Health Care Reform Compromise Rumors

Here’s a post that could be out of date by Wednesday, if not sooner:

Rumor has it Governor Arnold Schwarzenegger’s and Speaker Fabian Nunez’s staffs are busy hashing out a compromise that could be brought before the Legislature early this coming week. (I assume Senate Pro Tem Perata’s staff is involved, too). The broad outline is that lawmakers would enact health insurance market reforms while pushing off elements of the reform package that require money to a ballot initiative in 2008. This allows them to both beat the deadline posed by the Legislature’s scheduled adjournment on September 14th and to avoid the political pain and agony of garnering a super-majority in support of their package in both houses of the Legislature.

Among the market reforms would be limiting the percentage of premium health plans can spend on administrative expenses and profit to 15 percent (referred to as an “administrative cap” and requiring carriers to accept all applicants for coverage regardless of the applicants health (“guarantee issue”). Also likely to be included in the market reform portion of the package is expanding small group health insurance regulations to groups of up to 250 employees and eliminating carriers ability to adjust their standard premiums to reflect the risk profile of the applying group.

The revenue-related issues would presumably include premium subsidies for low- and mid-income Californians and the revenue to support them, which could come from fees and/or taxes imposed on employers, hospitals, doctors and individuals.

What’s all this mean? Several things:

  1. A Deal is in the Works: Whether this is an accurate outline of a proposed compromise or not, this rumor indicates that serious negotiations are under way and making progress. Rumors this detailed often have some tie to reality. Another indication of progress: Assembly Speaker Fabian Nunez postponed an expected vote on health care reform last week. He’d all but promised a vote on Assembly Bill 8 (the Legislative Leadership’s plan), the Governor’s proposal and others by Friday, August 31st. Pulling back is an indication that there’s likely to be something more substantive to vote on this coming week.
  2. Don’t Underestimate the Governor: It wasn’t that long ago that pundits at the Wall Street Journal and elsewhere were saying Governor Arnold Schwarzenegger’s health care reform plan was dead (“doomed” is the word the Journal used). Meanwhile, politicians as bright and savvy as Senate President Pro Temp Don Perata were on on record with the claim the Governor would have to sign virtually any bill the Legislature put on his desk. In my post on the topic, I described the Governor as an adroit politician who may have backed himself into a political corner. Anyone who doubts Governor Schwarzenegger’s political savvy should pay attention. This is a politican who knows his strengths and how to put them in play. In an editorial board meeting with the Sacramento Bee the Governor threatened to veto AB 8 unless it is amended to more closely resemble his own proposal. He follows that up with a hallway chat with several reporters reiterating and clarifying his position. No longer in a corner of any kind, the Governor is now shifted the discussion. He is now controlling the public dialogue on health care reform.
  3. Don’t Underestimate the Legislative Leadership: The Governor’s action puts the Legislative Leadership on the defensive, but not for long. Speaker Nunez and Senator Perata could have backed off and let the Governor continue to control public perception of the debate. Instead, Speaker Nunez announces he’ll put the Governor’s proposal into a bill and bring it to the floor of the Assembly for a vote. In the process he challenges the Governor to produce Republican votes for the Administration’s plan (which requires a two-thirds majority vote to pass) or to accept that only AB 8 can muster the votes to become law. The result, the Governor now must muscle a two-thirds vote out of the Legislature or admit his proposal really is doomed.
  4. Creativity Trumps Gridlock: Getting Republican legislators to support the Governor’s proposal would be a Herculean task. While the Governor may have played Hercules in the movies, Sacramento is no Hollywood set. One result of all this could have another long legislative deadlock as we witnessed with this year’s state budget. GOP lawmakers have proven their willingness to tie up legislation requiring their support. If the rumors about an initiative are true, however, the Governor and the Legislative Leadership have found a creative solution. By bypassing the Legislature altogether on provisions requiring a two-thirds vote they effectively lockout the GOP minority. In the process they give themselves the flexibility to enact health care reform as they see fit.
  5. Politics Still Trumps Policy: So we now know these are savvy politicans applying all their skills to producing a health care reform package — and to produce it quickly. Yet what’s still missing from the debate is an appreciation for the impact of the changes they contemplate. As I’ve previously posted, AB 8 is greatly flawed. Separating it into two pieces doesn’t fix the problems. It may enable them to become law, but that’s not a good thing if they will do more harm than good.

