AB 8 and Unintended Consequences: Funding the Pool — Part II

In an earlier post I pointed out how medical costs rise at a faster rate than wages, meaning the 7.5 percent payroll fee/tax imposed by Assembly Bill 8 would, over time, need to be dramatically increased. (The sponsors call it a fee so only a majority vote is required to pass  the bill; opponents call it a tax so a two-thirds vote of both houses of the Legislature is required. I call it a fee/tax because, well, why not?).

In reality, however, the 7.5 percent levy is inadequate from the first day of operation.

Proponents of AB 8 disagree with this claim. They cite a study by Jonathan Gruber, Ph.D of the MIT Department of Economics which, among other conclusions, seems to show that AB 8’s 7.5 percent fee/tax will not only cover the costs of the purchasing pool (called Cal-CHIPP), but generate a reserve as well. But there’s a gaping hole in the Gruber study. Apparently Dr. Gruber assumed plans in the purchasing pool would be reimbursing providers at MediCal rates — which are substantially below what commercial carriers normally pay physicians, hospitals and other providers. The study consequently used an average monthly cost of providing participants medical coverage through the pool of $224.

However, it is highly unlikely doctors and hospitals will accept these reduced fees from Cal-CHIPP, which is expected to attract as many as four million participants. Many doctors won’t accept any, or at least any additional, MediCal patients. They claim they lose money on such patients.

Which means that projected $224 average monthly premium Dr. Gruber used should be compared to what’s out there in the real world. According to a California Health Benefits survey, the premium for a single adult in California through a group plan in 2006 was $379 (of course, rates in 2008 will be higher than those in 2006).

Meanwhile, Cal-PERS, the state-run pool which insures state employees and officeholders recently published 2008 rates for its plans. They range from $351 to $742. Then consider that it is very likely the custodians of Cal-CHIPP, the Managed Risk Medical Insurance Board (MRMIB) will be heavily pressured to provide benefits in their pool closer to those offered through Cal-PERS than through MediCal.

The result is that the average cost of a participant is likely to be at least 57 percent higher than anticipated in the Gruber study. Which means MRMIB will be forced to substantially raise the fee/tax on employers to cover this higher cost. There goes the reserve. And there goes a 7.5 percent fee/tax.

In most instances, increasing a fee/tax would require the approval of the Legislature. Yet, in what some are calling an acknowledgement that a higher levy will be needed, AB 8 empowers MRMIB to raise the rate on its own. As much as it deems necessary.

And what it deems necessary is likely to be a lot, starting on the first day MRMIB opens Cal-CHIPP for business.

 Note: AB 8 was amended on August 20, 2007. It now appears MRMIB may increase the fee/tax only once per year. This post was modified on August 21st to reflect this change.

Elements of Effective Health Care Reform

I was talking to an agent the other day who asked a very valid question: “Let’s say CAHU’s Operation Drumbeat is succesful and AB 8 becomes a two year bill. What amendments will we (CAHU) seek? If AB 8 is flawed, what would “good” health care reform look like?”

It’s a valid point. With pressure mounting in Sacramento to pass health care reform — any health care reform — what’s the alternative? So, let’s take a breather from the urgency of the moment and focus on the elements of effective health care reform. Personally, I concur with how CAHU’s Healthy Solutions plan defines the goal of health care reform (disclosure: this isn’t surprising since I helped write the plan). Healthy Solutions calls for reforms which must:

  • ensure that all Californians have basic health care coverage;
  • neither bankrupt families nor the state;
  • provide the state’s diverse population with equally diverse health care choices;
  • promote ongoing and long-term innovation and experimentation that enable the state’s health care system to adapt over time to the evolving needs of its citizens;
  • address and constrain skyrocketing medical care costs;
  • provide consumers access to meaningful information and expert advice and counseling from licensed professions.

That’s why Healthy Solutions seeks to deliver on the promise of universal coverage. Knowing this won’t be inexpensive, Healthy Solutions identifies funding sources. It avoids expensive pitfalls like creating new state bureacracies or purchasing pools. It emphasizes wellness and prevention programs. It calls for reforms that preserve consumer choice, whether it’s in health plan design, the type of networks they have access to, or the kind of help and support they can access in navigating the system. It calls for shared and personal responsibility.

