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

A lot of heat, if very little light, has been generated in the Democratic primary campaign on the question of whether an individual mandate is a desirable feature of health care financing reform.  Senator Clinton accuses Senator Obama of not being committed to universal coverage and of being willing to leave 15 million Americans without insurance.  Senator Obama accuses Senator Clinton of forcing Americans to buy insurance that they cannot afford.  No doubt there are few voters who could cogently explain the pros and cons of the alternative positions, or make much sense of the campaign squabbling.  Assembly Bill X1 1 (ABX1 1), the health care financing reform bill painstakingly negotiated in Sacramento this year included an individual mandate, and consideration of the specifics of that provision can shed some light on the issues raised this campaign season.       

Many of us take as a given that we would be better off if everyone had insurance, and also that we will not get there unless everyone is eventually forced to contribute to the cost of coverage. Following the demise of Dennis Kucinich’s candidacy, the Democratic policy space has been restricted to proposals that build on the employer-sponsored insurance scaffolding.  In this restricted policy space, a key question for voters and policy makers is whether requiring people to purchase private insurance (in combination with public subsidies and an employer ‘pay or play’ requirement) is a fair, equitable, and politically palatable way to accomplish the goal of achieving universal coverage.

The answer, I think, depends largely on the size and form of the subsidies that are provided to make insurance affordable, and on who bears the risk if the cost of coverage is higher than expected. Consider two possibilities for how subsidies might be structured.  First, the government might specify that all individuals are required to purchase coverage, but that no individual would be required to pay more than X percent of her income for health care – if coverage cost more than X percent of income, the government would provide subsidies to make up the difference.  Second, the government might specify that all individuals would be required to purchase coverage, and specify a fixed dollar subsidy amount that phased out as income increased, with the individual fully responsible for the cost of insurance above some income level.

In the first scenario, many of us would likely conclude that an individual mandate is a reasonable method of achieving universal coverage – people would be required to contribute to the cost of health care, and the amount they would be required to contribute would be fixed as a proportion of income.  In the second scenario we might well have concerns about affordability – unless the government is able to make some promise about the cost of health insurance (and health care), it is possible that people would be mandated to pay an ‘unreasonable’ amount of their income for health insurance. 

The California bill, ABX1 1, took both approaches – providing a guarantee of affordability for people in families with income below 250 percent of the federal poverty level (FPL), but specifying a maximum subsidy level for people between 250 percent and 400 percent of FPL, and requiring people at 400 percent of FPL or above to fully pay for the cost of coverage.  Given the premiums projected by the bill’s proponents and the proposed subsidy schedule, most of us would likely conclude that the mandated coverage would have been affordable for most people above 250 percent of FPL.

However, a subsidy structure that requires people above some income level to fully pay for insurance inevitably creates concern.  Even if mandated coverage is affordable today, it may well not be affordable tomorrow.  Concerns about affordability are heightened if, as in California, the coverage that must be purchased is age-rated, with 60-year-olds being required to pay substantially more than 25-year-olds.  A subsidy structure that limits required payments to a defined percentage of income is fairer and likely to be more politically palatable.  (The political viability of such a system will be challenged by rising health care costs: if costs continue to increase more quickly than income, the percentage of income that people are required to pay for health care will also increase.) 

Concerns about affordability are ubiquitous because health insurance (and health care) is so very expensive and because costs are rising so much more quickly than productivity, wages, or tax revenues. Given that the average price of a family health insurance policy is approximately $12,000, many of us might conclude that health insurance is not affordable for a family in the middle of the income distribution – approximately 300 percent of the FPL, or $60,000 for a family of four.  But if health insurance is not fully affordable for a family in the middle of the income distribution, and subsidies are required for people in the bottom 60 percent to 70 percent of the income distribution, that leaves very few families as the source of the subsidies.

We might try to understand whether health insurance is affordable at various levels of income by analyzing the extent of coverage at various points in the income distribution.  If most people at a given level of income have insurance, we might conclude that it is affordable for most of them; conversely, if most people at a given level of income are uninsured, it would appear to be unaffordable for most.

Employer-Sponsored And Non-Group Coverage:
Two Different Views Of Affordability

Unfortunately, analysis of purchasing behavior provides two diametrically opposed views of affordability.  On the one hand, most moderate-income workers (people in families between 300 percent and 400 percent of FPL) have employer-sponsored insurance. On the other hand, hardly anyone without employer-sponsored insurance at 300 percent to 400 percent of FPL chooses to purchase non-group coverage.  

