calculations, and apportion contributions amongst numerous alliances each and every pay
Gap's current payroll system is able to take deduÂ«ions from employees either in the
form of a payroll tax (a percentage of payroll, e.g. FICA) or in the form of a set amount,
such as the current deduction for medical coverage for our full-time employees. This system
would have to be completely abandoned if a proportional premium method was
implemented to calculate and distribute contributions for part-time and seasonal workers:
a. Gap would need to collect substantial new information &t)m each part-
time and seasonal employee, including choice of plan, place of
residence, family status, and names and social security numbers of
spouses and dependents. Gap would also need to maintain and
constantly update all of this information, since each piece of data
would directly impact the employer's calculations each pay period and
the appropriate allocation of the contributions. Gap currently must
maintain only the name of the employee and the store location where
b. Because part-time and seasonal workers' hours vary considerably from
pay period to pay period (which is every two weeks at Gap), the
proportional amount of both the employer's and employee's premium
contribution would also change each pay period.
c. The weighted-average premium baseline would be different in every
regional alliance, further complicating the bi-weekly calculations of the
employer's and employee's contributions.
d. Separate and independent calculations would need to be performed for
the employer portion of the premium (which is based on an average
premium that differs by regional alliance) and for the employee's
portion (which is based on the plan chosen from the specific menu
offered in the regional alliance where the employee resides).
e. A premium-based mandate would require employers to obtain a
positive election form from each employee as to the plan chosen.
Often, the employee would have left the company before an election
was made. Since many of our employees are entering the workforce
for the first time, it would be unreasonable to make them elect a plan
on their first day of employment. In any case, the employer would
have to reconcile and collect the amount owed from previous pay
periods once a plan was finally chosen by the employee.
f. A premium-based mandate and a menu of health care plans which
would each vary by region would make it extremely difficult for an
employee to change job locations within a company. Over 2,000 Gap
employees transferred from one state to another in 1992. Under the
Act, it would be extremely difficult for us to effect these types of
These are just a few examples of the problems associated with a premium-based
approach as applied to part-time and seasonal workers. The variables inaease dramatically
when one considers the potential number of regional alliances, the total number of plans
available through the different regional alliances, employees' changes to plan elections, rate
changes and changes to family structure. Most changes would be communicated to Gap
after they have occurred, which would require Gap to perform frequent adjustments and
reconciliations. Most calculations would have to be made manually. All payments would
then have to be apportioned amongst the regional alliances. Each regional alliance would
have its own set of reporting requirements. Clearly, the constant maintenance and
manipulation of information required to correctly pay premiums each pay period and to
apportion them between the numerous alliances would be cost prohibitive and involve huge
additions to staff.
Regardless of the determinations made over how to finance coverage, Congress must
ensure that the final plan is carefully structured and does not force labor intensive
employers to incur unnecessary and wasteful administrative costs which could be better
spent on health care.
B. ANY HEALTH CARE REFORM PLAN MUST ENSURE THAT MULTI-STATE
EMPLOYERS ARE AFFORDED PROTECTION UNDER ERISA SO THAT THEY
CAN CONTINUE TO PROVIDE QUALITY AND COST-EFFECTIVE HEALTH
COVERAGE TO THEIR REGIONALLY DIVERSE EMPLOYEE POPULATION
Gap is strongly opposed to any plan or provision in the Act which would effectively
limit or eliminate the protections currently afforded to multi-state employers under ERISA.
We are strongly opposed to the Act's provisions which allow states and regions to readily
opt out of the federal system to create their own, single-payor systems. We are also
opposed to the provisions which would enable states to impose assessments and surcharges
on multi-state employers.
These provisions would not only substantially increase employers' costs but would
severely jeopardize and disrupt our ability to continue to deliver our current plans to our
diverse employee base. Multi-state companies such as Gap rely almost entirely upon the
protections afforded under ERISA to efficiently deliver uniform and affordable health care
coverage to their employees.
Unlike the consistency and continuity of coverage which has been achieved by
employers through ERISA, requirements to adhere to the laws of multiple jurisdictions
would be an unwarranted and unbearable waste of resources for multi-state companies.
Unlike the federal government, individual states have no real Incentive to ensure that their
own plans, taxes or requirements fit into a coordinated federal scheme.
For example, our experience with Hawaii's system (which is currently exempted fi-om
ERISA) has not been positive in terms of the additional administrative burdens we have
been forced to assume just to comply with its requirements. While Hawaii's system is often
touted as a success, the figures do not reveal the administrative and financial expenses
incurred by employers which operate in that state. In fact, it takes this company almost
three times as long to administer our plan for one employee in the State of Hawaii than it
does for any other employee located in the continental U.S.