If the Governor and the Legislative Leadership reach a compromise on health care reform before the Legislature adjourns it will be hailed as a political miracle. The media will marvel at how Schwarzenegger, Nunez and Parata pulled back from the brink of public failure and ushered in a new era of health care for the state.

Success, however, should not be measured by when legislation is enacted, but rather by what the new law accomplishes. The measure of success should be results, not action. Passage of a compromise along the lines of the rumor reported here would be no victory. A special session providing lawmakers the time to get health care reform right is both good politics and good public policy. Hopefully we’ll be hearing rumors about just that soon.

The Politics of Health Care Reform Vote

Pretend for a moment you’re a Democratic legislator. Your party controls your chamber. You sit on committees that both interest you and benefit your district. You even have a nice office and, while you could always use more, you have sufficient staff to get your work done.

As a conscientious representative you want to address the needs and concerns of your district. You’ve received lots of letters from the district concerning problems with the state’s health care system. You’ve met with constituents unable to get coverage or about to lose it. You’ve also read the polls. Clearly, something must be done to fix what you perceive to be California’s broken health care system. 

You’ve been focused on other important issues, but clearly health care reform is a high priority for the Legislative Leadership and the Governor. You know Assembly Speaker Fabian Nunez and Senate President Pro Temp Don Perata combined their separate bills into a single package, Assembly Bill 8. And you’ve heard a lot of opinions about it from your district and interest groups.

You know the bill has been heard by various committees, but you’re not sure if they impacted the content of the legislation or not. Most of the talk you hear about the bill has focused on politics (will the Governor sign it?), not on the substantive policy behind its provisions.

Based on what you’ve been hearing of late, AB 8 may be seriously flawed. The individual health insurance reforms sound like those in New Jersey, where premiums are on average 350 percent more than they are in Califronia. Empowering a state agency to raise payroll taxes (oops, let’s call them fees) on every business in the state without any considering the impact on job creation, overall state revenues and business growth strikes you as bordering on fiscal irresponsibility. You’ve heard been getting a drumbeat of messages from health insurance agents in your district concerning these problems and more. Yes, they have a vested interest in the current system, but they have their own reform package for achieving universal coverage. And they do know how the real world works.

You know Speaker Nunez and Senator Perata have been in heavy negotiations on health care reform.  The Governor has vowed to veto any bill which doesn’t spread the cost of the plan beyond employers and which fails to cover all Californians (which means he’ll veto AB 8). Yet you know the Governor’s own plan, because it includes taxes on doctors, hospitals and others, requires a tw0-thirds vote. After the state budget debacle you’re not convinced two-thirds of either house would vote on whether to continue putting Mother’s Day on the calendar.

The negotiations must be getting intense, because your Majority Leader is on the phone. Speaker Nunez and Senator Perata are bringing AB 8 to a vote. And they’re putting Governor Schwarzenegger’s proposal into a bill so it can be voted on, too. The Majority Leader wants to know how you intend to vote. What’s your answer?

On the one hand, you’re pretty sure Assembly Bill 8 is greatly flawed with numerous and dangerous unintended consequences. As Senator Perata himself said recently, “When we try to do things fast around here, we usually make mistakes that we regret.” This seems like one of those times. The goal should be to get health care reform right. If it takes a few more months, so be it. You were sent here to do what’s right, not what’s expedient.

On the other hand, the Leadership has made it clear it wants a “yes” vote. It will demonstrate the Democratic’s commitment to  addressing the state’s seroius problems (and perhaps leave behind the memory of the budget fiasco). If it turns out AB 8 is flawed, follow-up legislation can be introduced or the regulators can fix it. And a yes vote is good politics. Certainly a lot of your constituents — and contributors are clamoring for reform.  You want a successful carreer in Sacramento. This is one of those times when the Leadership will be tracking who is with them and who isn’t.

What’s your answer? Vote for a flawed law or score political points at the risk of enacting damaging legislation?

But wait, is that really the choice? Is there a way to get the political benefit of a yes vote, but do the right thing and delay enactment of a bad bill? Well, the Governor has vowed to veto AB 8 as written. And the Republicans are unlikely to give the Administration’s proposal enough support to reach the two-thirds majority. Does this mean you can vote for the bill knowing it won’t become law?