AB 8 has a noble purpose, but it’s approach will do more harm than good. A vote on the bill needs to be delayed until it can be amended. And there are proposals out there which can serve as a model for what AB 8 could — and should be. That’s a critical point. The goal of health insurance agents should not be to avoid reform, but to help bring about constructive, workable changes. Folks interested in what that might look like should visit www.CAHUHealthySolutions.org for an example of what effective health care reform might look like.

AB 8 and Unintended Consequences: Funding the Pool

AB 8 requires employers to pay 7.5 percent of their Social Security payroll ($97,500 this year) on health care coverage. Two calculations are actually required: one for full-time employees; one for-part timers (working less than 30 hours a week).  The employees of companies which choose to pay this fee are required to enroll in a state run purchasing pool. If the funds are not enough, the manager of the pool, the Managed Risk Medical Insurance Board (MRMIB) can raise the fee. MRMIB also determines the benefits provided in the pool. So they sit in a very interesting position: they determine the demand,  the supply and subsidy of the purchasing pool.

Supporters of AB 8 call the 7.5 precent charge a “fee;” opponents call it a “tax.” The debate is more than academic. If it’s a fee the bill can be passed into law by a majority vote of each house of the Legislature. If it’s a tax, a two-thirds vote is required. Some of you may have noticed that the Legislature has a bit of a problem coming up with two-third majorities, which is why there’s no state budget yet. This will no doubt be the topic of law suits if the bill is “passed” by a simple majority, but it’s not the topic of this post.

Neither is the fact that “pay-or-play” systems like that envisioned by AB 8 appear to run afoul of ERISA pre-emption.  What this post is about is whether the 7.5 percent charge is sufficient to pay the bills of the new purchasing pool. Because if it’s not, then AB 8 will lead to continuous increases in the fee/tax. And if the fee/tax becomes an unacceptable burden on businesses, the result will be depressed wages as company revenue is diverted to the fee, lost jobs as companies move out of state or put off new hiring, and a resulting reduction in state revenues, undermining the state’s ability to pay for other services. Such a result would truly qualify as an unintended consequence.

The California Chamber of Commerce is among those who claim 7.5 percent charge won’t be sufficient on Day One. On the other hand, researchers at places like the UC Berkeley Labor Center produce studies showing the fee/tax is sufficient.

But Day One is not the only day Californians will have to live with the fee and the purchasing pool. Let’s consider what might happen down the road. And if past is prologue, an interesting issue would be see what would have happened if this scheme had been introduced in 1997. For that, let’s revisit our favorite inflation calculation site, the amazing “Tom’s Inflation Calculator.

For purpose of this thought experiment, assume that in 2002, there’s a company in California whose average Social Secruity wages are $40,000 per employee. A 7.5 precent charge against that payroll would generate $3,000 per year. Let’s further assume that this revenue is sufficient to pay for a health insurance policy through a state-run pool. In other words, let’s assume in 2002 the payroll fee/tax was sufficient to pay for the coverage provided.

Now let’s turn to Tom’s calculator.  The $40,000 assumed salary in 2002, adjusted for U.S. Wage Inflation, would be $45,427.22 in 2007. Applying the 7.5 percent fee/tax on this salary generates $3,407.04 (the cents are provided to give this high-level calculation a false sense of precision).  Now take the $3,000 cost of coverage in 2002 and adjust it for U.S. Medical Cost Inflation. Assuming insurance premiums just kept up with the cost of underlying care, the cost of coverage in 2007 would be $3,695.75 — 8.5 percent more than the revenue received. To make up this difference, the 7.5 percent fee/tax would need to be raised to 8.1 percent of wages.

That doesn’t sound like much of a miss, but it assumes the rate of medical cost inflation remains flat compared to what it was in the 2002-2006 period (for various reasons, Tom’s calculator does not include the target year’s inflation rate in the calculation). Yet the population is getting older. Technology is getting more expensive. Consumer demand is increasing. Does anyone really believe that will be the case? And with the state of the economy, does anyone contend wage inflation will increase at a faster clip in the future?

