A Special Session AND An Initiative. Oh Joy!

I’ve been predicting that Governor Arnold Schwarzenegger would call a special session to push through a health care reform package for quite some time now. As the Legislature faces adjournment in less than a week, it looks like it’s now become all but a certainty. But it seems the special session is only a prelude. According to an article by Mike Zapler in the San Jose Mercury, the Governor will use the a special session to pass a framework for reform, but make much of it contingent on funding to be enacted by an initiative.  The Mercury reports an aide to the Governor predicting that “Schwarzenegger would assemble the ‘strongest, most robust health care coalition ever put together’ to push for the initiative.”

The aide is probably right. The Governor will be able to muster support among hospitals, insurers, consumer groups, and unions to create a unique and potent coalition. There’d still be opposition, including from some from hospitals, insurers, consumer groups and unions. But the mere fact that these stakeholders would be split on the issue is a huge win for the Governor.

How the split within these interest groups works itself out will depend in large part on how well the framework is designed and what funding mechanisms are included in the initiative. For example, the Democratic majority’s legislation, Assembly Bill 8 (Nunez) gives unprecedented power to the Managed Risk Medical Insurance Board to raise fees on every business in California without considering the impact of the fees on the state’s resources or economy.  If the Governor endorses this approach the framwork will be perceived as hopelessly flawed by a substantial portion of the business community which would otherwise have supported the Governor’s ballot measure.

The nature of the taxes and fees the Governor proposes will also impact the outcome. Broader taxes will be required to raise the billions of dollars required to achieve anything close to universal coverage. Some in the business community support a one-percent increase in the sales tax to raise the necessary funding. Others will argue this is a particularly regressive form of taxation which punishes low income families — albeit this population will no doubt benefit the most from the overall package.

In looking for more narrowly-targeted  taxes, the Adminstration may want to look at the list of potential financing mechanisms proposed by the California Association of Health Underwriters in its Healthy Solutions health care reform plan. CAHU recommends taxing activity which directly impacts health care costs. This includes common targets like smoking and alchohol, but CAHU goes further. It recommends imposing fees on handguns and ammuniation and on unhealthy foods. These would no doubt be controversial, but there’s no denying they target significant drivers of increasing medical expenses. (Full disclosure: I helped draft Healthy Solutions and pushed to have these targeted taxes included).

 What all this means is, the coming week will be devoted mostly to political theater. Act One will be symbolic passage of Democratic reform proposals followed quickly by vetos. Act Two will be the special session. If robust public debate flourishes at this point the result could be a framework for reform which is reasonable and effective. Act Three would be the funding initiative, most likely to be part of the November 2008 ballot.  What’s interesting is, while the script is finally becoming clear, no one is really certain yet if the play is a comedy or a tragedy.

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.

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.