Governor’s Health Care Reform a Bill at Last

Cue the music (not sure if it should be the theme to “Jaws,” “The Twilight Zone” or “Happy Days,”). Rumor has it Governor Schwarzenegger’s health care reform plan will emerge in legislative form as early as Friday, September 21st. Several spot bills have already been introduced in the special session called to consider reform proposals. (A spot bill is one introduced initially with little, if any, substance awaiting a later date when the complete text  is “dropped into” the bill).

For months the Governor has forcefully outlined the principals he believes must be a part of any health care reform package. For the first time the public will how the Governor and his staff translate these principals into the detailed place where devils dwell.

There are unlikely to be many surprises. It will contain an individual mandate, create the California Cooperative Health Insurance Purchasing Program (“Cal-CHIPP”), a state-run purchasing pool for individuals receiving premium subsidies, require carriers to spend 85 percent of premiums on health services, promote wellness and preventive programs, and speak to containing health care costs.

It will not include any funding for the above. That will be left to an initiative the Governor and his allies will qualify for the November 2008 ballot. This means the bill could be passed on a majority vote of the Legislature. Including taxes and/or fees means it would need a two-thirds majority in each house.

A couple of tea leaves to look out for:

  1. Is there anything in the bill Republicans can get behind? Leaving out taxes and fees is a good start, but he’ll need to do more to capture any GOP support. My guess: it offers Republicans something from their reform package. Including a few of the Republican proposals would be a show of good faith to his own party. And  even if the Governor doesn’t really support those provisions, he can count on the Democrats to be the bad guys and eliminate them later.)
  2. Does it reflect the compromises the Governor has already reached with Speaker Fabian Nunez and Senator President Pro Temp Don Perata or does it take a few steps back towards the Governor’s original proposal? If it’s the former, it’s a sign a final deal is close; if the latter then there’s more than cigar smoke filling up the Governor’s tent. My guess: they’re close to a final deal and this bill will reflect their progress.
  3. Does it specifically spell out how the reforms would be structured or does it leave the nitty gritty to regulators? It will be easier to pass a bill that avoids contentious specifics for now. My guess: it will include a lot more detail than we’ve seen before, but regulators will still have plenty to do.

Seeing the Governor’s proposal in bill form is a huge step toward acheiving comprehensive health care reform. It also will invite everyone and their cousins to start a new round of sniping. However, there’s something the Governor said when he unveiled his plan back in January, “The status quo can no longer be everyone’s second choice.” He’s right. There will be plenty to argue about as the Governor ratchets up the specificity of his vision. But the goal should not be to defeat any health care reform. The goal should be to come up with the right reforms.

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.