Editor’s Note: This is the first post in a Health Affairs Blog roundtable on the unsuccessful health care reform effort in California. Patricia Lynch, Lucien Wulsin, and Rick Kronick are also participating in the roundtable. Follow-up comments from Curtis and Neuschler, Lynch, and Wulsin are posted.
Although stymied by economic woes and governance constraints unique to California, the Golden State’s health care reform effort is particularly noteworthy because the serious attempt to address its outsize uninsurance problem may well serve as a model for other states and for the nation. The low-income uninsured (those with incomes under 250 percent of the federal poverty level, or FPL) in need of subsidies constitute a larger share of the nonelderly population in California (13.5 percent) than the national average (11.6 percent), and much larger than in Massachusetts (6.1 percent), based on 2005-2007 data from the Current Population Survey (CPS). When it undertook reform, Massachusetts was in a unique position, facing a relatively small uninsurance problem and having available substantial federal funds that could be reprogrammed. A similar coverage framework would cost much more in California than in Massachusetts.
Especially in this light, the widely reported leadership from Gov. Arnold Schwarzenegger and strong bipartisan efforts from Assembly Speaker Fabian Núñez and, until the end, Senate President Pro Tem Don Perata were immensely important. But it is also relevant that California shares with Massachusetts a large, diverse, and committed advocacy community with a history of strong support for measures to cover the uninsured. While some of these groups steadfastly oppose anything other than a single-payer system and specifically oppose individual mandates (and thus joined all Republican legislators and other interest groups such as Blue Cross of California [WellPoint], the state Chamber of Commerce, and the tobacco industry in opposing the bill), a number of them — notably SEIU, Health Access (an umbrella coalition), AARP, and Consumers Union — supported the final bill and have indicated that they will renew efforts towards enactment of this framework in the future. The governor has already been meeting with a range of supportive groups towards this end.
Governor Schwarzenegger’s “shared responsibility” approach (including meaningful employer contribution minimums and an individual mandate) provides a framework for states with more acute uninsurance problems than Massachusetts. In combination with California’s well-established role as a pioneering state that others often follow, this conception of shared responsibility provided an important impetus for other states that are pursuing reform, as well as being reflected in the Edwards, Obama, and Clinton proposals during the Democratic presidential primaries.
The policy combination of individual and employer requirements, state subsidies and tax credits for pool coverage, and measures to improve insurance access would have covered an estimated 3.6 million (70 percent) of California’s 5.1 million uninsured people, according to estimates by our colleague Jon Gruber of MIT. Of the remaining 1.5 million uninsured people, two-thirds would be undocumented adults not included in state-subsidized coverage expansions (but many of whom could have access to county clinics and other direct services). In other words, the reforms would have covered 87 percent of California’s uninsured people who are children and documented adults, resulting in an overall coverage rate of 98 percent for those groups.
Affordability. As with other proposals incorporating individual mandates, health insurance affordability was a controversial and critical issue in California. Some groups urged a Massachusetts-like waiver of coverage requirements for people in the income range just above California’s maximum state-subsidized level (250 percent of FPL) if they would have had to spend more than a specified percentage of income to purchase coverage. Not wanting to erode his goal of universal coverage, the governor instead proposed a new tax credit (up to 400 percent of FPL) to assure affordability. Only older people and large families facing disproportionately high coverage costs would get significant credit amounts, so the tax credits would account for only a relatively small portion of total state subsidy costs. But the tax credit was a breakthrough compromise element of the final plan. Since many federal and state proposals across party lines incorporate tax credits, key aspects are worth noting.
Refundable tax credits. To assure that the credit would work for those who need it, legislative leadership wanted the credit to be both refundable and payable in advance. However, tax officials said that such tax credits (e.g., the federal credit for displaced workers) are very expensive to administer and, when applicable to myriad vendors, are subject to abuse. To address such problems, it was agreed that the tax credit would be available only for private plans obtained through the state pool, whose core administrative functions (enrollment, premium collection, and plan payment from multiple revenue sources) could assure timely and efficient administration. Concerns about the adequacy of coverage and out-of-pocket cost exposure led to more generous standards for the benefit plan whose premiums would determine the credit amount. But the approach retained the key distinguishing feature of tax credits: recipients could apply credits to a choice of competing health insurance plans and could choose to pay more (of their own money) for more comprehensive or broader network plans.
