CALIFORNIA STILL DREAMING OF UNIVERSAL COVERAGE

Volume 29, Issue 513 April 14, 2008

Matthew Gever and Christina Kent

Analysts weren’t too surprised that California’s latest universal coverage bill was defeated in January. After all, the state faces a $14.5 billion deficit. They’re more surprised that the Golden State—home to almost 7 million of the 47 million uninsured Americans—has come within a whisker of overhauling its massive health-care system. And it’s done so twice now.

In 2006, the Legislature passed a government-financed, single payer bill (SB 840) but it was vetoed by Governor Arnold Schwarzenneger. In 2007, the governor unveiled a measure that emphasized “shared responsibility.” Democratic lawmakers led by Assembly Speaker Fabian Núñez joined the governor to fine tune the measure and work for passage. The compromise bill (ABX1-1) was passed by a large majority in the Assembly in December 2007, but died when it was rejected by the Senate Health Committee in January.

Senate President pro Tem Don Perata was in favor of reform. But he ultimately rejected the compromise legislation and in a letter, he spelled out why. “This bill…would create the third-largest program in state government, surpassed only by K-12 education and Medi-Cal,” he explained. “Under any circumstances, but especially in light of the state’s $14.5 billion budget shortfall, we have the fiduciary responsibility to approve a health-care coverage plan that is both self-financing and fiscally sound.”

Speaker Núñez vowed to continue to work for reform. And Senator Perata had encouraging words. The negotiations surrounding ABX1-1 enabled lawmakers to come to terms with “some of the most intractable policy problems imaginable,” such as how to share the costs of coverage, he wrote. When the state’s budget and economic climate improves, that progress can “assure swift future steps.” In the meantime, other lawmakers—and presidential candidates—are extracting lessons from California’s experience.

Subsidies and Responsibilities

Modeled partly on the Massachusetts plan, ABX1-1 would have:

required all health plans to offer benefits that included incentives for healthy behavior and chronic care management;
provided sliding-scale subsidies to families with incomes below 250 percent of the federal poverty level, and sliding-scale tax credits to those with incomes up to 400 percent of poverty;
limited premiums to a percentage of income, but not capped out-of-pocket costs;
required insurers to sell plans to all individuals regardless of risk;
joined an individual mandate to a provision that employers either provide coverage or pay a tax of up to 6.5 percent of payroll; and
sought a waiver to expand income eligibility for Medi-Cal (California’s Medicaid program) and SCHIP.

The California Hospital Association agreed to contribute 4 percent of hospitals’ gross revenues in exchange for higher Medi-Cal payments, and cigarette taxes would have been raised.

“A Full-Contact Sport”

“Health reform is difficult,” Richard Figueroa, health-care advisor to the governor and an architect of the plan, said in a briefing held by the non-partisan New America Foundation and sponsored by the Henry J. Kaiser Family Foundation. “It’s hard. It’s a full-contact sport, so you have to really want it and you need leaders who really want it, both within and outside of government.”

Throughout 2007, the governor and lawmakers adjusted the proposal and met with interest groups. They gained the support of consumer groups, most insurers and some unions. Many large businesses and even some small business groups were persuaded to throw their weight behind the measure by the “hidden tax” argument, i.e., that those with insurance pay higher premiums because of cost-shifting by providers who must finance uncompensated care.

But single payer advocates such as Senator Sheila Kuehl (who sponsored the measure that was vetoed by the governor in 2006) opposed passage, as did those who wanted less reliance on the government and more emphasis on the market.

Many worried that the employer mandate in particular would threaten the state’s economy. “Extracting billions of dollars in new taxes from employers will just drive many of them out of business,” said Senator Sam Aanestad.

The mandate would “place an undue burden on brick and mortar companies,” echoed Michael Shaw of the National Federation of Independent Business. He estimated that the employer mandate would cost the state 41,000 jobs in its first five years of implementation.

The state constitution also made passage more difficult. California is one of only a handful of states that requires a two-thirds majority in the Legislature for approving the state’s budget and for raising taxes. That gives significant power to a minority of legislators.

“The final nail in the coffin was the fiscal situation,” said Jonathan Gruber, professor of economics at MIT and a consultant to the governor. In particular, a report from the state’s Legislative Analyst Office (LAO) found that the plan was structurally under-funded. Under the most optimistic scenario, the costs could produce a potential $1.5 billion deficit by year five, the LAO said.

“The potential shortfall could devastate a state budget already teetering on insolvency,” said Senate President Perata. The shortage would require either tapping general revenues—unlikely given the current budget deficits—or increasing taxes, which would require a two-thirds vote or a ballot initiative.

In response to the Senate committee vote, a staffer for Assemblyman Núñez said that any plan, including single payer and doing nothing, contains major risks. “Our job now is to move forward with bringing California closer to the goal of universal coverage and to work hard to avoid, contain and manage any realistic fiscal risks associated with the plan,” he said. “The best tool we have for doing that continues to be the plan’s explicit provision that if funds aren’t available, the plan doesn’t take effect.”

Although ABX1-1 was defeated, the fact that it came so close to passage shows there’s hope for future state and perhaps even federal reforms, policy experts at the New American Foundation wrote in an analysis.

“The bipartisan spirit displayed by Governor Schwarzenegger and Assembly Speaker Núñez proved that leaders can cross party lines and find common ground in addressing the nation’s challenging health care crisis,” they concluded. “Negotiations between the governor and the speaker resulted in compromise legislation that incorporated elements important to each, including: individual responsibility, wellness, a stronger Medicaid program, a consumer-friendly insurance market, and a guarantee that the financial burden of expanded coverage would be widely shared. If health-care reform efforts are to succeed, leaders on both sides of the aisle must see their core values reflected in proposed legislation. California met this test.”