Some San Francisco firms using legal loophole to skimp on health care cost

It’s no wonder there is a hue and cry about an uneven playing field among businesses as they comply with San Francisco’s Health Care Security Ordinance.

The law requires most employers to provide health care benefits to workers who put in at least eight hours a week.

But an analysis of compliance reports submitted by 15 randomly selected employers to the city’s Labor Standards Enforcement Office finds that they spent wildly different amounts on health benefits per employee in 2010, the most recent year reported.

The analysis provides details of a major loophole city leaders tried to patch last fall to recoup an estimated $50 million that businesses put in the bank last year to cover employees’ health costs but withdrew when employees failed to use it by year’s end.

While some of the differences between health care spending by businesses reflect part-time versus full-time workforces, the differences also reflect how an employer chooses to comply with the law.

Employers have three options: provide health insurance, use the city’s own Healthy San Francisco program, or set up health reimbursement accounts.

For instance, A16 Restaurant, a trendy cafe in the Marina district, enrolled most of its eligible employees in health reimbursement accounts, according to its own reporting. The cafe spent $71 per year per employee with those accounts.

Wayfare Tavern, an upscale pub on Sacramento Street, spent even less — $26 per employee — for all but one of its employees, for whom it spent $3,610. How? It enrolled all but that one employee in health reimbursement accounts, contributed $60,114 into those accounts and paid out only $601 in benefits — or an average $26 per worker — recouping the remaining $59,513.

By comparison, Zuni Cafe, which like the others depends on part-time workers, spent $738 on each of 41 employees it enrolled in health reimbursement accounts. Zuni bought conventional health insurance for 49 more employees.

And the Marriot International Hotel (admittedly in a different industry with more full-time workers), bought health insurance for 1,901 employees. The hotel spent about $9,368 on each and enrolled 34 more employees in Healthy San Francisco, the health care access plan run by the city, and spent $1,845 on each of those employees, according to the report filed by Marriot with the Labor Standards Enforcement Office.

The compliance report information was released by the enforcement office through a California Public Records Act request.


Evidence of compliance disparities with San Francisco’s Health Care Security Ordinance led the Board of Supervisors to amend the law, effective January 2012.

The disparities also appear to have spurred the San Francisco civil grand jury to investigate. The citizen commission, which writes independent reports examining the effectiveness of city government, has been questioning people involved with the program in and out of city government about the ordinance and seeking documents. The civil grand jury also interviewed this reporter after the release of a detailed report on the program in the winter edition of the San Francisco Public Press. The commission’s report is expected by June 30.

The landmark Health Care Security Ordinance provides for health insurance for any San Francisco resident by requiring most employers to spend a minimum amount on employees’ health care benefits and by establishing Healthy San Francisco, a health access plan, for people who do not have employer-based health care coverage.

The 2007 law requires businesses with at least 20 employees and nonprofit organizations with at least 50 employees to spend a minimum on health care coverage for any employee working more than eight hours a week. The minimum currently is $1.46 an hour per worker, which adds up to $607 a year for an eight-hour-a-week worker.

Employers have three ways of meeting that requirement. One is to provide health insurance. Another option is to enroll their employees in Healthy San Francisco. And the third option is to set up health reimbursement accounts and put in a minimum per hour per worker.

It was that third option, contributing to health reimbursement accounts, that led to compliance problems, although only a small percentage of employers used this option.


After the ordinance was passed, some employers found a loophole in setting up health care reimbursement accounts. They found they could recoup any money in these accounts unspent at year’s end. And so they did.

An analysis last summer by the city’s Office of Labor Standards Enforcement of 2010 compliance data found that 860 employers using this option together contributed $62 million to health reimbursement plans 

for their employees, but spent only $12 million in actual health care reimbursements. They took back the remaining $50 million at year’s end.

In fact, half of the companies using health reimbursement plans to meet the requirement were retaining 90 percent of the money they allocated.

Noting this “raises public policy concerns” especially because it coincided with a detectable climb in the number of companies ditching health insurance in favor of  reimbursement plans, the analysis caught the attention of Supervisor David Campos. He had heard from workers, particularly in restaurants, who found their benefits gone when they got sick in January. Campos introduced an amendment to forbid employers from taking back any unspent money in health reimbursement accounts.

The withdrawals created an uneven playing field among businesses trying to compete because some had lower costs than others did, Campos said.

The amendment that passed and was signed by Mayor Ed Lee, however, was a compromise with businesses. Groups like the San Francisco Chamber of Commerce said leaving money in reimbursement accounts would harm small businesses, which could otherwise use the money to hire more workers.

The new rules require that employers allow 24 months worth of contributions to accrue in health reimbursement accounts before taking back any unspent money beyond the 24-months’ worth. The amendment also required employers to actively inform workers that they have the health care benefit and a reimbursement account. One study found there was an incentive in the previous system for employers to not promote the existence of these accounts so employees wouldn’t use them.

But Campos’ office expressed frustration that this solution was merely a patch.

“It doesn’t really close the loophole,” said Hillary Ronen, Campos’ chief of staff. “Businesses that do follow the rules and provide health coverage to employees through insurance or Healthy San Francisco, they have to unfairly compete with those paying less into health reimbursement accounts.”

Because employers can still take money back from reimbursement accounts, there is still a monetary incentive, she said, for employers to choose  them over insurance.

“The issues remain,” she said, adding that allowing employers to take some of the money back leaves an incentive for  employers to limit the type of reimbursable expenses that workers can use.

The Labor Standards Enforcement Office, meanwhile, won’t receive reports for 2011 until April. “It’s too early to tell whether the amendment made a difference,” said Donna Levitt, a division manager.

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