To put it simply, by pegging the cost of health care coverage to payroll, AB 8 makes a fatal flaw. The changes of them increasing in lock-step is virtually nil. Instead, health care costs are likely to increase at a far greater rate than wages. Which means the payroll fee/tax will need to increase — often and substantially — over time.

The result, those unintended consequences mentioned earlier.

CAHU Launches Effort to Delay Vote on AB 8 Until It’s Fixed

The California Association of Health Underwriters (CAHU) launched Operation Drumbeat yesterday, August 16th. It’s goal is to get key Legislators to urge their Leadership to delay a vote on Assembly Bill 8 (Nunez) until it can be fixed.

The concern is one that I’ve written about in previous posts: that the Legislature will rush through a health care reform bill that will generate many devastating unintended consequences. As currently drafted, the unintended consequences include higher health insurance premiums, more uninsured among the self-employed, higher taxes on businesses and place a damper on the state’s economy. It does some good, too, but on balance, it’s would do more harm than good.

Yet there is tremendous pressure on Legislative Leaders and the Governor to pass a bill quickly (as described in yet another previous post). To counteract this pressure, CAHU is asking its members, their clients, friends and colleagues to contact key legislators, to explain to them how important it is to get health care reform right, and to ask them to put off a vote on AB 8 until it can be thoroughly reviewed, debated and amended. The hope is that it will be amended to something more akin to CAHU’s Healthy Solutions plan.

Why Operatation Drumbeat? Because CAHU will be initiating new messages to these key lawmakers at least once a week until the current legislative session ends on September 14th.

To promote it’s own health care reform package and to facilitate Operation Drumbeat, CAHU launched its a new website yesterday: www.CAHUHealthySolutions.org. (I posted the link yesterday before the site was ready. My apologies to those who visited the site before the links were all in place). 

If you haven’t done so already, I strongly urge you to send your own message to these key legislators. It takes only a fe minutes to use the Operation Drumbeat communication tool, but the impact can be great. After all, everyone in this debate wants to pass the right reforms. If that requires more time, it will be time well spent.

Full Disclosure: As CAHU’s Vice President for Public Affairs, I’m responsible for Operation Drumbeat.

Bill Richardson’s Health Care Reform Proposal: More Insured, Less Bureacracy

Bill Richardson is what’s called a second tier presidential candidate. He’s got a strong resume (Cabinet Secreatry, Congressman, Govenor), but has neither registered well in polls nor over-impressed with fundraising — yet. This makes his candidacy no less credible than others, it just means he has a steeper hill to climb.

Earlier this month, Governor Richardson unveiled his health care reform plan (Bill Richardson Health Care Reform Plan). As is proclaimed on his web site, Richardson believes “we need to make health care more affordable for all Americans, including those who are already covered. And any real solution to making health care more affordable for everybody must start with the commitment that all Americans should have health care coverage.”

Any of the Democratic candidates would be comfortable framing the goal of health care reform this way. What makes Governor Richardson’s position unique is how he goes about achieving trying to achieve this goal.

He wants to preserve consumer choice, so he proposes giving Americans to buy the same plan as do members of Congress, reducing the age for Medicare eligibility to 55, stronger Medicaid, Children Health Plans (like California’s Helathy Children program), and Veteran programs. Or, they could simply keep their current coverage. Few candidates have captured the simplicity of this latter provision. If consumers are happy with what they have, they can keep it.

The Richardson plan requires all Americans to purchase coverage and all carriers to accept all applicants. Yet, unlike most advocates of such arrangements, he does not call for the creation of a government-run pool, connector or exchange. This alone distinquishes his plan from those of other candidates. The Richardson health care reform plan subsidizes the cost of care through a sliding-scale tax credit and requires employers to contribute to health insurance.

The Richardson health care reform plan is less detailed than others, hopefully more specifics will be forthcoming. However, as a framework for change, it adds several worthwhile ideas into the Democratic campaign mix, including a vision for achieving universal coverage without creating government-run purchasing pools. The Richardson plan is certainly worthy of consideration and debate. Whether ideas from the second tier will get heard above the din of presidential primaries and sound bite debates remains to be seen.

