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.

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.

AB 8 and Unintended Consequences: Prelude

AB 8 is chock is comprehensive reform poorly crafted. Most of it is well intentioned, but it seems cobbled together. Perhaps it’s because the bill tries too hard to strike a balance between competing political agendas. The result is something unhelpful to consumers, dangerous to the state’s economy and toxic to folks like insurance agents.

This outcome is obviously not the author’s goals. I think they’re trying to do the right thing, but they’re torn between trying to appease political constituencies and interested parties, especially unions and Governor Schwarzenegger. Throw in the hodgepodge of reform proposals that have floated around Sacramento for awhile and you’ve got a rather unweildy bill. Worse, you have a bill with many (hopefully) unintended consequences — all of them harmful.

Unintended consequences is like gravity: it is ever present and unavoidable. The law of unintended consequences is fairly straitforward. Every piece of legislation enacted into law impacts society in unanticipated ways. Sometimes the surprises are helpful, but the ones that get the attention are those that do harm.

AB 8 is no exception. Because it’s addressing a complicated issue and is being rushed through the legislative process, it is likely to serve as a magnet for unintended consequences. Here’s five of the more likely ones:

  1. a state-run purchasing pool which will tend to attract high risk individuals and repel those with lower risks. The result: the need for ever higher payroll taxes — or fees if you prefer — and a host of unhappy voters.
  2. a cap on administrative costs which will force premiums higher, not lower, making coverage less affordable and increasing the number of uninsured.
  3. a tax/fee on payroll which is likely to increase rapidly and consistently which will make attracting, retaining and growing businesses in the state harder, weakening the economy and driving high paying jobs to other states.
  4. a system which diminishes consumers’ access to independent advocates and counselors, reducing consumers’ ability to get full value for their health insurance premiums and potentially forcing thousands of insurance agents to find other ways to meet the rent.
  5. fewer carriers participating in the California health insurance marketplace, depriving consumers of choice and  innovation in their coverage.

I’ll be discussing each of these in more detail in upcoming posts. (If you have any to add to the list, please write a comment. It’ll be interesting to see how big a list we can get.) Again, Speaker Fabien Nunez and President Pro Tem Don Perata are pushing AB 8 for the right reasons. They want to fix real problems (and, perhaps a few less-than-real ones) and improve the quality of life for Californians. Unfortunately, they are trying to enact their bill before the Legislature adjourns next month. Unfortunate, because this bill is too important, and it’s consequences too dire, not to be thoroughly vetted and refined.

Where Have You Gone Joe Dimaggio? I mean, Burt Margolin?

The small group health insurance marketplace was a nasty environment back in the late-1980’s and early-1990’s. Groups were declined coverage because of the nature of their business. Rate increases of 100% or more were not uncommon and were applied selectively on businesses with employees who dared to actually use their coverage. And health plans came into — and out of — the state more frequently than a caffeine addict into a Starbuck’s.

Then Speaker Willie Brown decided to do something about the situation. And in 1991 he introduced AB 350, a “pay or play” bill with a lot in common with several of the proposals being considered by the Legislature today. However, there was no realistic way such a proposal was going to become law. So Speaker Brown and Senate President Pro Tem David Roberti created a conference committee around AB 1672, which until then, I believe, dealt with the medical component of automobile policies.

Speaker Brown and Senator Roberti appointed Burt Margolin to chair the conference committee. Mr. Margolin was highly regarded, smart and very much a liberal (he represented parts of West Los Angeles and Hollywood). But most importantly, he was serious about finding workable solutions to difficult problems. Solutions which were fair, would work and were responsible. He made sure all sides were given an opportunity to speak their peace. More importantly, the committee and its staff listened. They didn’t always agree, but by focusing on policy instead of politics, by being open to all points of view, they fashioned a balanced, effective piece of legislation.

AB 1672 became law in July 1993. While not perfect, it went a long way toward fixing the system without destroying it.  No small business could be denied coverage, rates were required to fit within specified bands and rate increases, again within rate bands, were applied equally to all groups in a particular health plan. In short, AB 1672 made the small group marketplace much more fair while creating only a few, manageable unintended consequences.

Comparing the process which led to AB 1672 with what’s happening with AB 8 and with the Governor’s proposal is, at best,  disconcerting.  The dialogue with stake holders seems perfuntory and almost passive-aggressive. There’s conversations, but it doesn’t seem like anyone’s listening. By meeting with interested parties separately, the drafters are denied the ability to observe and learn from the give-and-take which occurred during the AB 1672 deliberations. And instead of meaningful public policy being the primary focus, it appears that politics and election time tables are front-and-center now.

It seems to me that what today’s process needs is a few more Burt Margolins.

P.S. Incidentally, Burt Margolin is doing fine. He’s president of the Margolin Group, a health policy and lobbying firm which includes among its clients the County of Los Angeles.

AB 8: Let’s Slow Down and Get it Right

With the Legislature unable to agree to a budget, the Legislative Leadership’s health care reform plan, AB 8, hasn’t been the center of attention — yet.  However, there are plenty of incentives out there to pass something — anything — quickly. The Unions are anxious for reform, rank-and-file legislators want to show some major accomplishments before asking voters to change term limit rules, and then there’s those pesky elections in 2008.