So, pretend for a moment you’re a Democratic legislator. What’s your answer?

Hasty Health Care Reform a Bad Idea

I’ve written ad naseum on the danger inherent in the Legislature hastily passing health care reform. The unintended consequences from enacting changes in something as complicated as health care without thoroughly vetting the ramifications could make matters worse, not better.

I’m not alone in this concern:

  • “I hope that none of these ill-conceived, quickly thrown together plans will pass this year,” said state Sen. Sheila Kuehl, the Santa Monica Democrat who chairs the Senate Health Committee and advocates a single-payer system. “Because really, that is not good for California.” (from ABC News).
  • But State Senate President Pro Tem Don Perata (D-Oakland) admitted, “Time is working against it … When we try to do things fast around here, we usually make mistakes that we regret.” (from NBC News).

They are both right. Ill-conceived reforms leads to seroius problems. What’s amazing is that there is no need to rush a bill — any bill — throught the process. Yes, if it’s put off until 2008 health care reform will have to compete for legislators’ attention with other bills — and with elections. But the momentum for reform is strong and getting stronger. Yes it would make it tougher to be a lawmaker. But it’s their job to deal with difficult issues under pressure, even during election years.

Senators Perata and Keuhl is not the universal view, however. Offering another viewpoint is Assembly Speaker Fabian Nunez. In a Los Angeles Times op-ed piece  that ran Monday (“Healthcare reform — now”), he says those seeking a delay are simply trying to derail any reform. “… delay means death to controversial big-issue legislation. Given more time, the forces against healthcare reform will find ways to take more potshots at the proposals. We don’t need a special session of the Legislature later this year. We don’t need to punt to the 2008 election year.”

I suppose one person’s warning is another’s potshot. But does the Speaker really mean to imply his chamber cannot consider legislation in even-numbered years? 

The reality is, Speaker Nunez’s legislation, Assembly Bill 8, is seriously flawed (another topic on which I’ve written ad naseum).  The Speaker claims “… for nearly 10 months now, the reform proposals I put forward with Senate President Pro Tem Don Perata have been vetted in the legislative process, fiscally analyzed by academics and scrutinized by the media.”

Really? Did I miss something? I remember the bill coming before various committees, but it seems to me they were passed through fairly quickly and with little changes.  The only real change occured when Senator Perata’s health care reform legislation, SB 48, and AB 8 were merged — but that didn’t result in substantive policy changes; different sections of the two earlier versions were simply grafted together).

One of the problems with the health care reform debate this time around is how little real dialogue there has been. Most of the time the debate seems to be about what legislation can pass, not what legislation should pass. To their credit, the Administration and the Legislative Leadership have met with a number of people, but I don’t see much of what they’re hearing being incorporated into any proposals. It’s as if ideas not generated within the State Capitol aren’t given credence.  How else do you explain AB 8’s inclusion of a mandate for carriers to accept virtually all applicants without a requirement for all individuals to be insured? I don’t know anyone who has studied the issue who believes this won’t raise premiums as it has done in New York and New Jersey

My pesonal opinion is that there’s been too much politics and not enough public policy in the legislative vetting process to date. If a special session or a delay to 2008 allows for a meaningful dialogue on health care reform, then it’s worth it. Otherwise, we’ll all wind up regretting the results of quickly thrown together plans.

California Health Care Reform: Public Maneuvers

The budget passes the Legislature and, within hours, the negotiations over health care reform goes public in a big way.

Governor Arnold Schwarzenegger tells the Sacramento Bee editorial board he’ll veto the Legislative Leadership’s bill, Assembly Bill 8 (view post), if it places the entire burden of funding reform on business and lacks a requirement that all Californians obtain health care coverage (sometimes called an “individual mandate.”). He later indicates a willingness to bring Legislators back from their Fall recess in special session to assure health care reform plan is passed this year (view post).

The Democratic Leadership complains that Governor Schwarzenegger’s individual mandate would require a two-thirds vote of the Legislature, meaning it would need Republican votes. They point out that such a dynamic blocked passage of the state’s budget well pass the Constitutional deadline and question the Governor’s ability to deliver any Republican votes. Now Assembly Speaker Fabian Nunez is planning to drive this point home. In a clip of a press conference posted by the California Majority Report today, he committed to introducing the Governor’s health care reform plan as legislation and bring it to a vote on the Assembly floor as early as next Friday, August 31st. His challenge to Governor Schwarzenegger: deliver Republican votes.

