Under the new law, for-profit employers that do not spend at least 8 percent of payroll on health care costs, must pay the difference between what they pay now and the 8 percent into a special state fund that will be used to fund the state's Medicaid program. Non-profit employers with 10,000 or more employees would have to spend at least 6 percent of payroll on health care or pay into the fund.

The law, which takes effect January 1, 2007, excludes from the definition of employer, federal, state or local governments. Thus, it does not apply to the public sector.

Approximately three employers in the state have 10,000 or more employees, but only one, Wal-Mart, spends less than 8 percent of payroll on health care costs.

Implications of the Law

This could set the stage for other state legislatures to consider similar legislation. The "fair share" bill is a variation of what has been called "pay or play" legislation that was considered and defeated by referendum in California in 2003. That bill would have required California employers with 50 or more employees that do not provide health insurance to either provide it or pay into a state insurance purchasing pool. Massachusetts has and will continue to consider similar legislation. Massachusetts and Oregon passed employer pay-or-play laws over 10 years ago. Both laws were repealed before they were implemented.

Legal Challenges Likely

Courts have not yet had the opportunity to consider whether this type of law is preempted under ERISA. No doubt, both sides are gearing up for a preemption challenge to the new Maryland law. ERISA preempts state laws that "relate to" employee benefit plans. For example, it preempts, as applied to self-insured ERISA plans, state laws that mandate that plans provide specific types of coverage.

Opponents of "pay or play" legislation argue that this type of legislation "relates to" employee benefit plans because it operates as a requirement on plans to provide a certain level of coverage. This is the type of law, opponents argue, that ERISA was designed to preempt. Supporters of "pay or play" legislation argue that these types of laws place no requirements directly on employee benefit plans, but instead are directed at employers themselves. The argument is that these laws do not require employers to provide coverage, but give employers the choice to either "pay" into the state fund or "play" by covering a certain percentage of health care costs or a certain level of health insurance.

As with all issues involving the interpretation or application of laws, health plan sponsors should rely on their legal counsel for authoritative advice on Maryland's new health law. The Segal Company can be retained to work with plan sponsors and their attorneys to evaluate the impact of the law and comply with it.

*	To see the unofficial text of the law, click here. (To return to the Capital Checkup text, click here.)