SAN FRANCISCO – When the Health Care Security Ordinance (HCSO), the city's program to cover uninsured residents, mandated that employers provide health insurance for employees or pay into a fund, the Golden Gate Restaurant Association (GGRA) filed suit against the city, and small business owners in general complained loudly that the law would put them out of business and cost the city many jobs.

About 25 percent of San Francisco restaurant owners promptly added a line at the bottom of their menu cards, telling customers that they will be billed a "service surcharge" to support the program.

Most other restaurant owners have simply increased food prices, or charge a flat fee to pay for the program. A few have done nothing at all.

But in the year since the employer mandate took effect, there is no evidence that HCSO has caused the doomsday scenarios that critics predicted. In fact, some employers have figured out how to make the law work to their advantage. Patient satisfaction in Healthy San Francisco, the city health care program for uninsured residents, has been rated as high by an independent survey, and the city‘s key goal of providing health care for those without it is being met.

As the national debate on health care reform rages on, San Francisco's model offers lessons on the contentious issue of whether an employer mandate will hurt business, especially small business. And so far, the lesson seems to be that it can work to everyone's benefit.

"Two of the most controversial issues in the national debate – a public option plan and a shared responsibility by the employer – will not hurt businesses," said Ken Jacobs, a UC Berkeley labor researcher and author of a recent study of Healthy San Francisco.

Healthy San Francisco is not health insurance but direct care provided on a sliding scale to the uninsured at city and private health clinics. The program began in July 2007 providing care to the city's uninsured, who number over 60,000. It has now covered about 75 percent of them at a cost of roughly $120 million a year, including city money, state grants, employer contributions and participants' fees. The average monthly cost per person is $280.

In the health reform proposals under consideration in Congress, employer responsibility generally takes the form of "play-or-pay," meaning, firms that do not directly provide adequate health care to their employees (or play), are required to "pay" into a public pool.

Since 2008, employers with 20 or more workers, and not-for-profit groups with 50 or more employees, are required to either spend a minimum amount on health insurance, set aside money in health reimbursement accounts or pay a fee to the city's fund, the HCSO. The minimum amount is determined by multiplying the hours paid to the employee by the expenditure rate mandated by law, which is currently set at $1.23 for businesses with 20 to 99 employees, and $1.85 for businesses with 100 or more employees.

Businesses contribute about 15-20 percent of the $230 million needed to fund the program annually.

Business owners who were already providing health insurance for their employees welcomed the ordinance because they said it leveled the playing field.

The restaurant association claims in its lawsuit that the employer spending requirement of the HCSO violates the federal Employment Retirement Income Security Act (ERISA), which pre-empts certain state and local government requirements regarding employer-sponsored benefits, because it freezes the employer's contribution rate only until the year 2010.

"It doesn't offer any hope for cost containment in the future," said association director Kevin Westlye. "We believe the employer mandated ordinance has done nothing except assign responsibility to a failing health care system to the employer."

But Jacobs dismissed Westlye's claims, saying the rate the employer pays will be 50 or 75 percent of the averagel health premium for city employees, pro-rated by hour.

"That's set in the law," said Jacobs, adding: "Overall, national health reform would be extremely positive for businesses, especially small businesses."

Jacobs cited results of a recent Kaiser Family Foundation survey of participants of San Francisco's health care program that showed that overall, 92 percent of participants said they were satisfied with the program.

The survey also showed that the city's shared responsibility model has not led to the job losses many feared; that public option has also passed muster, while not crowding out private options.

"The lesson from San Francisco is you can do it, and it works," Jacobs said. "You cannot find any negative impact on employment by the ordinance. Fear of job losses is unfounded."

Michelle Orrock, communications director with the Sacramento chapter of the National Federation of Independent Business, an advocacy group for small businesses, is not so sure.

"Anecdotally, any time mandates are put on small businesses, they are forced to close," she said.

When asked if NFIB had any statistics to support this claim, Orrock said: "We don't have any numbers. A lot of time they are so small, they just disappear."

Arthur Swanson, president of the San Francisco Small Business Network, a membership organization, said that the industry most affected by the ordinance is the restaurant industry because their margin of profit is "so small."

But some others, even those who say they are opposed to the city's health care ordinance, seem to think otherwise.

"I'm definitely opposed to the ordinance because I believe government shouldn't have any role in mandating what businesses should do," said John Ryan, president of the San Francisco-based Baybenefits, Inc., an employee benefits consulting firm. "But the ordinance has actually turned into a good thing for restaurant owners."

Ryan said that many employers have chosen to put money in a health reimbursement account for their employees instead of buying insurance for them or paying into the city's fund. And he says that "generally, only 10 percent of the money accrued in that account is used."

"If the money is not used, the restaurant owner has the option of retaining it." Ryan said.

That option, plus the surcharge restaurant owners are slapping on their customers, has resulted in "a lot of restaurants actually coming out winners on this," he said.

"Some restaurant owners are getting around this by setting up the HRA," Jacobs said. "There's some question on whether the employers notify their employees about this. Or it may be that employees feel the paperwork is too cumbersome."

Martin Connolly, owner of Johnny Foley's Irish Pub and Restaurant on Union Square, is one business owner who accepts the new city program--and is faring well. His customers see a 4 percent surcharge on their checks. Connolly offers his employees the HRA option, and said he hoped by making health care accessible to his employees he was "buying loyalty."

Jose Mukua, who has worked at Johnny Foley's for 10 years, said the health access program encourages him to go to see a doctor when he falls sick these days.

"Before I had [health care], I would have to spend about $350 from my pocket every time I went to see a doctor," Mukua said.

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