I’m sure there’s lots of negotiations going on behind the scenes, but public activities is a lot more fun to watch. It also demonstrates how serious leading lawmakers are to actually get something done. And quickly.

Schwarzenegger Threatens AB 8 Veto: Update

An article in this morning’s Los Angeles Times (Schwarzenegger criticizes Democrats’ health plan) makes explicit what was implicit in the Sacramento Bee story I posted about last night: he won’t sign a bill without an individual mandate. The Times quotes the Governor as saying any health care legislation he signs “needs to have mandatory healthcare coverage and it needs to have shared responsibility.” This has been a consistent theme of the Administration when it talks about health care reform: shared sacrifice from individuals, businesses, doctors, hospitals, and insurers.

In the Times article, Governor Schwarzenegger also reiterated his opposition to a single payer approach to heatlh care reform. This means the Governor is on record as being willing to veto both reform bills the Legislature is likely to send him. His minimum criteria for a bill is pretty clear now:

  1. No 100% government run health care system
  2. No putting the burden of financing the system on business alone
  3. Everyone must be required to obtain coverage

Otherwise, the Governor has announced himself open to compromise. As he says in the Times, “We have a good shot of getting it done, not exactly my way but a compromise way.” So the ball is now in the Legislature’s court. It will be interesting to see if they try to accomodate the Governor prior to their September 14th or stick to their guns and pass bills they know he will veto. My guess? The Legislature passes both AB 8 and Senate Bill 840, Senator Sheila Kuehl’s single payer legislation. The Governor vetoes both and, in his veto message calls for a special session devoted exclusively to health care reform. This allows all the players to demonstrate their commitment to the concerns of their key constituencies, while also sending a message that it’s time to get serious and work out some compromises.

The key to whether a special session produces the right reforms will be how open the Governor and the Legislative Leadership will be to incorporating the ideas and addressing the concerns of outside parties. But that’s a topic for another post.

Schwarzenegger Threatens AB 8 Veto: Negotiations Must Be Getting Serious

According to the Sacramento Bee, Governor Arnold Schwarzenegger is promising to veto Assembly Bill 8 (Nunez) if it “relies solely on charging employers to provide coverage (“Governor threatns veto of Democratic health plan”).  In a meeting with the Bee’s editorial board, the Governor is quoted in an article posted on www.sacbee.com today as saying,  “…. if anyone over there [the Legislature] thinks that I will sign a bill that comes down to me that has only employer mandate, they shouldn’t …. I won’t sign it.”

The Governor may also be saying he will veto AB 8 if it doesn’t require all residents to obtain health care coverage (sometimes referred to as an “individual mandate”), a provision AB 8 lacks.  This is at least the implication in his statement that if AB 8 is passed as is, “… we will never have a chance again to go back and cover the rest.”

This development is great news for those of us who believes AB 8 is too flawed to be rushed through before the Legislature adjourns for the year on September 14th. Amending the bill before adjournment to meet the Governor’s cocnerns will be extremely challenging. It could be done, bit it would be a Herculean task. This means there will be more time to try to fix the bill’s many problems.

What else does the Governor’s veto threat mean?

It mostly likely signifies that the Governor and Legislative Leaders are now in deeply engaged in negotiations over health care reform and the gloves are now off.  By publicly locking himself into his demand for broadly spreading the burden of reform and an individual mandate, Governor Schwarzenegger puts heavy pressure on Speaker Nunez and Senator Perata to concede on these points. (As noted in an earlier post , the Governor has used the press to strengthen his negotiations before, most impressively during the Workers Compensation reform effort).

Or it could mean the Governor is providing the Legislative Leaders political cover so they can be more flexible in negotiations. Many of those supporting AB 8 are adamantly opposed to proposals such as an individual mandate.  Now Speaker Nunez and Senator Perata can go to their backers, honestly claim they fought the good fight, but ruefully admit it’s time to accept the mandate or give up on any reform at all.