There are many reasons that most moderate-income workers are covered by insurance, while hardly any moderate-income who are not covered by employer-sponsored insurance choose to purchase coverage on their own.  These reasons include: the fact that non-group insurance is a much less good buy than group coverage; the fact that people with health problems often cannot buy non-group coverage at any price; differences in tax treatment (although premiums are fully deductible for the self-employed, and relatively few self-employed purchase coverage, so tax treatment is far from the whole story); and the possibility of self-selection in which people who most value insurance manage to find jobs that offer coverage.  Part of the difference is no doubt due to confusion about who is really paying the bill – although most economists would swear that employer contributions to insurance are really paid for by workers in the form of foregone wages, the very high coverage rates for moderate income workers suggests that many economists swear too much.  Regardless of the reasons for the difference, the very high coverage rates for moderate -income workers and the very low purchase rates among moderate-income workers who do not have employer sponsored insurance provide diametrically opposed views of affordability, and complicate the discussion about the level of income at which a person can fully afford insurance.

Obstacles To Reform

Given how difficult it is to enact sweeping legislation in the U.S. political system, it is not surprising that California didn’t quite get the job done on health care reform this year. In addition to the formidable obstacles created by a political system with multiple veto points and the enduring vigilance of well-funded and highly motivated special interests, health care reform efforts at the state-level encounter additional obstacles – the straitjacket imposed by ERISA, the constitutional requirement for a balanced budget, and concerns about interstate competition for capital and labor.

California adds its own special version of hell: the requirement that any revenue raising measure receive a two-thirds vote in both the Assembly and the Senate. And if all this were not enough, the unanticipated $14 billion deficit projected in the California state budget for FY 09 might well have been enough to spook even the most confident and committed of health care financing reform advocates.  As was the case in dissecting the failure of the Clinton’s Health Security Act in 1993-94, the failure in Sacramento this year (or, as the ever-optimistic Governor Schwarzenegger might say, the temporary setback) was overdetermined. 

Some of the opposition to ABX1 1 reflected familiar and shopworn arguments, and many of the usual suspects played their accustomed roles.  However, new alliances and new fissures were evident as well.  These new alignments provide fuel for optimism – in Sacramento, in other state capitols, and in Washington DC – as well as reasons for caution. As would be expected, the California Restaurant Association, the CalChamber, and a number of other business groups strongly opposed the ‘pay or play’ requirement which stipulated that employers with more than $15 million in gross revenue were required to either spend at least 6.5 percent of payroll for health benefits or pay 6.5 percent of payroll into a state fund.  But business organizations were not united in opposition: Safeway and the San Diego Chamber of Commerce were supportive.  Vocal support from employers for mandatory employer contribution requirements has rarely been expressed in health care financing debates, and is a positive development. 

As a result of the contortions required by ERISA and the inevitably messy compromises required to get a bill passed (or, almost passed), ABX1 1 incorporated some measures which might well have made it difficult to obtain majority support at the ballot box, and would certainly have made it difficult to successfully implement the law if it had received the support of the voters and survived ERISA-based court challenges.  But even with difficulties, ABX1 1 is noteworthy for almost accomplishing three valuable goals: expanding public support for insurance for low-income workers and their families; requiring all employers to contribute to the cost of coverage; and making health insurance financing considerably less regressive than the status quo.  Under the status quo, all workers pay approximately the same dollar amount for health insurance (here, with some schizophrenia, crediting the economist’s notion that employer contributions to insurance are part of the employee’s compensation).  As a result, lower-income workers pay a much larger fraction of their income for coverage than upper-income workers.  The regressive nature of health care financing would not have been entirely undone by ABX1 1, but the bill would have moved us much closer to a neutral (that is, neither progressive nor regressive) financing system.  The significant expansion of coverage, combined with movement towards less regressive financing, are notable and salutary features of the bill.

ABX1 1, like all health care reform proposals, was subject to a “damned if you do and damned if you don’t” relationship with health care cost containment.  Without serious efforts at reducing the rate of growth of health care costs, any financing system will ultimately be undone by our apparent unwillingness to elect politicians who promise to continually raise our taxes in order to support ever larger health care expenditures. But any reform proposal containing elements that are likely to significantly reduce cost growth will certainly arouse intense opposition from the health care providers and producers whose income growth would be threatened, and might also create concern on the part of voters worried about rationing.   ABX1 1 took the politically sensible tack of largely leaving cost containment problems for another day, although was of course criticized by some for not solving all the problems of the world in one fell swoop.

With any luck at all, we will collectively be grappling with these problems in 2009 in Washington DC. Both Senator Clinton’s and Senator Obama’s plans require us to address the challenge of how to structure subsidies in the context of a system based on employer-sponsored coverage. Any successful plan must find a method of assuring lawmakers and the public that the amount individuals pay for health insurance and health care (whether mandated or not) is affordable.  I can only wish for a more successful resolution than we have seen to date. The progress in Sacramento this year provides cause for optimism, while the temporary setback reminds the optimists among us (if there are any left) of the difficulty of scaling the mountain.

This entry was posted on Thursday, March 6th, 2008 at 12:08 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.