What if California Had Passed Health Care Reform?

California lawmakers recently passed a budget that, at least on paper, may, perhaps close the $42 billion shortfall the state faces in this and the next fiscal year. The budget was due before July 2008. So it was a bit less than eight months overdue. One of the methods required to close the gap was to reduce funding to some of the state’s neediest citizens.

Lawmakers inability to find a budget compromise in a timely fashion and in such a cruel fashion speaks volumes about a dangerous and dysfunctional political system. It brings into question whether California lawmakers can be trusted with something as critical to its citizens as the nature of its health care system, which would have happened had California enacted Assembly Bill X1-1 last year. Given the state’s current economic and political problems, what would have happened had health care reform passed in early 2009?

ABX1-1, you may recall, passed the Assembly, was supported by the Governor, but was defeated in the Senate early last year. A major reason for its demise was a Legislative Analyst’s Office Report on ABX1-1 that raised serious concerns about the state’s ability to implement the reform package within the $14 billion price tag touted by its supporters, primarily Governor Arnold Schwarzenegger. then Assembly Speaker Fabian Nunez and then President Pro Tem Don Perata. Using what it considered to be optimistic assumptions of the bill’s sponsors, the LAO concluded the plan would be running a deficit of $300 million. Using more conservative (and what the LAO called, more realistic assumptions), it estimated the health care plan would be running a deficit of $1.5 billion in it’s fifth year and have run up a cumulative deficit of $4 billion during it’s first half-decade of operation.

Supporters of the health care reform bill protested that the LAO report underestimated savings from fixing the state’s broken health care system. They relied on a study conducted by professor Jonathan Gruber of the Massachusetts Institute of Technology that demonstrated the reform package was a net financial plus for the state.

Yet the Gruber report made some questionable assumptions. The LAO report noted, for example, that the Gruber model “is not designed to estimate the effects of an economic slowdown on population responses” to the various elements of the reform.”  Translation:  if the economy tanks the Gruber analysis doesn’t work. That’s because, according to the LAO report, ABX1-1’s proponents assumed then current growth rates would continue over time. “For example, the cost of expanding Medi-Cal to adults was grown at the projected growth rate for current Medi-Cal expenses, while the wage-based employer fee was projected to grow at the projected growth rate for wages.”

But tank the economy did (and has). Time and again, the LAO report, delivered to the Legislature on January 22, 2008, warned against the danger of mis-predicting the future. “California is subject periodically to slowdowns in economic activity. During these times, unemployment often increases. This reduces the number of Californians with access to employer-provided healthcare. A recession similar to the one California experienced in the early 1990s could result in hundreds of thousands of Californians losing access to employer-provided health care, thereby increasing the costs for the [health care reform] plan.”

Statistics published by the California Economic Development Department puts this into context. In January 2008, when the LAO report was published, the state’s unemployment rate had been below six percent for three years, dipping below five percent in 2006. This compares to the state’s unemployment rate during the 1990s recession of more than nine percent during most of 1992 and 1993, peaking during several months at 9.9 percent. California’s current unemployment, at least during January 2009, was 10.1 percent. The worst case scenario the LAO warned against has arrived.

I don’t bring all this up to deny the need for substantial health care reform. For the state and national economies to recover sooner-than-later, substantial changes to the health care system are necessary. In times of economic dislocation like we are experiencing now, the human need for change in health care is especially acute and poignant. Unemployment is about more than data and statistics, it’s about neighbors and families in pain.

Nor am I raising this issue to gloat over the failure of ABX1-1. A number of the reforms contained in that legislation would have significantly improved California’s health care system.

These statistics, however, point to several truths:

  1. Predicting the future is hard, if not impossible. Any reform package has to make assumptions about the economic environment years from now. And most likely, those estimates will be wrong.
  2. Meaningful health care reform must come from the federal government — state’s simply aren’t equipped to deal with it. This isn’t to say there aren’t good ideas emerging from the states. But they lack the tools needed to deal with unexpected problems. As California has ably demonstrated, states do a poor job of facing economic challenges. They can’t deficit spend. The federal government has a tough time influencing the economy; states simply can’t.

Think about the budget drama of the past eight months. Now think about a health care structure upon which the state’s residents depends being subject to this horrendous display of chaos. It’s more than scary. It’s a nightmare that eventually California — or any state — will likely face if it tries to tackle the complex issues of comprehensive health care reform aimed at achieving anything close to universal coverage. Until states can print money, they will be incapable of shepherding their health systems through economic times like these.

America’s economy will recover. It’s only a matter of time and hard work. The nation’s health care system can be reformed into a truly American-style system that achieves universal — or nearly universal — coverage. It’s also a matter of time, hard work as well as of smart politics able to find common ground among competing factions. It won’t be easy, but it can be done.

No one during the debate over ABX1-1 could have anticipated what’s happened to the economy. The LAO warned against the potential, but even they did not declare this situation likely. Yet here we are. If ABX1-1 had passed the California fiscal crisis would be even worse than it is. And the state’s lawmakers would have been unable to face the challenge.

LAO Report on ABX1-1 Identifies Risks

California’s non-partisan Legislative Analyst’s Office (LAO) has weighed in on the fiscal impact of Assembly Bill X1-1, the compromise health care reform package negotiated by Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez. The LAO report is expected to be influential in the State Senate which, in addition to considering ABX1-1, is facing tough decisions to address the state’s $14+ billion deficit. And it will no doubt be a hot topic of conversation during the Senate Health Committee’s upcoming hearing on the legislation.