Canada’s Health Care System: One Doctor’s View

Proponents of a single payer system cite Canada as a role model for America. Bruce Benton, Regional VP for the National Association of Health Underwriters, recently forwarded me a column which appeared in Investors Business Daily. It was written by a Canadian doctor David Gratzer and describes his disillusionment with the system.  [Edit 8/17/07: the link to this article is no longer valid. Fortunately, Dr. Gratzer wrote an even more detailed article for City Journal Magazine which covers much of the same ground.]

The column also takes on some of the urban legends surrounding both the Canadian and American health care systems. For example, every single payer advocate cites the true statistics that the average life expectancy of Americans is less than that of Canadians and Europeans, except for Portugal. Dr. Gratzer points out that a life can end due to murder, a car accident or a fall. He then cites a study which factors out intentional and unintentional injuries from life-expectancy statistics. The result: “Americans who don’t die in car crashes or homicides outlive people in any other Western country.”

Dr. Gratzer’s is an opinion worth considering, especially by those in California supporting Senate Bill 840 (Keuhl), which would establish a Canadian-style system in the state.

Ouch! Schwarzenegger and the Wall Street Journal

Being a worldwide movie star, leader of the world’s 8th largest economy (or is California the 7th now?) and trying to tackle difficult policy issues can be tough. Consider: Last January Governor Arnold Schwarzenegger announces he’s taking on health care reform. He puts forward a bold and comprehensive plan. As readers of this blog know, I believe the plan was terribly flawed, but the effort was admirable.

Several months later, the passage of health care reform seems, to some, doomed. The Legislature is still nearly two months late in passing a budget. The Legislature is scheduled to adjourn on September 14th. To folks like those at the Wall Street Journal it looks like Governor Schwarzenegger’s dream of passing health care reform is dead.

Thus the editorial published today entitled “Arnold’s Health Flop.” Rupert Murdoch hasn’t even taken control of the paper yet and the Journal is lambasting the Governor’s proposal and practically dancing with glee it’s dead in the water.

But the Journal may not have the last laugh. There’s still time to pass health care reform this session — the Democratic Leadership is planning on moving Assembly Bill 8 (Nunez) as soon as they can. And the Governor can call a special session focused exclusively on the issue. So there’s plenty of opportunity to rush through reforms.

That’s where the Journal has it wrong — and it’s where the danger lies. California doesn’t need quick health care reform — it needs effective reform. The Journal should not be chortling over Governor Schwarzenegger’s problems in passing his reform package. It should be encouraging lawmakers to slow down and get the reforms right.

AB 8 and Unintended Consequences: Guarantee Issue

AB 8 requires individual health insurance carriers to accept virtually all applicants for coverage (a practice called “guarantee issue”). Because it empowers the Major Risk Medical Insurance Board (MRMIB) to establish criteria which would divert three-to-five percent of applicants to a high risk pool MRMIB manages, there’s a small safety valve. But it is small indeed — too small to avoid creating dramatically higher premiums and increasing the number of uninsured among self-employed and unemployed Californians.

Health insurance is about spreading risk. Insureds who incur lower than average claims subsidize those who incur higher than average claims. Why? Because the “healthier” group expects their costs to be covered if they’re ever on the subsidized end of the equation.

But if individuals know they can get coverage as soon as they need it, why would they buy it when they’re healthy? A system that incents healthy individuals to forgo coverage, but encourages those incurring heavy expenses to buy insurance is called adverse selection. It can devestate a health care market and AB 8 is a recipe for doing just that.

This isn’t just theory. In Kentucky when a guarantee issue market was created 45 carriers left the market and premiums skyrocketed. Things got so bad Kentucky lawmakers had to reverse their “reforms.” In Maine, guarantee issue, along with other reforms, means only one carrier offers individual coverage.  Significantly, even after the state agency regulating rates approved rate increases totaling 124 percent over six years, the lone carrier left in Maine still loses money in this market segment.

