Millions in SF health fees don't go to workers


But an Associated Press analysis of records showed that roughly 40 percent of that money hasn't been spent on their workers' health care.

The surcharges, which range from 3 to 5 percent and often appear in fine print on receipts, are one result of San Francisco's five-year-old health care program, which includes some of the most far-reaching such requirements mandated by any U.S. city.

The law applies to more than 4,000 businesses with as few as 20 part-time workers, from nail salons to international banks with local branches, requiring them to set aside for workers an extra $1 to $3 an hour for health care.

The city's mandate is unrelated to the federal health care law that takes effect in 2014 and will apply only to companies with 50 or more employees. They could face fines if they don't provide coverage. And the IRS will collect the money, minimizing the chances of gaming the system.

In San Francisco, the fees have become a vexing issue for local officials, labor leaders and restaurants, whose owners say they are doing their best to comply with what many consider to be a confusing law with an admirable goal.

City officials say the vast majority of businesses in San Francisco go beyond what's required to make sure their workers have health care. But Donna Levitt, who is head of the city's Office of Labor Standards and Enforcement, said self-reporting by the 5 percent of businesses with surcharges last year confirms the city's suspicion that the money doesn't always go to health care.

There was nothing on the books in 2011 that required businesses to spend all the health surcharge money they took in. But a new law took effect this year requiring them to use the money for its intended purpose, or face a consumer fraud investigation.

In July, the San Francisco Civil Grand Jury raised concerns about abuse of the surcharges after looking at about three dozen restaurants jury members had patronized. It concluded many businesses were misleading customers into believing that every dollar was going to the health and well-being of workers.

"Most residents are socially conscious and embrace social changes, and paying a surcharge for employee health care is something we would readily agree to," said Mark Busse, a retired real estate agent who led the investigation. "But to discover they would make profits off surcharges really turned our stomachs."

The AP, through a public records request, later obtained names and health care expense breakdowns of the 172 businesses that reported imposing surcharges. There are likely even more that didn't file their numbers, city officials said. The records showed that 14 businesses collected at least $100,000 more than what they paid out for costs such as doctor's visits, medication and insurance. A third of the businesses spent less than half of what they collected from customers for health care.

In interviews, representatives of a dozen companies that collected more than they paid out denied hoodwinking anyone. Instead, they said the businesses are saving excess money for the future, or had workers who didn't fully take advantage of free money for medical expenses. Others disputed the figures they had filed, saying they were confused by the reporting requirements.

Celebrity chef Michael Mina, a business partner of tennis-legend Andre Agassi, owns high-end restaurants that include RN74 and a namesake eatery that was declared Esquire's 2011 Restaurant of the Year. Both spots reported collecting about $540,000 in health surcharges from customers last year while paying out about $211,000 in health-care money.

Paula Kaduce, a Mina Group controller, said the company worked hard, even held mandatory meetings, to get its workers to apply for reimbursement of medical expenses. But many of the 150 plus employees did not, although the company recently started seeing a bump in health care spending.

"Why they are not all excited about it like we are, I don't know," Kaduce said.

Some, like American eatery The Blue Plate, have ditched the surcharge. It raised $40,000 with the fee but spent only $500 in 2011. Co-owner Jeff Trenam said he noticed many of his young, healthy employees didn't have many medical expenses, so he stopped charging his customers for them. The company plans to use the extra money for future health care needs.

"No one really wants to feel like we are collecting money or charging guests in a way that is irresponsible or secretive," Trenam said. "That's not how we want to make our money or how most people want to make their money in this business."

Some local politicians and labor advocates say the gap between surcharges and health care spending reflects a wider problem, namely that businesses are skirting their obligations to pay workers' health care costs. The law doesn't say how money should be spent on health care. As a result, critics say many businesses set up accounts to reimburse medical expenses that disallow many types of them.

Ian Lewis, a representative for Unite Here Local 2, said his union has advocated for stricter employer health care spending rules, though its restaurant worker members receive benefits over and above the law's requirements. He said these reimbursement accounts "are structured so employees don't know they are there, and there are strict limitations on their use; and as a result, workers can't take advantage of them, which undermines very much the spirit of the law."

Records show more than $50 million set aside for workers were not paid out last year.

Squat and Gobble, a chain of five local restaurants, reported collecting more than $160,000 from its customers in surcharges but spending nothing from a reimbursement account for more than 80 employees in 2011. The company reported workers could not be reimbursed for services such as health insurance premiums and over-the-counter drugs.

The owner did not return calls for comment. Deisy Bach, whose company HR Ideas helps dozens of companies including Squat and Gobble comply with the law, said the company was among several clients who presented slideshows and updated their handbooks to instruct workers about their benefits, but employees may not have understood. "This restaurant has gone above and beyond to educate their people," Bach said.

Mayor Ed Lee signed legislation last fall requiring businesses to inform individual employees about their reimbursement accounts and keep left-over money available for workers for two years.

The 800-member Golden Gate Restaurant Association, which unsuccessfully fought the health care spending requirements in court, said it expects that new legislation will increase the amount spent on health care this year. The 2011 spending, said Executive Director Rob Black, "does not reflect at all how successful the amendments were at achieving goals set forth by the mayor."

William Dow, a University of California, Berkeley health economist who has studied San Francisco's health care law, said the disparity between what businesses have collected through surcharges and what they pay out is "striking."

"This seems as if they are bringing in funds under the guise of paying health care for employees and in fact that's not where the funds are going," he said.

However, Dow said it is too early to conclude companies are deliberately pocketing unspent money, because they could spend it on health care later.

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