The Legislative Analyst’s Office Report on ABX1-1 is, appropriately, couched in academic, unemotional prose. Their assignment was to assess the fiscal impact of the bill, not the soundness of its policies. There are nuggets in the report that proponents will like, but overall the report is a devastating blow to ABX1-1’s chances of passage. The LAO estimates the legislation would not only have a negative financial impact on the state’s 2008-09 budget, but is likely to require at least $4 billion more than the bill’s proponents estimate over the first five years of its operation.

Because of time constraints, and the complexity of the issue, the LAO could not thoroughly review every financial impact of ABX1-1. So it focused on the financial soundness of the state-run purchasing pool the bill establishes because it is one of the largest fiscal components of the legislation. It found that even given proponent’s overly optimistic projections, the pool would be running at a deficit. 

ABX1-1 proponents claim the cost of covering individuals in the government-run purchasing pool will be $250 per person per month (pmpm). The LAO report notes this figure is taken from the low end of various cost scenarios developed by a private consultant hired by the supporters. The consultant considered several benefit packages and estimated their cost to the pool. “The premium scenarios ranged from $246 pmpm to $330 pmpm. Thus, the $250 pmpm assumed in the proponents’ overall cost estimate is very near the bottom end of the range of possible benefit packages identified by their own consultant.”

The LAO noted that a 2007 study by the California Employer Health Benefits Survey found employers pay monthly premiums of about $374 for each employee. It questioned the state’s ability to achieve costs its $250 premium target without “setting the minimum benefit level substantially below the average employer-provided benefit level.”

In assessing the legislation’s impact on the state’s finances, the LAO used two cost estimates: the $250 pmpm optimistically suggested by the bill’s proponents and another at $300 pmpm. This higher figure still assumes the state is able to negotiate a discount approximately 20 percent below what employers pay, so it is difficult to call even the LAO premium assumption pessimistic.

Using the $250 estimate, the LAO concluded “there are sufficient revenues to support the program in the first year of operation (2010-11). However, by the fifth year of the program (2014-15), annual costs exceed revenues by $300 million.” Because tobacco tax and employer fee revenues are collected prior to the start of the program covering anyone, the LAO estimates the program will still have a “positive cumulative fund balance” after five years.

When the $300 pmpm cost is used, however, the LAO predicts the state-run pool’s costs will exceed revenues by $122 in the first year of opeation “and this shortfall increases to $1.5 billion by the fifth year of the program.” The LAO estimates the cumulative fund balance would climb to almost $4 billion by the end of this period, even with the early collection of the tobacco tax and employer fee revenue.

But wait, there’s more.

The LAO identified “a number of other fiscal risks and cost pressures. These risks total another $1.5 billion annually. Several of these items, however, are substantially more speculative than the impact of the average monthly cost per enrollee to the pool’s operation. For example, if proponents of ABX1-1 have significantly underestimated the number of uninsured in the state (by, say, 500,000 residents), there could be hundreds of millions of dollars additional costs to the program. Whether they have underestimated the number of uninsured is not known, however.

Others risks are less speculative. As the California Association of Health Underwriters and the National Association of Insurance and Financial Advisors-California cautioned in a letter to Senate President Pro Tem Don Perata recently, medical costs are likely to grow far faster than payrolls and wages. Because ABX1-1 relies on these slower-growing sources for a significant portion of its revenues, over time a shortfall is likely.

The LAO concurs. It estimates that “a 0.5 percent per year increase in medical inflation above that assumed by the proponents would result in potential annual costs by the fifth year of implementation of $300 million, or a cumulative net cost to the state by 201-15 of approximately $1 billion.” It’s important to recognize that the LAO is warning of an additional increase in medical inflation — the cost of health care, not the cost of insurance.  

As if the long term financial impact wasn’t enough, the LAO also expressed concern that ABX101 would have a negative impact on the proposed 2008-09 budget to support implementation activities by state agencies.

ABX1-1’s advocates are already mounting a defense against the report. The Associated Press reports Daniel Zingale, a key health care advisor to Governor Schwarzenegger, as defending the $250 pmpm estimate as sound and that having $300 million in uncovered costs in the fifth year was small compared to the overall size of the program.

Steve Maviglio, a spokesman for Speaker Nunez, told the AP that there would be cost risks associated with any health care reform plan. “‘Our job now is to move forward with bringing California closer to the goal of universal coverage and to work hard to avoid, contain and manage any realistic fiscal risks associated with the plan,’ he said in a statement. ‘The best tool we have for doing that continues to be the plan’s explicit provision that if funds aren’t available the plan doesn’t take effect.'”

The LAO also recognizes that any health care reform legislation as far-reaching and complex as ABX1-1 is subject to fiscal risk. It also can be argued that the LAO’s assumption, the one predicting a nearly $4 billion cumulative shortfall over five years, is optimistic. And then there’s the additional risks and their potential costs to the program.

What California’s State Senators will need to consider is whether a $4 billion gamble in the face of the state’s current $14.5 billion budget crisis — not counting the minimum $1.2 million required to fund health care obligations to state worker retirees — is a bet they’re willing to make.

Reasonable people can — and will — argue that the potential benefits of near universal coverage is worth the risk. But unless something comes along to undermine the credibility of the LAO report, the magnitude of the bet cannot, and should not, be ignored.