Restaurants' Healthy San Francisco Surcharges Defraud Diners, Grand Jury Says

Jury urges ban on surcharges & employer medical reimbursement accounts

Woman paying bill in restaurant,
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If you’ve ever been suspicious about the extra 4 percent fee that many San Francisco restaurants tack onto your dinner bill to cover their employees’ health costs, it turns out your gut is correct: Many restaurants are pocketing the money, San Francisco’s civil grand jury has found.

“The unequivocal fact [is] that a significant number of restaurant owners are benefiting financially from the addition of surcharges that are represented to customers as paying for employee health care,” the civil grand jury says in a scathing report.

The owners can reclaim the health care dollars that aren’t used, “thus increasing their profits even more,” the report notes.

The grand jury’s analysis, released in July 2012, urges San Francisco to eliminate the surcharges and to ban employers’ private medical reimbursement plans for their workers, which have been the vehicle for the restaurateurs’ profiteering.

In its review of 38 San Francisco restaurants, the civil grand jury found that two-thirds of them added surcharges for workers’ health care, generally 4 percent. Eighteen restaurants collected a total of more than $2.17 million in surcharges. Of that, about $1.16 million was spent on health care expenses--leaving $1 million extra.

The Healthy San Francisco law

The surcharge business is an unforeseen offshoot of San Francisco’s 2008 Health Care Security Ordinance, which provides health care to San Francisco residents without insurance (the Healthy San Francisco program) and requires businesses to help fund health care for their employees in San Francisco.

  How much employers must spend depends on the size of the workforce and the number of hours employees work; it amounts to a maximum of about $4,540 per full-time employee at large businesses, and about $3,000 per employee at companies with less than 100 staffers.

Employers can comply by providing conventional health insurance, enrolling their employees in Healthy San Francisco or setting up health reimbursement accounts that employees draw from to pay for medical costs.

Restaurants and other businesses that rely heavily on part-time workers generally use the third option--in which they pay out money only when employees get medical or health services.

As “Healthy SF” and “health insurance” surcharges became increasingly popular (and suspicious) after 2008, San Francisco specified that as of January 2012, such add-ons must be spent on employee medical expenses. Businesses must also keep funds in health reimbursement accounts for two years before recouping any of the unspent amounts. Employers are to report the account balances to the city annually—but the first of these reports is not due until April 2013, and any surcharges collected before 2012 do not have to be reported.

Misuses and abuses of health reimbursement accounts

In the jury’s survey, six restaurants offered either Healthy San Francisco or a regular health insurance plan to their workers in 2010. Twenty-two restaurants designated more than $2 million for medical reimbursement accounts, but actually reimbursed less than $124,000 to their employees—thus keeping nearly $2 million.

Five restaurants employing more than 200 people total set aside almost $416,000 for health reimbursement—but gave no reimbursements whatsoever in 2010.

It is “hard to believe that not one of 206 workers had any medical expenses during 2010,” the jury says in its report. “[D]id the employers not tell their employees about the program, or did they set the bar for reimbursement too high, or were employees too intimidated to seek reimbursement?”

The high cost of business in SF

Besides requiring companies to help cover employee health care costs, San Francisco has the highest minimum wage in the U.S., $10.24 an hour. Businesses must also provide paid sick leave to part-time employees.

Of the San Francisco Chronicle’s top 66 restaurants in San Francisco for 2012 (part of its annual list of top 100 Bay Area restaurants), nearly half levy a surcharge. Chronicle restaurant critic Michael Bauer notes that some restaurants, like Park Tavern and La Folie, axed the surcharges but then slightly increased their prices.

And unfortunately for us consumers, the surcharge practice has expanded. “This trend started with restaurants and has spread to beauty salons, caterers, event planners, and other retail businesses,” the civil grand jury report says, with surcharges ranging “from a low of 50 cents per person to a high of 16.8% of the total bill.”

The grand jury wants responses from the mayor, board of supervisors, city agencies and the restaurant industry. “When businesses use the health care surcharge to earn large profits, the public trust is violated,” the jury says. And because San Francisco “cannot effectively police the rampant abuse of [employer health reimbursement accounts],“ it “strongly recommends” the city eliminate them.

“These recommendations will end the fraud being perpetrated on many unwilling patrons of San Francisco restaurants every single day,” the jury says.