Health Affairs

Editor’s Note: This is the second post in a Health Affairs Blog roundtable on the unsuccessful health care reform effort California. Rick Curtis and Ed Neuschler, Lucien Wulsin, and Rick Kronick are also participating in the roundtable. Follow-up comments from Curtis and Neuschler, Wulsin, and Lynch are posted.

Kaiser Permanente views the failure to put the health reform legislation developed by Gov. Arnold Schwarzenegger and Speaker Fabian Núñez before the voters as a major lost opportunity. The bill, which would have significantly expanded coverage, enacted comprehensive market reform, and begun much-needed delivery system reform, was supported by, and developed in conjunction with, a broad coalition of business, labor, providers, consumers and health plans. Organizations that rarely work together were willing to moderate their differences and stretch their comfort zones to achieve larger goals.

The bill would have (1) provided coverage to nearly four million uninsured Californians with substantial subsidies for low- and middle-income people; (2) improved the individual and small-group insurance markets through underwriting and rating reforms that promoted competition based on cost and quality rather than avoiding adverse risk; (3) strengthened safety-net providers; (4) increased Medi-Cal (California Medicaid) funding; (5) established a financing system based on shared responsibility through an individual mandate, employer funding, and a publicly financed pool for low-income people ineligible for public programs; (6) promoted health information technology; (7) promoted prevention and healthy choices by individuals; (8) protected consumers from unexpected charges for emergency services; and (9) established a process to create a statewide approach towards transparency in the cost and quality of health care services.

The need for an individual mandate. One of the most difficult issues addressed in the process of negotiating the bill was affordability. An individual mandate was critical to meeting the goal of universal coverage. Jonathan Gruber of the Massachusetts Institute of Technology estimated that an additional 700,000 people would be covered through the adoption of an individual mandate, compared to the number of people who would have been covered under the employer “play-or-pay” proposals. In addition to the increased coverage in the individual market, we believe that an individual mandate would increase the pressure on employers to provide coverage as a result of pressure from uninsured employees and potential employees covered by the mandate.

Creating an affordable benefit. The mandate meant that an affordable benefit package with a meaningful level of coverage had to be available to all Californians, regardless of health status. The solution was a combination of (1) carefully crafted market rules that would have allowed carriers to offer different levels of coverage and (2) cost sharing within guidelines established by the regulator to prevent benefit design aimed at avoiding risk. Medical underwriting would have been prohibited in the small-group and individual markets. The rates for the lowest benefit packages would have been tied to the rates for the highest benefit package. A risk-adjustment mechanism would have been established to keep plans from enrolling only healthy individuals. Advanceable tax credits would have been provided for lower-income individuals and families ineligible for public programs if the cost of coverage exceeded 5.5 percent of adjusted gross income (specifically, those earning 250-400 percent of the federal poverty level, or $51,600-$82,600 for a family of four in 2007).

Publicly subsidized programs would have been expanded, and a new publicly operated purchasing pool would have been created to offer coverage to persons earning up to 250 percent of FPL. Employers would have been required to establish federal Section 125 cafeteria plans to allow employees to pay premiums for health coverage with pretax dollars.

An active education and outreach program would have informed people about the individual mandate and the available options. Enforcement of the individual mandate would have been done through the state income tax process and through a variety of state agencies that interact with the public. People identified as uninsured after a period of time would have been automatically enrolled in a plan at a higher premium rate than they would have been charged had they enrolled on time. Individuals and families would have been exempt from the mandate if the cost of coverage exceeded 5 percent of income for a family earning less than 250 percent of FPL. In addition, a state agency would have been empowered to provide temporary and hardship exemptions from the individual mandate.

A tax, based on a sliding scale related to an employer’s payroll, would have been imposed on employers to support the provision of health care. An employer could choose to pay the tax or provide coverage directly to employees. If an employer chose the former, its employees would have been required to purchase coverage through a state-operated pool that would have provided coverage through contracting health plans. The state would have contributed an amount equal to 20 percent of the premium of a minimum benefit product to employees in the pool with incomes at or above 250 percent of FPL.

It was estimated that the plan would have cost approximately $14 billion in the first year, financed not only by employers and individuals, but also by a tax on hospitals, a tax on employers who chose not to provide coverage directly, a tobacco tax, and increased federal funding.

Despite unprecedented support among a broad spectrum of stakeholders, elements of business, labor, providers, and health plans opposed key elements of the bill, such as the prohibition against medical screening for underwriting purposes and the employer tax. The announcement of a multibillion-dollar California budget deficit provided enough uncertainty that the opposition was able to convince legislators that adoption of health reform in 2008 was more risky than continuing on with the current health care financing system.

We believe that the California proposal provides a potential model for the nation. It addresses a number of difficult issues that face any health reform effort and that should be considered as the discussion on health reform continues in California, in other states, and at the federal level.

This entry was posted on Wednesday, March 5th, 2008 at 3:06 pm and is filed under All Categories, Coverage, Health Reform, Politics, States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.