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

Nearly 20 percent of Californians under age sixty-five are uninsured over the course of a year. In the final compromise proposal (Assembly Bill X1 1, or ABX1 1) negotiated by Gov. Arnold Schwarzenegger, Speaker Fabian Núñez, and Senate President Pro Tem Tom Perata, California would have covered more than 70 percent of its uninsured people: (1) those with incomes below poverty (below $10,000 for an individual) through the state’s Medi-Cal (Medicaid) program, (2) those with incomes of 100-250 percent of poverty ($20,000–$50,000 for a family of four) through expansion of the state’s popular Healthy Families program for children to parents and other adults, (3) those with incomes of 250-400 percent of poverty through refundable, advanceable tax credits, and (4) uninsured employees at all income levels through Section 125 tax-deductible cafeteria plans.The proposed coverage expansions and increase in Medi-Cal provider reimbursement rates to Medicare levels would have been financed through federal matching, county matching, a hospital tax/assessment of 4 percent of revenues, a graduated employer payroll tax based on size of payroll from 1 percent to 6.5 percent of Social Security payroll, and a cigarette tax.

Intersections. I found the skillful and sophisticated navigation of intersections to be the most interesting aspect of California’s reform proposal, an important building block for future California reform efforts and one that other states contemplating reform should study carefully. By intersections, I mean the interface between public and private coverage, between employer and individual coverage, and between safety nets for the uninsured and private delivery systems.

One example of an intersection is the prospect of expanded public coverage crowding out private coverage. A second is giving large budget windfalls to the federal or county governments that now pay for much of California’s care to the uninsured. A third is the potential to shift the insured from employment-based to individual coverage. And a fourth is the prospect that the newly insured choose to receive their services outside the safety net, thus unraveling and toppling the financial solvency of community clinics and public hospitals.

Jonathan Gruber’s January 2008 analysis of the reform proposal found that little to no “crowd-out” of the insured from private coverage to public coverage would occur and that no shift of the insured from employment-based to individual coverage would occur. For the most part, the uninsured with low and moderate incomes would move into public coverage, where federal financial participation would help defray the costs of coverage. The uninsured of middle or higher incomes would move into private coverage, where federal tax advantages through the use of Section 125 plans would help assure affordability. Very few of the uninsured with incomes in excess of 400 percent of poverty (where state financial subsidies would have ended) would have moved into individual coverage, where typically there are no tax advantages except for the self-employed, but rather they would have enrolled in employment-based coverage. These are modeling projections only, not tested by practical experience, as the plan was not approved in the state Senate Health Committee.

The proposed reform achieved these results in several ways. First, by using refundable tax credits (as opposed to expansion of public programs) to promote affordability for those with incomes of 250-400 percent of poverty ($25,000-$40,000 for an individual). Second, by disqualifying uninsured people with access to (but no take-up of) employment-based coverage from eligibility for a portion of the state’s Medi-Cal program expansion or for the refundable tax credits. And third, by giving state regulators the authority and flexibility to design premium assistance for moderate-income working families receiving their coverage through their employer who might otherwise enroll in the new state program(s).

Role of counties. California counties are legally responsible for care to the indigent uninsured and spend upwards of $1.8 billion annually providing care to 1.3 million uninsured people who use county health services. County health care for the uninsured is now being financed by an intricate and wholly inadequate web of interlocking federal, state, and county sources, rather than through local property taxes, as was typical prior to California’s tax-cutting Proposition 13. Some counties like Los Angeles operate their own systems — i.e., county hospitals and clinics. Others like Orange pay private hospitals and doctors. Some pay nonprofit community clinics for their care to the county’s uninsured; others do not. The reform proposal would have required a county match up to a capped amount as indigent adult county residents enrolled in the states’ expanded coverage. It gave county-operated managed care systems the flexibility to joint venture in extending coverage to the uninsured now enrolling in the state expansion programs where they would compete with commercial health plans. And it allowed counties with public hospitals an exclusive transition period during which they must contract with local nonprofit community clinics and must meet state managed care requirements but were exempt from a head-to-head competition with private managed care delivery systems in delivering services to the lowest-income, newly insured indigent adult population (known as MIAs in California). This would have assured that counties would contribute a matching amount proportionate to enrollment of their current users of county health services into state coverage and also would have enabled county systems to participate meaningfully in the new system(s) of coverage — so no windfalls to counties and no toppling of safety-net institutions (indeed, they would be part of the essential building blocks of the new coverage system).

Federal role. The federal government finances a large share of California’s hospital based care to the uninsured through multiple aspects of the state’s Medi-Cal program, including disproportionate-share hospital (DSH) program funding. If coverage for the uninsured is extended through employer or private individual coverage, much of this existing funding reverts to the federal government through a series of Catch-22 funding formulas. California proposed to use a purchasing pool and state flexibility under the Medicaid Deficit Reform Act and federal Section 1115 waivers to keep current federal funds in the new system of coverage for the uninsured. This sought to assure that California would not inadvertently export current state financial resources to the federal government as part of the reform package.

Uncompensated care. Uncompensated care or “cost shifting” redistributes the cost of care for the uninsured and underreimbursed costs of care for Medi-Cal patients to the purchasers of private insurance. For the most part, this cost shift occurs in private hospitals, as California public hospitals have relatively few privately insured patients. Governor Schwarzenegger referred to this as a “hidden tax” that some analysts estimated ranged as high as 10 percent of private insurance premiums. The reform proposal would have paid for care to the uninsured and Medi-Cal patients at Medicare rates, thus notably increasing providers’ revenues and reducing their uncompensated care quite dramatically. In recognition of this, California hospitals agreed to a hospital revenue tax of 4 percent to finance reform; doctors did not. The underlying unanswered question is whether health plans would have been successful in negotiating rate reductions with hospitals and doctors — reflecting the reduction/elimination of the “hidden tax” — and if they did so, if they would have passed the cost savings back to consumers as premium reductions. The reform measure included a 15 percent cap on health plans’ “non-benefit costs” so that this particular savings would not inure to health plans’ bottom lines. It relied on free-market negotiations with providers to return the “coverage dividend” to subscribers in the form of a premium reduction. I was and am skeptical that California’s health marketplace is sufficiently price-competitive that it would have reduced premiums for the insured without a higher level of pricing scrutiny and transparency than was envisaged in the reform package.

What’s next? The governor had it right: reform must encompass both shared responsibility and shared sacrifice. In my opinion, the bill was defeated not because it was poorly constructed as a matter of policy, but rather because it was a quite a large undertaking for the stakeholders and legislators to digest in a very short period of time with a $14 billion state budget deficit, the mortgage meltdown, and the prospect of mild or severe recession hanging over their considerations. The bill was and is a major step forward and sets the stage for the next steps in California reform. The challenge going forward is to match the coverage expansion with the right dose(s) of cost controls in a package pleasing to a majority of the state’s voters and state legislators. California’s two-thirds vote requirements for spending and revenues assure that the state’s voters will be the final arbiters of any major health reform.

In the immediate term, we should be able to complete the job of covering all California children with a small increase in the state’s tobacco tax and a shift to the “culture of coverage,” since most of California’s uninsured children are eligible for the state’s Medi-Cal and Healthy Families programs. This could be accompanied, if need be, by a restatement and reinforcement of parental responsibility to enroll their children in available private or public coverage. The legislature should also promptly act to put a stop to and strongly penalize the practice of post-underwriting rescissions, which puts individual subscribers at risk of losing their coverage if they use it.

This entry was posted on Thursday, March 6th, 2008 at 12:27 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.