Editor’s Note: This post continues the conversation in the Health Affairs Blog roundtable on the unsuccessful health reform effort in California. Below, Ed Neuschler and Rick Curtis respond to the ideas expressed in the first round of California posts, which appeared last Wednesday and Thursday. You can also read and comment on response posts appearing today from Patricia Lynch and Lucien Wulsin. Watch for an additional response post from Rick Kronick coming up as well.

Patricia Lynch, Lucien Wulsin and Richard Kronick all make valuable points about California’s health care reform effort.  Here we make some additional observations prompted by their posts.

Patricia Lynch observes that “an additional 700,000 people would be covered” with the individual mandate in the final California legislation compared to previous employer “pay-or play only” versions of the legislation.  It is worth noting that many more would remain uninsured if there were no requirement that workers participate in employer coverage offered them or in pool coverage where their employer paid a fee, as those “pay-or-play only” versions did.  (Even the version vetoed by the Governor last fall, which allowed workers to decline coverage costing more than 5% of income, would have left about 1.5 million more uninsured than the final bill.)

While it is generally understood that lower income persons cannot be expected to participate in coverage unless they are heavily subsidized, how far up the income stream subsidies should extend under universal participation is a more contentious issue.  As Richard Kronick notes, 300 percent of the federal poverty level (FPL) is approximately median income for the nonelderly in California (and nationally), and extending subsidies to 60 percent or 70 percent of the population leaves a relatively small population to pay for subsidies for a very large population.  The proposed tax credit was intended to assure the affordability of mandated coverage beyond 300 percent FPL, phasing out at 400 percent FPL, which is the 60th percentile of income in California.  Above that level, the requirement that employers make section 125 plan tax sheltering available to all workers continues to provide a significant subsidy.  For a 57-year-old couple with two children at 500 percent FPL, the estimated net cost of a Kaiser plan with no deductible (but with a $200/day hospital co-pay) would be reduced by 39 percent, yielding a net cost of 6.9 percent of income.

With or without an individual mandate, affordable access for higher risk people requires some allocation of health care costs among (i) the individuals who incur those costs, (ii) other individuals in the individual insurance market, and/or (iii) government subsidies—the last largely paid by others who have already paid (directly and indirectly) for their own coverage.

Avoiding A Market-Wide “Death Spiral”

Lucien Wulsen references the “hidden tax” on those with coverage, due to provider cost shifts for care of the uninsured.  This importantly includes catastrophic costs for higher income “immortals” who chose not to purchase coverage.  Those who have insurance are further unfairly burdened if there is no individual mandate but everyone is guaranteed access to coverage at a price that does not vary based on health risk.

Previous experience with such market rules for individual insurance in states like Massachusetts and New York confirms that high risk/expensive individuals who can possibly afford it will buy insurance, while many healthier and younger people will not.  The resulting high per capita costs can either be borne by those who purchase individual coverage, or subsidized via taxes on others who have coverage (e.g., workers and employers paying for their own coverage)  The latter course seems clearly unfair.  The former course means at best very high costs for those who obtain coverage.  And if insurance is made available to any individual at any time with no limits, it will almost certainly cause the kind of market-wide “death spiral”—as more and more normal-risk persons leave the market due to higher costs—that was previously experienced in Washington State.  The apt (if trite) analogy is that homeowner’s insurance would be prohibitively expensive if people could buy it when their house was burning down.

Alternatively, individuals with adequate means who would otherwise choose not to buy coverage (knowing that they can access coverage should their medical needs change) can be required to at least contribute something.  In the California legislation (as in Massachusetts), the judgment was that such persons should at minimum buy coverage for catastrophic health expenses.  California went further in adopting policies to assure affordability for such coverage.  This seems to us to be a fair and sustainable approach.

Some oppose any requirement that people (or employers) participate in coverage.  To the extent they accept that all Americans should be assured access to urgently needed care, it seems inconsistent to reject shared responsibility to pay for that access.  And, yes, we believe that sharing risks through insurance needs to be part of the equation.

Others believe that individuals are powerless to address ever rising health care costs, and that only employers and government should bear those costs.  But if even higher income Americans are insulated from such costs, it seems to us unlikely that there can be either adequate market incentives or sufficient political will to make the difficult decisions needed to avoid eventual economic melt-down of our health care system.  We again believe that the shared responsibility approach in the California plan sets a better course.

This entry was posted on Monday, March 10th, 2008 at 1:45 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.