Then there’s New York and New Jersey. As noted in an earlier post, citizens of those states pay, on average, a “health care reform surcharge” of 350 percent. That’s how much more the average annual premiums in those states exceed the average annual premium in California.  Adverse selection will do that.

There’s other ways AB 8’s mandate to sell provision could increase premiums in the individual market. For example, it could result in non-Californians facing surgery or expensive treatment to establish residency in the state just tenuous enough to qualify for coverage. (It appears even opening a California-based post office box might work). Once the treatment is completed, they could “move” back to their home states having paid a fraction of the cost of their care. The majority of their medical expenses would be paid by Californians in the form of higher premiums. And as premiums increase it would make it economically attractive for even more individuals to drop their coverage until they need it, increasing the amount of adverse selection in the system and driving costs up further. The process would repeat in a death spiral that could undermine the entire system.

The problem with AB 8, as it is in Maine, New York and New Jersey, is its creation of a mandate to sell coverage without a corresponding and enforceable requirement that consumers buy coverage.  Guarantee issue, when coupled with mandates to purchase, could go a long way toward achieving universal coverage. This is precisely what Governor Arnold Schwarzenegger proposed and it’s what the California Association of Health Underwriters calls for in their Healthy Solutions plan. Another previous post describes how Healthy Solutions approach to guarantee issue would help mitigate against the adverse selection and higher premiums AB 8 will create.

The proponents of AB 8 are not trying to increase premiums and encourage people to drop their coverage. Unfortunately, as written, the legislation is likely to have that very result. Let’s hope supporters of the bill will slow down and enable the Legislature to reconsider some of its provisions before Californians pay the unintended consequences.

Will Budget Impasse Delay California Health Care Reform?

The California budget for this fiscal year was to have been finalized before July 1st. Senate Republicans are withholding their needed votes, however, until more cuts are made and regulations are changed.  With lawmakers at home for their summer recess until August 20th passage of a budget anytime soon is unlikely. And with the Legislature scheduled to adjourn for the year on September 14th, the window available to pass other legislation is short.

Health care reform, as embodied at the moment in Assembly Bill 8 (Nunez), is just one of several major pieces of legislation held up by the budget impasse. Governor Schwarzenegger has an ambitious proposal concerning California’s water supply while Legislators are passionate about reforming term limits and addressing reapportionment.

So the question is, will the budget fiasco derail passage of health care reform legislation? The Los Angeles Times reports today that, the answer is probably “yes.” Under the headline, “Budget deadlock stalls Schwarzenegger’s agenda” the Times reports, “Everything has been put on the sidelines,” said Senate Leader Don Perata (D-Oakland). “No one would like to have a healthcare bill more than I would. But if we don’t have a budget, nothing else matters.” The article concludes with another quote from Senator Perata, “The only game played in center field here is the budget,” Perata said. “Until the budget is resolved, no one else gets in.”

All this would seem to lead to the conclusion that AB 8 is destined to become a two year bill, right?

I’m not so sure. As I posted earlier, there’s a tremendous amount of political pressure on the Legislative Leadership and the Governor to pass health care reform as soon as possible. Govenor Schwarzenegger wants leverage and visibility in the run-up to the state’s February presidential primary, which means he wants health care reform as soon as possible. The unions, close allies of both Senator Perata and Assembly Speaker Nunez, want health care reform now. Plus Legislators want voters to change the term limit laws on election day in February, and passage of health care reform before then would help cast them in a positive light.

It’s hard, if not impossible, to come up with solid public policy reasons for passing the budget this year. But politics often trumps public policy in capitals across the country. Yet if there’s just a few weeks between passage of the budget and the Legislature’s adjournment, the immutable laws of space-and-time trumps politics, doesn’t they?

Usually. But we have a Governor who has no qualms about making a dramatic gesture. A Governor who relishes acting outside of normal political practice. A Governor, in short, who could easily call for a Special Legislative Session to consider AB 8. As I understand it, all it takes is a stroke of a pen. The press conference is optional, but inevitable.