Transition toward a regulated market. Also of note is the difficulty California faced in transitioning from a relatively large and unregulated individual market to guaranteed access with no health rating. Massachusetts substantially lowered premiums for people with individual coverage by merging its individual market with its much larger small-employer market and then bringing in lower risks with an individual mandate. Massachusetts’ individual-market prices had been extremely high due to the systemic adverse selection inevitably experienced under its voluntary individual market with guaranteed access and community rating. California had no such easy solution, given its aggressively underwritten individual market with relatively low prices for currently low-risk people (especially those choosing plans with no maternity benefits). The reform bill’s individual-market framework incorporated a number of innovative measures to move the basis of competition from risk selection to value. But its grandfathering of underwritten populations and products would probably have meant a higher risk distribution among initial reformed-market participants. To address this potential problem, “backstop” reinsurance was authorized if the risk distribution of the new market was substantially worse than expected.
Fate of the California reform. Ultimately, the final bill approved by the Assembly and supported by the governor did not emerge from the Senate’s Health Committee in significant measure because California was overtaken by a housing-market-induced economic downturn and associated precipitous state revenue decline. The public initiative needed for financing (because unanimous GOP opposition in the legislature precluded the required two-thirds vote), scheduled for the November ballot, proposed structures intended to separate financing sources and spending for health reforms from the state’s general fund budget. However, the consensus among senators was that upcoming state budget and service cuts would not constitute a fortuitous environment to take a major new initiative to the electorate.
Lessons for other states. This problem dramatically underscores the observation that if states are to play a significant future role in covering low-income populations, additional federal financing will be needed using formulas that are more timely and sensitive in responding to the greater economic and revenue volatility in individual states. The existing Medicaid per-capita-income-based formula is not responsive to often rapid state economic downturns that cause revenue reductions simultaneous with growth in the low-income uninsured population. One long-standing candidate for a timely metric to trigger increases in federal funds would be a change in state unemployment rates.
And if states are to make real progress in covering the uninsured, it will be important to clarify the extent of state authority in defining employer responsibilities. Employers are the primary source of coverage for the nonelderly, including many modest-income people. Nationwide, 45.8 percent of those with incomes between 100 percent and 250 percent FPL have employer coverage, based on 2005-2007 CPS data. Without the ability to include some employer responsibility, most states could not finance major expansions in subsidized coverage for those who cannot afford individual coverage, especially given the “crowd-out” of employer coverage that would ensue.
While the California legislation was painstakingly crafted to avoid preemption under the federal Employee Retirement Income Security Act (ERISA) statute (and more generally to avoid new spending requirements or burdens on most employers that now finance coverage), it is not clear that it, or any such state approach, would withstand a federal court challenge. If, as expected, a pending 9th Circuit Court case regarding a San Francisco initiative goes to the Supreme Court, the Court’s decision should provide at least some clarification of the elusive meaning of existing federal law. The growing concern of major employers who suffer increasing cost shifts and/or competition from others that do not offer coverage may provide support for some legislative resolution. Safeway led a coalition of employers that supported the California legislation. However, most multistate employers would understandably oppose approaches that could lead to fifty (or, in the case of local purview, many more) different standards.
Reflecting ample precedent in our system, the plan did not resolve the question of who will pay for health cost escalation that exceeds growth in earnings. Business and labor were both adamant about their opposing views. The public initiative language deferred to subsequent legal decisions whether a majority or supermajority vote of the legislature would be needed to adjust the employer percentage-of-wage contribution floor. (An earlier legal opinion on the governor’s similar construct suggests that a supermajority would be needed.) Some future balance could hopefully allow the real economic trade-offs to be realized by all purchasers with adequate means.
Requiring that higher-income people purchase coverage (without new subsidies) brings our current health care cost problem into sharp focus. While familiar with the 16 percent and escalating share of our economy that goes to health care, many advocates are taken aback at the prospect of requiring upper-middle-class Americans to spend even 10 percent of their income on their own coverage and care. But is this not preferable to the current indecipherable cross-subsidies that preclude cost accountability, indirect financing that quietly erodes real earnings for the middle class, and coverage systems that respond to cost escalation by forcing ever-increasing numbers of modest-income workers into the ranks of the uninsured? And if not themselves, who should pay to subsidize higher-income people? The California plan, which ultimately had support from a broad range of perspectives, seems like a better course.