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California’s Shelved Health Care Reform

March 5th, 2008

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 NeuschlerLynch, 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.

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  1. Healthcare Economist · Why California Health Reform failed
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1 Response to “California’s Shelved Health Care Reform”

  1. L Ozeran Says:

    There are few things more complicated to discuss than the failed healthcare reform efforts in California this past year. As a California physician heavily involved in last year’s reform discussion, this topic is very important to me. I am posting limited comments in other areas on this site with the majority of my remarks here. These comments apply to all of the roundtable discussants’ initial remarks, so I will not confuse the process by posting these comments in multiple locations. If it is possible, perhaps these remarks can be linked from those other roundtable posts.

    Rather than dissect everything that was done and discuss why each contributed to failure, I think it will be clearer to start at the beginning. How did we get here and what *should* we be doing?

    The standard business transaction involves a buyer and a seller. Their goals may be different (a buyer wants to buy and a seller wants to sell), but their goals are aligned. If you accomplish the goal of either, you accomplish the goal of the other. There is one relationship between them affected by government.

    The healthcare transaction also involves a buyer, the patient, and a seller, the provider. The patient wants to receive the best care and the provider wants to give the best care. Their goals are aligned. But it doesn’t end there.

    There is also an employer who selects the health plan (or none at all) and when the patient can take time off. The employer’s goal, to get the best employees at the lowest cost, is not aligned with the goals of the patient or the provider. There are also insurers, both public (like Medicaid) and private, whose goals are often in direct opposition to the goals of the patient and the provider. Their stated goal is to minimize the money spent on healthcare. Unfortunately, for various legal and financial reasons, the insurers have the most power in the healthcare transaction. To add to the complexity of our healthcare system, there are 5 relationships among the parties, each of these relationships subject to government regulation. Plus, investors influence the behavior of insurers (policy changes at for-profit plans often force similar changes at non-profit plans) and tort attorneys influence provider choices.

    In this maelstrom, it is no surprise that the employers, patients and providers are all losing while the insurers are showing huge profits and paying huge management salaries and bonuses.

    It was wrong for our Governor to implement across-the-board 10% budget reductions without considering what was already underfunded (like Medicaid which he acknowledged needs more money). It was equally wrong to come to the reform discussion as though everyone at the table had been suffering equally. When you negotiate to the middle of a tilted table, you guarantee a solution which favors those already favored. The final bill only marginally improved our system without fixing the underlying causes and ultimately would have brought us to the same place we are today.

    We want a sustainable healthcare system. We want a system which is profitable and effective like every other industry in our capitalist society. To get there, we cannot play or modify the current political game. We need a paradigm shift to define a new game. What should have been done, and needs to be done in future reform discussions is identify our principles for a functional healthcare system.

    We must acknowledge and discard dysfunctional elements. We must describe first how we want a system to look which works well for all Californians and eliminates a multitude of perverse incentives which increase costs while reducing quality. Then we can look at what rules, regulations, policies and laws we currently have and determine how they need to be modified in order to implement the policies which will support our principles.

    While the principles ultimately adopted may look somewhat different than these, below I share the principles adopted by the Yuba-Sutter Healthcare Council [disclosure: I am Chair]. These principles can serve as an example of what might make sense. They also should make clear some of the obvious policy choices we would make in an effective reform effort. Many of those policy choices were part of the Governor’s original outline. Unfortunately, the policies actually implemented by the reform bill were warped to the middle of the tilted table in a quid pro quo fashion.

    = = Sample Principles for Effective Healthcare Reform = =

    The Yuba-Sutter Healthcare Council is dedicated to continuously improving the health of the residents in our region. The Council has identified a collection of basic principles which together serve as a foundation for optimizing the use of healthcare resources in pursuit of continuously improving local healthcare. The Council believes that each principle will be self-evident to rational individuals who identify democracy and capitalism as axiomatic in American society. However, individual principles taken out of the context of the whole, may not adequately represent the view of the Council. As a result, it is the Council’s intention that all the principles be considered together as a unit in any healthcare policy discussion.

    1. Everyone now living will die someday

    2. Regardless of how much money we spend, we cannot change the first principle

    3. The goals of healthcare should be:
    * promote positive lifestyle choices
    * prevent preventable illness
    * screen for early treatable disease
    * promote effective therapy
    * provide comfort when treatment is not an option
    * allow people to die in a dignified and comfortable manner

    4. There is a fixed amount of money that can be spent upon healthcare, even if we choose for it to be 100% of GDP

    5. We must optimize our healthcare budget in support of the goals of healthcare

    6. Money collected for healthcare should maximally be spent on provision of effective healthcare services

    7. Every Californian should be able to access a minimum level of healthcare services

    8. No one should be precluded from paying for healthcare services that they choose to obtain in California

    9. Patients should have some responsibility for their healthcare choices, so long as they are legally competent

    10. Allocation of limited healthcare resources should be done in the most rational fashion that supports our goals

    11. No party may dictate to another party what they may charge for their services

    12. Sellers of services shall be paid by buyers (or payers) at the agreed upon rate or the seller’s price when no agreement exists

    13. Buyers (or payers) who were forced to obtain services in an emergency which limited their ability to investigate other options may seek a neutral third party to negotiate a reduction in a seller’s price.

    14. Provider pricing should be transparent

    15. In recognition of the critical need for trained healthcare workers, some resources of the healthcare industry (insurers and providers) should be directed to support education and training for the development of the next generation workforce.

    16. To ensure that a healthcare system endures in perpetuity, there must be:
    * adequate financial resources to support education and training of the healthcare workforce
    * enough clinical positions open to enable trainees to complete their practical training
    * strong incentives to encourage those capable of becoming healthcare workers to apply to do so

    More at:

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