Or the Governor could be laying the groundwork for calling a Special Session of the Legislature, something he told John Myers, KQED Sacramento Bureau Chief, was a real possibility. In this scenario, the Legislative Leadership pushes through AB 8 (which makes their supporters happy) and probably SB 840, too. The Governor gets to veto one as too extreme and the other as inadequate, then call the Legislature back to Sacramento to fix this incredible problem (which reinforces his image as an problem-solving leader). This win-win situation  might also provide the time necessary to fix the flaws in AB 8 and in the Governor’s proposal. Assuming, of course, they’ll listen to and accept outside input.

Or his statements could be seen as the start of the 2008 ballot battles. In the article, the Governor mentions his willingness to go the initiative route to resolve the issue (another echo of his Workers Compensation reform tactics). Senator Sheila Khuel has threatened to do the same with her single payer proposal. And the Chamber of Commerce is rumored to be developing it’s own ballot proposal on health care reform.

So what should we make of all this?

The Governor’s threatened veto is an important event and a hopeful development. It may provide the opening needed to help Sacramento enact meaningful, effective and responsible health care reform. It needs to be viewed, however, as one movement in a very long and complicated dance. Now is not the time to declare victory and go home.

AB 8 and Unintended Consequences: Increasing Small Group Premiums

On Tuesday I participated in a conference call with over 550 agents. After describing Assembly Bill 8 (Nunez)) and the California Association of Health Underwriter’s response to it, we took questions. One question in particular reminded me how some of the less discussed elements of the bill can be just as dangerous as those getting all the attention.

The changes to the individual market AB 8 imposes has received a lot of attention — as they should since the bill will increase rates and reduce consumer choice. The 15 percent cap on administrative expenses has gotten a lot of attention, as has the underfunded purchasing pool the bill creates.

But few folks are talking about a seemingly modest change made by AB 8 to California’s small group market (the rules governing the marketing of small group coverage in the state is sometimes referred to as “AB 1672” after the bill which created them back in 1992).

AB 8 seeks to extend the AB 1672 protections enjoyed by groups with 50 or fewer workers to companies with up to 250 workers. Personally I support this reform. Unfortunately, AB 8 doesn’t stop there. It then calls for the elimination of “Risk Adjustment Factors” on January 1, 2010.

What are Risk Adjustment Factors (RAFs)? AB 1672 requires carriers marketing small group coverage to accept virtually all legitimate groups applying for coverage. The authors of AB 1672 knew this could lead to higher prices for some groups, so they gave carriers the ability to modify their standard rates. Today this rate modification allows insurers to lower their standard rates for low risk groups by 10 percent and to increase them for high risk groups by 10 percent. Subject to the other rating rules created by AB 1672, the premiums charged small groups all fall within this rating band.

The ability to make relatively small adjustments to rates provides just enough flexibility to help lower premiums for all small groups. If AB 8 takes the ability to apply an RAF away, however, tens of thousands of groups will see their rates increase. Granted, tens of thousands of other companies may see their premiums decrease, but over the long run rates will be higher than they would have been if the RAFs continued.

So the interesting question is, why make the change? In the 14 years since AB 1672’s rules went into effect I’ve never heard one complaint about the risk adjustments. Is this then a solution in search of a problem?

Maybe, but it’s just as likely to be a way to help out the purchasing pool created by AB 8 (the California Cooperative Helath Insurance Purchasing Program or “Cal-CHIPP”). Historically, purchasing pools don’t fare well against competing health plans, neither gaining substantial membership nor reducing rates. (The California Health Care Foundation has an insightful study on the challenges faced by state-sponsored pools).  So states have a tendency to tilt the playing field to help them out. One way is to require certain populations to enroll in the pool.  After all, if a pool can’t win the business of consumers, compelling them to participate works almost as well. This is the approach Govenor Arnold Schwarzenegger takes in his health care reform plan.

Another way to help purchasing pools compete is to hamstring the competition. This is the path AB 8 seems be taking. State-run purchasing pools have both administrative and political problems in applying an RAF. As a result they tend to be more attractive to high-risk groups (which might face a surcharge in the open market) and less attractive to low-risk groups (which could receive a discount of up to 10 percent outside the pool). The result: the pool’s membership incurs higher than average claims, the pool raises rates to meet the higher cost, and it becomes even less competitive against the private marktplace. This is one factor in the demise of the state-run purchasing pool created by AB 1672.