Calling for a Special Session would emphasize the importance of health care reform to the Governor. And it might be welcomed by Senator Perata and Speaker Nunez as it would enable them to divert attention away from the budget deadlock to substantial public policy. A Special Session would allow both the Governor and the Legislature to achieve their political need of passing health care reform — any health care reform — before the end of the year.

It’s the “any health care reform” that’s the problem. AB 8 needs a lot of work before its anywhere close to ready for implementation. As currently drafted it is likely to cost the state jobs and tax revenue, increase health insurance premiums and the number of uninsured, and devastate an industry that makes up over 15 percent of the state’s economy. Preventing these unintended consequences will require a great deal of discussion, deliberation, hard choices and compromise. In short, AB 8 needs to be a two year bill.

A Special Session might allow for a thoughtful approach to health care reform, but more likely ti will just serve as a forum for political theater. Californians deserve responsible, effective health care reform. There are proposals on the table, like the California Association of Health Underwriter’s Healthy Solutions plan which would deliver on that goal. AB 8 isn’t there yet. The Governor and the Legislature should take the time to get it right. Their constituents deserve no less.

Blue Cross of California

First, full disclosure: I was a Senior Vice President at Blue Cross of California, or its parent company WellPoint from September 1997 through November 2005. While my precise responsibilities varied during those eight years, they centered around helping the company grow its Individual and Small Group business. Before joining and since leaving WellPoint, I’ve continued to work with Blue Cross while also having the pleasure of working with its competitors. I greatly respect those carriers, for many of the reasons I respect Blue Cross.

But it’s Blue Cross that has been in the news so much since I started this blog. Yet I’ve purposefully avoided posting on its situation and probably won’t post on it again. It’s too much of a no-win situation for me. If I’m too supportive, then I’m just being defensive. If I’m too harsh, I’m misusing my former insider status.

However, with the Department of Managed Care holding hearings on Blue Cross yesterday, and so many readers knowing of my affiliation with the company, I thought it permissible to make an exception. But this won’t be a post about the the substance of the charges. It’s more personal in nature.

I view the public pilloring of Blue Cross by the Department of Managed Health Care with mixed emotions. I enjoy seeing big companies brought to task as much as the next guy. It’s like watching toothpick thin famous-for-being-celebrity-types doing perp walks. Or watching bombastic politicians busted for the behavior they publicly decry. There’s a karmic aspect of it all that we humans seem to enjoy, the reasurrring balancing of forces in the universe.

So seeing a regulator take Blue Cross to task doesn’t bother me. It’s a part of the process. What prompts me to write, however, is how all this impacts the people of Blue Cross who have accomplished over the years.

The individuals representing the company at the hearing are friends and former colleagues of mine. I’ve seen them at work. Yes, it’s true they paid attention to the bottom line. That’s how any enterprise — for-profit or non-profit — stays in business. But I’ve also seen them striving to do the right thing for their members when no one outside the company was watching. I’ve seen them invest sweat, time and resources to improve customer service. I’ve seen how hard they’ve strived to create new ways of helping those with serious diseases improve their quality of life and medical outcomes. I’ve seen the efforts they’ve made — and the risks they’ve taken — to bring to market products which provide strong coverage at the lowest possible price in the face of skyrocketing health care costs.

Blue Cross is not a perfect company. There are no perfect companies — nor perfect people or government agencies, for that matter. They’ve made mistakes and where those mistakes violate law or regulations they should be appropriately punished. Further, Blue Cross has made their situation worse over the years by sporadically descending into moments of hubris and arrogance — and sometimes just plain public relations mindlessness. They’ve also taken risks to make things better, which means at times, they’ve failed and made things worse.

But Blue Cross of California is no Enron. There aren’t people there conspiring to rip off the innocent. It is a company by and large of people trying to do a good job for their members, their business partners and yes, their shareholders. (Traits they share with most of their competitors and respected companies everywhere).

Few things in life are clear cut. There’s a context and subtlety that gets overlooked in the circus-like atmosphere of a public scolding. Maybe every business and every industry needs to go through this now and again. When done right the results can be positive change. At worse, the hot water may help keep the enterprise humble. It’s just a shame that in the process, the people which make up the company and who are trying to do the right thing, can get scalded along the way.