Canada also presents a difficult situation where employers must operate under
separate, independent provincial plans. Even though the country is based entirely on a
"single-payor" system, each province has been given "flexibility" to set up its own financing
mechanisms and administrative requirements which every employer must follow. Gap
employs over 1,400 individuals in Canada and has 57 stores in six provinces. The constantly
changing requirements of each province are not coordinated in any way, which makes
administration for multi-province employers extremely difficult and time-consuming.
Based upon our experiences with Canada and Hawaii, we would anticipate that any
state pre-emption from the federal system would eventually make It Impossible for Gap to
offer its own plan.
Yet Gap's self-insured program currently provides quality and cost-effective coverage
to most of its full-time employees and their dependents. Through innovative health
education, prevention programs and economies of scale. Gap and its employees have worked
together to control health care expenditures wiiile promoting quality of care and good
health. Gap has been able to tailor its plan and offer a variety of special benefits based
upon the particular demographics of our workforce.
Gap believes that large employers which can efficiently provide this kind of coverage
to their full'tlme employees and dependents should not only be permitted to do so under
any reform Initiative but should be encouraged to do so. ERISA pre-emption allows large,
national companies to aciiieve valuable economies of scale and to operate efficiently by
avoiding fragmentation of administration on a region-by-region basis. For most companies
like Gap, the astronomical adminisuative costs necessitated by regional decentralization
would far exceed any anticipated or realized benefits. The eventual elimination of self-
insurance which would occur under the Act would defeat current incentives for employers
and employees to directly impact their own health care costs through proactive cost-
contaiimient measures. Moreover, employers would still be subjected to the potentially
limitless number of state and regioned mandates even after they were forced into the
This Government can no longer afford to impose uimecessary and undue burdens on
employers which would no doubt divert much-needed funds from real health care to
needless administration and paperwork. The piecemeal disintegration of ERISA would have
a devastating and irreversible impact on the ability of multi-state employers to function
without facing a myriad of inconsistent and conflicting state regulations which pay litde or
no regard to any overall, federal design.
C. THE ACT WOULD IMPOSE NUMEROUS OTHER PENALTIES,
REQUIREMENTS AND BURDENS ON CORPORATE ALLLVNCES WHICH
WOULD ULTIMATELY FORCE ALL EMPLOYERS INTO THE REGIONAL
In the end, the Act would effectively deny most companies the option to create their
own corporate alliances. Not only would the Act impose a 1% surcharge on a large
company's total payroll, it would subject corporate alliance employers to a host of other
burdensome requirements and expenses. Under the Act, the 7.9% cap on employer
contributions does not apply to corporate alliance employers. Even with respect to a
company's full-time workforce, the plan would impose new, substantial administrative and
financial burdens involving the calculations and apportioimient of premium contributions
which would differ depending on the employment status of an employee's spouse. A
corporate alliance woiild also be required to offer at least three plans in each region.
Finally, regional alliances would have the freedom to impose additional, uncapped taxes on
all employers to reimburse the regional alliances for the uncollectible, bad debts of the
regional alliance members.
1. The Proposed Corporate Assessment of 1% on a Company's Total, Uncapped
Payroll Would Force Gap (and Other Labor-intensive Employers) to Opt
Entirely Into the Regional Alliances.
Under the Act, a 1% surcharge would be imposed on a company's total, uncapped
payroll. Gap beUeves that an assessment of 1% would be far too excessive if applied to a
company's total payroll, which is defined to include all fringe benefits and non-cash
compensation (e.g. group-term life insurance, relocation expenses, stock options, car
allowances and taxable stock transactions). Assuming the Administration's figures are
correct and a 1% surcharge were appUed to Gap's total uncapped payroll, we would spend
milhons of dollars more each year if we functioned under a corporate alliance as opposed
to opting entirely into the regionzil alliances.
While we imderstand the need to assess a surcharge on companies with self-insured
plans to obtain necessary financing for the regional alliances and/or for medical research
and education, we beUeve that a reasonable cap on income must be applied in defining
total "payroll" subject to the tax. Moreover, the one-percent tax should apply only to the
payroll of the employees which are covered under the corporate alliance and should exclude
the income of employees which are already covered through the regional alliances.
If the assessment applied is too onerous on large employers, the obvious effect would
be to eliminate any realistic employer choice and to effectively force employers to opt
entirely into the regional alliances. Of course, this move would directly impact the
Administration's ability to collect a large portion of the assessments it is counting on to
fund the system.
Thus, in order to ensure that the Government is able to collect sufficient revenues
while at the same time allowing large companies to remain self-insured under a corporate
alliance. Gap proposes that any assessment be based on a capped percentage of payroll
applicable only to the employees which are insured through the corporate alliance. The cap
could be the same as the current Social Security wage base cap of $57,600.
2. The overall cap on employer contributions of 7.9% of payroll would not apply
to contributions made by corporate alliances.