There are two ways to deal with this challenge: 1) come up with creative ways for the purchasing pool to apply RAFs; or 2) do away with RAFs altogether. The proponents of AB 8 have apparently chosen the latter course of action —  stacking the deck in the favor of Cal-CHIPP to the detriment of tens of thousands of small employers.

The reality is, when the umpire steps up to the plate he’s rarely called out on strikes. That’s what happens when the state dives into the comercial health insurance marketplace. In ways big and small, the government tilts the playing field in its own favor. It’s human nature. Bad public policy, but typical human nature.

MRMIB: Economic Superpower?

The Managed Risk Medical Insurance Board (MRMIB) is a very important state agency. It doesn’t get the press others receive, like the Public Utilities Commission. Yet it deals with critical public policy issues and provides very beneficial services to many Californians.

Created in 1990, MRMIB’s initial mission was to advise California lawmakers on strategies for reducing the number of uninsured persons in the state. Its volunteer board members oversee several worthwhile programs such as Access for Infant and Mothers, Healthy Families and the Major Risk Medical Insurance Plan for otherwise uninsurable individuals. (The MRMIB web site has more information on the Board and its programs).

But this influence on the state’s well being is nothing compared to what MRMIB would exert if Assembly Bill 8 (Nunez) becomes law. AB 8 gives MRMIB amazing new powers even Peter Parker would envy. Here’s how:

  • Under AB 8 MRMIB would manage a new program, the California Cooperative Health Insurance Purchasing Program (Cal-CHIPP).
  • AB 8 requires employers to spend at least 7.5 percent of their Social Security wages on health benefits for full-time and part-time employees. (Social Security wages caps the payroll calculation at $97,500 for each employee in 2007). Instead of obtaining coverage in the open market, employers can pay the state a fee equal to 7.5 percent of their Social Security wages. Their workers would then be required to enroll for health coverage in Cal-CHIPP.
  • AB 8 empowers MRMIB to increase this 7.5 percent fee (some call it a tax, but that’s not important for the purposes of this post) if it determines there is a need to do so and by however much it deems necessary. This may seem like a startling abdication of authority by the Legislature, but it’s fairly common for state agencies to have the authority the fees for programs they manage.

What’s different about this situation is the magnitude of the dollars involved. The 7.5 percent levy is expected to raise over $7.4 billion annually. Significantly, as noted in earlier posts , the need for an increase to the fee is likely to arise almost immediately upon the launch of Cal-CHIPP. So MRMIB is likely to be flexing its new economic superpowers very quickly.

And superpowrs they are. Because when MRMIB adjusts the fee for employers participating in Cal-CHIPP it automatically increases the percentage of payroll non-participating firms need to spend on health-related benefits.

Think about that. Let’s say the 7.5 percent fee was sufficient to support Cal-CHIPP (it’s not, but let’s pretend). MRMIB, however, decides to increase benefits or make other changes which require additional revenues. It can then unilaterally raise the fee to be paid the pool and that will increase the percentage of payroll companies outside the pool have to spend on health care benefits.

Never mind that those companies might prefer to spend this money on increased wages, research and development, capital investment, or increasing profits. If MRMIB says more needs to be spent on health care, other purposes have to take a back seat. Unions don’t have this power. The Legislature isn’t asking for this power. But under AB 8 the volunteer members of the Managed Risk Medical Insurance Board would have this power.

Does AB 8 require MRMIB to take into account the effect its fee increase will have on the state’s economy? Or how it will impact state revenues? Or whether the increase will discourage job creation? Or whether it will drive businesses from the state? Does it need to consult with the Department of Finance? Does it need to consult with anyone?

No. The only factor MRMIB needs to consider is the amount of revenue it needs to support Cal-CHIPP.

If I’m missing something here, or misread the bill, I hope someone will correct me. Because the way it looks to me, AB 8 is making MRMIB more than just a strategist for decreasing the number of uninsured Californians. It makes the agency a mini-Federal Reserve Board of Governors. Hmm, do you think Alan Greespan would volunteer to serve?

Note: AB 8 was amended on August 20th. It appears MRMIB can only make a change to the fee/spending percentage only once a year, not as often as it wants to as I previously posted. I’ve edited this post to reflect this.

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.