouse’s employer), the City will set up a MRA. An employee, not living in the City has only one option, which is the City’s MRA (Table 4). Lives in City Has Existing Insurance Options Yes Yes City MRA Enroll in Healthy SF Yes No with 75% discount No Doesn’t matter City MRA Table 4. City Option The City contracts with a third party specializing in health care spending accounts to administer the employees’ MRA accounts. The funds remain available to the employee for life 10 Surcharges and Healthy SF City and County of San Francisco Civil Grand Jury 2011-2012 unless there has been a period of inactivity for 18 months. In that case, the City reclaims the unused funds.11 B. The HRA Option The HRA option is becoming increasingly popular with employers for many reasons. Third- party insurance and the City Option require cash payments by the employer, which are non- refundable. By administering their own HRAs, employers earmark the funds and pay out only when actual medical costs are incurred by their employees. Furthermore, after two years, or 90 days after the employee’s termination, employers can retain any unused funds for their own use. Employers may also arbitrarily define what medical expenses qualify for reimbursement under their HRA plan. The OLSE reported in 2010 that 860 out of 4,000 employers used the HRA option.12 The total amount allocated to the employees was $62.5 million. However, only $12.4 million was actually spent on employee medical care, allowing their employers to “reclaim” or “retain” up to $50.1 million or 80% of their required expenditures. This compares to DPH records that show a reimbursement rate of 50% for City managed MRAs.13 This discrepancy is disturbing, and clearly indicates to the Jury that employees are not receiving the full benefit of health care funds intended by the HCSO. C. Legislative Response to HRAs There have been legislative attempts to rectify the abuse of HRAs. In the fall of 2011, in response to the OLSE study and intense media scrutiny, Supervisor David Campos introduced an amendment closing many of the loopholes and abuses of the current system.14 Supervisor Campos’ amendment defined “expense” as actual funds spent on behalf of the employee, not an earmark that can be “retained” later. This amendment passed the Board of Supervisors; however, Mayor Lee used his first veto to kill the legislation.15 Mayor Lee, President of the Board of Supervisors Chiu, and Supervisor Cohen subsequently introduced their own amendment to the HCSO in November 2011.16 This alternative measure passed the Board of Supervisors on November 15, 2011, was signed by the Mayor, and became effective on January 1, 2012.17 Under the new law, all funds that remain unspent in an employee’s HRA account at the end of 2011 now roll over into calendar year 2012. Also, HRA expenditure guidelines must now be “reasonably calculated to benefit the employee.” Further, Employer-to-Employee postings and notifications of the program details, rights, and obligations are now required. Employers must provide statements showing the account balance annually and also upon termination of employment. The new legislation still allows businesses to adopt their own guidelines and manage their own HRA plan. This still forces employees to disclose their medical conditions to their employer in order to obtain reimbursement for medical expenditures. Surcharges and Healthy SF 11 City and County of San Francisco Civil Grand Jury 2011-2012 D. HRAs and the Affordable Care Act New federal laws are also a concern. The Affordable Care Act requires a minimum level of health care coverage. However, HRAs, as currently structured, will not meet the federal guidelines under the new statute. A report published by the Forum for Health Economics and Policy, titled “How Do Employers React to a Pay-or-Play Mandate? Early Evidence from San Francisco,” reveals some interesting information. It reports that the Affordable Care Act will make it more difficult for employers to comply with the San Francisco ordinance because health reimbursement accounts will not be an allowable option under the federal requirements.18 The Affordable Care Act is now under review by the U.S. Supreme Court and a decision is expected shortly. E. The Jury’s Survey Results on HRAs The Jury’s survey of the 28 restaurants that filed with the OLSE (out of the 38 requested by the Jury) for the year 2010 found that: • 22 (80%) used the HRA option; • Four (14%) opted for the City Option; • Two (6%) used third-party health insurance; and • Five paid zero amounts to their employees. As detailed below (Table 5), the 22 employers that used the HRA option in 2010 earmarked $2,040,140, but only reimbursed their employees $123,659 and retained up to $1,916,481 at the end of the year. This represents a miniscule 6% reimbursement rate compared to the City’s MRA reimbursement rate of 50%. # of # of HRA Funds Paid to Reimbursement Retained by Type Restaurants Employees Earmarked Employees Rate Employers Fine Dining 4 190 $306,844 $36,016 11.74% $270,828 Neighborhood 16 1,083 1,225,583 65,856 5.37% 1,159,727 Favorites Convenient / 2 289 507,713 21,740 4.28% 485,973 Fast Food Total 22 1,562 $2,040,140 $123,612 6.06% $1,916,528 Table 5. Employer HRA Reimbursement Rates Our survey found that five (23%) of the 22 employers using the HRA option made zero reimbursements to their employees out of the $415,928 these employers earmarked during 2010. Surcharges and Healthy SF City and County of San Francisco Civil Grand Jury 2011-2012 These five restaurants had a total of 206 covered workers in 2010. Even though San Francisco is ranked #6 on Forbes list of the Top 20 Healthiest Cities,19 the Jury finds it hard to believe that not one of 206 workers had any medical expenses during 2010. It begs the question, did the employers not tell their employees about the program, or did they set the bar for reimbursement too high, or were employees too intimidated to seek reimbursement? F. HRAs and Employees Working for Two or More Employers The ESR applies to full-time and part-time employees not covered by employer-paid health insurance. When choosing the City Option the employer must pay the City the required ESR for each employee. The City then contacts the employee to determine what benefits are available (See Table 4). Employees who are City-residents will be enrolled in Healthy SF if they have no health coverage or in a MRA if they do. Since non-residents cannot enroll in Healthy SF, a MRA will be established for them. The City’s MRAs are administered by a third-party administrator with on-line access for program participants. There is a small monthly fee, currently $2.25, which program participants pay from their accounts.20 When an employee works for two or more employers using the HRA option, each employer allocates and administers its own HRA for the employee. Each employer adopts separate specific reimbursement guidelines and reimburses the employees directly. The employee must submit covered medical expenses to one of their employers for reimbursements. Although employers may have differing reimbursement guidelines, they must be “reasonably calculated to benefit the employee.”21 It becomes even more complex for an employee working for two or more employers when one takes the City Option and the other(s) takes the HRA option. Now the employee must manage reimbursements between their employer(s) and the City in order to take full advantage of various guidelines and time limits. There is no coordination between plan administrators and there is nothing to prevent an employee from submitting the same invoice to different plans enabling the employee to collect more than once for the same invoice. Over a period of several years part-time or temporary workers can and often do accumulate several HRAs from different employers and perhaps an MRA from the City. This system makes it difficult for workers to sort out applicable guidelines and time limits when submitting medical expenses. Surcharges and Healthy SF 13 City and County of San Francisco Civil Grand Jury 2011-2012 G. Findings
• R4
  Disallow the use of the employer HRA option. Responses are requested from the Mayor, the Board of Supervisors, Department of Public Health, City Attorney, and the Golden Gate Restaurant Association.
• R5
  Eliminate time limits for employees to use their MRA funds. Responses are requested from the Mayor, the Board of Supervisors, Department of Public Health, and the Golden Gate Restaurant Association.