Under the Act, a corporate alliance employer's risks are virtually unlimited. While
the Act generally provides for a cap on employer contributions of 7.9% of payroll, corporate
alliance employers are clearly excluded firom any savings this cap could provide. Not only
would large employers be denied the benefits of this cap with respect to their full-time
workforce covered through the corporate alliance, the cap does not even apply to
contributions for their part-time and seasonal employees covered through the regional
alliances. In fact, even if a large corporation opts entirely into the regional alliance, it
would not fully benefit from this cap for eight years. Collectively, these provisions
inappropriately penalize large companies based on their size alone, thereby failing to
account for the fact that, just like small employers, many large compeinies operate on very
low profit margins and simply would not be able to afford these severe and unfair penalties.
3. The Act Would Allow the Regional Alliances and States to Impose Additional
Burdens on Corporate Alliance Employers.
First of all, regional alliances would have the ability to impose unlimited payroll taxes
on all employers to compensate the regional alliances for the uncollectible debts of its
members. In addition, states and regions could opt out of the federal system and thereafter
require corporate alliance employers to operate under their own individual state or regional
single-payor systems. Obviously, this would make it impossible for multi-state employers to
operate efficiently on a national level and offer a uniform and affordable health plan to all
cf its employees.
4. The Act Would Impose New Financial and Administrative Burdens on
Corporate Alliance Employers With Respect to Their Full-Time Workforces.
Gap would need to collect and maintain a substantial amount of new information
with respect to its full-time workforce even though these employees would be covered
through our own plans. For exzunple, Gap would need to collect information regarding the
employment status of eveiy employee's spouse, and if employed, whether the spouses worked
for corporate alliance employers. For every married couple employed by two different
corporate alliance employers. Gap would be forced to either collect premium contributions
from all of the other corporate alliances or to reimburse the other alliances one by one each
pay period. Payments would also have to be made to and collected from the regional
alliances for other employees.
5. The Act Would Require a Corporate Alliance Employer to Offer at Least
Three Plans in Every Region Where it Operates.
Even in regions where Gap employs a large number of workers, its bargaining power
and ability to compete would be seriously undermined given the anticipated size and power
of the regional alliances. Consequently, it would be highly unlikely that Gap could offer
three affordable and quality health plans even in its most populated areas. While the Act
would allow Gap to opt into the regional alliances on a case-by-case basis in areas where
our employee population is small, there is no flexibility to self-insure at a later date if our
employee base grows in that region. Under the Act, Gap would simply not be able to
compete with the regional alliances given their control over the market and the
requirements imposed on corporate alliances.
D. TAX CAPS ON EMPLOYER AND EMPLOYEE DEDUCTIONS ARE A
NECESSARY COMPONENT TO ACHIEVE MARKET-BASED COST
CONTAINMENT AND TO DISCOURAGE EXCESS SPENDING AND
UTILIZATION OF HEALTH CARE
Given the urgent state of our health care crisis, our Government can no longer afford
to retain components of a system which effectively encourage the excess expenditure of
limited funds on nonessential health care. Any plan which permits tax deductibility beyond
a standardized level of benefits would be an inherent contradiction to any market-based
approach to reform.
Gap agrees that the "tax cap" should be imposed on both employers and employees.
Such a cap would directly distribute the costs of excess benefits to those who specifically
choose to use excess benefits. Without this tax cap, employers which insist on offering
richer plans will defeat the reform measures implemented while shifting their excess costs
of health care to others. Likewise, employees who elect and receive richer benefits should
pay for the excess costs with after-tax dollars, just as they currently do for other benefits
such as life insurance.
Thus, Gap strongly supports the immediate elimination of favorable tax treatment
for those who spend excessive junounts on health care. Even though this would mean
substantial additional costs to Gap, we understand that removal of this inappropriate
incentive is imperative to achieving market-based cost containment and efficiency.
Regardless of which plan is ultimately passed by this Congress, Gap believes that the
following considerations must be fully analyzed and taken into account in the development
of a comprehensive reform plan:
The plan must be administratively feasible for all employers, including multi-
state, labor-intensive companies which employ large numbers of part-time and
seasonal workers. Any proposal which imposes needless and excessive
administrative burdens on employers should be rejected or revised.
The plan must be flnancially feasible for employers so that job loss can be
kept to a minimum. Clearly, employer-based health coverage means little to
those who lose their jobs as a result of "reform." We must acknowledge that
employer mandates, if related to the number of workers employed, will fall
disproportionately on labor-intensive employers and impact the availabihty of
jobs. The plan must minimize the unfair burden placed on these employers
and employees. Extreme caution must be exercised to ensure that the path
for reform will be manageable for both large and small employers. If the
magnitude of change unexpectedly produces too severe an impact on business,
all efforts to improve the system may be thwarted.