The danger is that in their haste to pass something, the Legislature will cobble together a cluster of interesting, yet ill-conceived, reforms which, when taken together, result in a health care system worse than the one we’ve got. And there’s no one betting the Governor will hold them accountable. He has his own reasons for wanting to pass “comprehensive health care reform.” So he may sign a bad bill just to sign a bill.

 So for those who care about achieving responsible, comprehensive reform, the thing to focus on when communicating with their legislators it to let them know it’s OK to take the time to do this right. If enough rank-and-file members tell their leadership it’s OK to slow down and get things right, the Leadership might listen.

After all, the day they pass something like AB 8, the law suits start. So why not develop legislation that will have a better chance to survive the legal challenge? And why not spend some time thinking through some of the consequences of AB 8? As I’ll discuss in future posts, there’s a very good chance the legislation, if passed as is, will:

  • make health insurance less affordable; 
  • increase the number of uninsured,
  • deprive consumers of meaningful choice when it comes to selecting coverage;
  • deprive consumers of access to independent advocates and counselors (i.e., insurance agents); and
  • disrupt a very substantial portion of the state’s economy.

I’m willing to bet no one wants any of these outcomes, yet that’s the bruisin’ AB 8 is cruisin’ to. Let’s hope Legislators stop the race to disaster and try to get things right.

Is Schwarzenegger Backed into a Corner?

Governor Arnold Schwarzenegger has consistently stated his desire to enact “comprehensive” health care reform this year. With the Legislature scheduled to adjourn in mid-September, that gives him about two months to deliver — barring his calling for a special session.

His problem is, however, that while he offered a vision of comprehensive reform, there’s no legislation fulfilling his goals. Instead, Speaker Fabian Nunez and President Pro Temp Don Perata have conjured up AB 8. While failing to deliver comprehensive health care reform it is a sure recipe for driving up health insurance costs, permitting escalating health care costs to continue to, well, escalate, and throwing a devastating monkey wrench into the current health care coverage system without offering workable alternatives. In other words it’s a pastiche of reforms which, taken separately are dangerous but taken together are truly disastrous.

AB 8 is not the kind of bill Governor Schwarzenegger was describing when he unveiled his own health care plan. Signing it would be at best embarrassment and at worst would tarnish his image for a long time to come.

Yet, there are rumblings that the Governor may have no choice but to sign AB 8 if it’s passed by the Legislature — passage which would come solely on Democratic votes. The reason he might see no alternative but to sign AB 8 is because of the high expectations his administration has set. Having put California in the forefront of Workers Compensation reform, fighting green house gases and the like, Governor Schwarzenegger has vowed to do the same with health care reform. Some of his staff are rumored to be admitting that, as a result, he’ll sign any bill the Legislature sends him.

 And they know it. Senator Perata was recently quoted in the Wall Street Journal in this regard, saying, “If something lands on his desk, how do you explain not signing it?”

In an earlier post I suggested Senator Perata’s and Speaker Nunez’s bill was designed as a Frankenstein’s monster to give themselves plenty of negotiating room. Now I’m not so sure. Since the Governor isn’t expected to deliver a single Republican vote in the Legislature and is perceived as needing to sign anything that comes his way, the Democrats have little incentive to move away from a bill which appeals to many of their core constituents.

In the past, Governor Schwarzenegger has shown himself to be an adroit politicians, often outmaneuvering experienced legislators. On health care reform, however, the Governor may have backed himself into a corner from which even he will have difficulty escaping. And if that’s the case, he will not only blemish his own legacy, but he will have done serious harm to the state.

Unified Legislative Health Care Reform Plan

Legislative leaders have combined their bills to create a unified alternative to Governor Arnold Schwarzenegger’s health care reform bill.  Assembly Speaker Fabian Nunez and Senate President pro Tem Don Perata announced on Thursday that the Senate bill (SB 48) would be rolled into an amended version of the Assembly bill (AB 8).

That Democrats in the legislature felt a need to present a unified approach is not surprising. They both have incentives to resolve the health care reform debate this session. These pressures include a desire to demonstrate accomplishments on “big issues” prior to expected ballot initiatives on reapportionment and term limits next year.

It’s also not surprising Speaker Nunez and Senator Perata resolved differences between their original health care reform bills by adopting the most expensive and intrusive option. (AB 8 and SB 48 Key Compromises).  This gives them plenty of negotiating room as they prepare for the inevitable talks to come with Governor Schwarzenegger. And adopting provisions advocated by their liberal and union constituencies has positive political benefits for them as well.

So now the pressure is on Governor Schwarzenegger to stake out his position by publishing details of his plan. The ideal format would be in the form of legislation, although that’s not really necessary for the Governor to have influence. Once the negotiations begin the legislative language will change quickly. The key is to have starting points with roughly equivalent levels of details.

In a future post I’ll discuss the key provisions of the new AB 8. For now, the most interesting dynamic to watch is the pre-negotiations positioning. It’s going to be a long summer.