The plan must, in eveiy respect, preserve the protections currently provided
to multi-state companies under ERISA. Individual states and regions should
not be allowed to create their own single-payor systems. Provisions which
allow states or regional alhances to impose taxes or other requirements on
multi-state employers should be rejected. Multi-state companies must be
afforded continued protection under ERISA in every state so as not to be
subjected to a myriad of inconsistent and uncoordinated state mandates and
regulations throughout the country.
The plan must allow larger companies to function effectively outside of the
regional alliances. Employers should be encouraged to continue providing
coverage through their own innovative and successful programs, which have
been successfully designed to increase quality of care while effectively
containing costs. For self-insurance to remain a viable option for employers,
providers of this type of coverage must not be effectively forced out of the
The plan must not create additional, unwanted levels of bureaucracy, but
must encourage the market to perform efficiently and fairly within specified
parameters. Any plan based on regulatory, as opposed to competitive, forces
would likely mean less iimovation, less responsiveness to consumers, less
efficient resource allocation, higher taxes and a rigid externally imposed cost
structure that could threaten a company's ability to adjust to business
The plan should ensure access to continuous health care coverage to all
Americans. We agree that individual and small group insurance reforms are
badly needed and that pre-existing conditions should not prevent anyone from
The plan should effectively eliminate cost shifting from government-provided
programs such as Medicare and Medicaid to the private sector.
The Gap, Inc. looks forward to participating in the development of national health
care reform plan which is not simply palatable to the many different interest groups but
which is feasible and equitable for all employers and individuals. We welcome the
opportunity to discuss our concerns and ideas with you and your staffs as the debate
Mr. HOAGLAND. Well, thank you very much, Ms. Shanahan.
We have about 4 or 5 minutes left before I need to go over to vote
on the current issue. And I do have some questions I would like
to ask you. I will try and keep the questions short. If you keep your
answers short, maybe we can get through all of them in the few
remaining minutes we have.
First, Mr. Williamson, you suggested that health premiums
should be deposited using the same mechanism as payroll taxes de-
posited with IRS. Could you elaborate briefly on the reasons for
Mr. Williamson. Yes, the act specifically says that the Secretary
of Labor will establish a new system, and I think the employer
would rather run as much of any new program through existing
systems as possible rather than design a new one. So we have just
learned how to deposit the taxes under the new deposit rules a cou-
ple of years ago.
So it seems much more sensible just to add it to what is going
on rather than to build an independent system.
Mr. HoAGLAND. And that basically is Chairman Stark's position,
too, isn't it, Mr. Williamson?
Mr. Williamson. I couldn't speak for him. This is one we
thought up ourselves.
Mr. HoAGLAND. He testified this morning about the remarkable
efficiencies we could realize by using IRS and I think you concur
Now, Ms. Kelley, do you agree with Mr. Williamson that it would
be more efficient to use the IRS tax collection teams to collect the
employer and employee premiums?
Ms. Kelley. I am going to refer that to Ms. Hevener.
Ms. Hevener. The American Payroll Association certainly under-
stood that payroll personnel are crucial to the implementation of
health reform. That is why I think we, I am confident, that we re-
quested to testify at this hearing today. We expected that the pay-
roll personnel would be asked to do more than they currently do,
probably along the lines of Mr. Stark's proposal this morning.
We have not yet had the opportunity to analyze it in much detail
because we just did receive the joint committee's report late this
afternoon. Several points, though, even with respect to that report.
The report notes that information is currently or will be provided
next year under a reporting system whereby perhaps the payroll
administrators and certainly employers give detailed information
about health plan and health plan participants to an unspecified
agency, probably HCFA. The American Payroll Association has al-
ready been presenting press releases and commentary on that pro-
The GAO has just done a study that says it is not administrate.
HCFA doesn't have the budget to collect the data. Employers
weren't told with enough lead time to be able to provide it in any
kind of timely fashion.
The reason we are testifying today is to make sure that Congress
understands that all of these proposals must be adopted with
enough lead time that employers are able to implement them.
There are many aspects of Mr. Stark's proposal that are fun-
damentally different from the current payroll system, because it is
not even collecting a percent of payroll, it is collecting a premium
based on mjrriad health plan values. And that is going to take a
lot of lead time before payroll personnel are going to be able to im-
plement that system.
We certainly are eager to work with you. We would like to re-
serve the right to submit testimony later with respect to Mr.
Stark's proposal. It is very complicated and we know we are crucial
to the system. We just want to be able to work with the implemen-
Mr. HoAGLANfD. Well, good. And maybe you could let us know
your thoughts when you submit that testimony, about using IRS
resources to process information and revenues.
My understanding is that earlier, in the context of the reconcili-
ation package, the payroll association argued that it was inappro-
priate to use the W-2 form to report nontax information. Do you
still maintain that position, or would you rather address that in