California is once again mulling whether to effectively deprivatize its health insurance market and put in place a Canadian-style publicly funded insurance program. SB 810 would create the California Healthcare Agency that like Canada’s Medicare program would pay all medical bills out of tax levies. The idea is to create a market monopsony that would shift bargaining power from providers of medical coverage to purchasers — in this case making the state the 800-pound gorilla purchaser.
The legislation is a reintroduction of a bill of the same number and author that died in final days of the previous legislative session last year. Even had the bill had passed out of the Legislature, it faced near certain death at the hands of then-Governor Arnold Schwarzenegger, a Republican who vetoed previous single payer bills that reached his desk. Schwarzenegger instead preferred reform that aggregates purchasing power — particularly among individuals and small employers that currently have little to none — through purchasing exchanges. That approach was pioneered in Massachusetts and ultimately adopted as the national standard in the Patient Protection and Affordable Care Act (PPACA). The PPACA establishes the American Health Benefit Exchanges in the states; the exchanges must be ready to begin operations by January 1, 2014.
SB 810 would require California’s health and human services secretary to seek a waiver from the exchange requirement as well as the PPACA’s standards for the inclusion of “qualified health plans” in the exchanges under a PPACA provision allowing for waivers for innovative state health plans that offer coverage beginning January 1, 2017. So even if SB 810 becomes law, California would have three years of experience with the PPACA’s benefit exchange demand aggregation approach. While the exchanges in theory should exert enhanced market forces to hold health insurance and managed care plan premiums in check, it remains unclear as to whether they will meaningfully accomplish that goal. As payers continue to respond to rapidly rising medical treatment costs for their insureds and members, the state exchanges could end up being nothing more than large pass through mechanisms for those higher costs. That situation would bolster single payer advocates, who apparently hope to have their preferred alternative primed and ready to go in 2017. Or possibly at the same time the benefit exchanges begin operations. President Obama said on Monday, Feb. 28 he supports legislation that would amend the PPACA to allow states to start their own programs sooner then 2017 provided their plans provide the same extent and quality of coverage as under the PPACA and don’t add to the federal deficit.
Will SB 810 unlike its predecessors actually be signed into law? During Schwarzenegger’s administration, the chances were slim to none. Under recently installed veteran democratic Gov. Jerry Brown, it’s more likely but nevertheless still unclear. Democrats have a solid majority in the state Legislature and with the exception of 2010 have been willing to give their blessings to single payer. Whether Brown would be inclined to sign SB 810 into law will probably be largely influenced by the extent of voter outrage at having to pay more for less coverage as insurers raise premiums and shift more risk to their customers. With California’s economy still in bad shape, it won’t take much to spark that anger. Brown might also be convinced to sign the measure if it were presented to him as a backup plan in case the benefit exchange doesn’t hold down premium increases.
However, even if Brown were to support SB 810 in concept, there’s a political complication. In order to keep his campaign pledge to allow voters to ratify tax levies, an appropriation measure to fund it (drafted as a companion measure to previous single payer proposals) would have to go before the electorate. Minority Republicans in the Legislature wouldn’t likely provide the necessary supermajority vote to place a tax measure on the ballot. The same issue currently threatens to stymie Brown’s budget proposal calling for extending temporary tax increases to balance the state’s deficit-plagued budget.
The enactment of comprehensive health care reform nearly one year ago aside, the U.S. health care system needs deep systemic reform that can meaningfully reduce medical costs and align risk and incentives among consumers, providers and payers. That’s the consensus among several panelists who took part in a health care forum Friday in Sacramento, California sponsored by the UC Berkeley Institute of Governmental Studies, School of Public Health and the UC Sacramento Center.
For Diana Dooley, California’s newly installed secretary of Health and Human Services, tamping down demand for medical services is an essential component of bending what all panelists agreed is an unsustainable, unrelenting upward trajectory in medical costs. People have to take more responsibility for their health, Dooley emphasized, suggesting that the current mindset that equates more medical care with better health must be abandoned. “We have an inexhaustible appetite for health care and it’s a significant cost driver,” Dooley said. “We have to have some very frank conversations around kitchen tables and in political dialogue and ask ‘How much medicine is enough?’ A lot of these cost drivers are our choices.”
Dooley’s absolutely right. Poor lifestyle choices are within the control of individuals and are the ultimate cost driver. I would add that those lifestyle choices are strongly influenced by cultural values that place too much emphasis on sedentary work, commuting and leisure time. Those values reinforce spending too much time sitting, too little time exercising and sleeping and the interconnected lifestyle issues of excessive stress and bad eating habits.
In this environment, it’s no wonder people’s health declines and they become overweight and develop costly chronic conditions like obesity, cardiovascular disease and diabetes. From the perspective of health insurers, all of that adds up to poor risk management. But most people don’t view it that way. Health insurance is seen more as a prepaid medical plan rather than a means of paying for unexpected, high cost medical expenses. Health breaking down? Get to the doc shop or the hospital and get fixed up. The problem is as Dooley and others on the panel pointed out, when too many people adopt this way of thinking, insurers and managed care plans end up paying out too much, jeopardizing the financial solvency of these payers. Hence, premiums keep futilely chasing after costs in a vicious, unvirtuous cycle.
Panelist Paul Markovich, COO of Blue Shield of California, underscored the seriousness of those escalating premiums in the individual health insurance segment. Premiums can go up only so much before healthier people decide to drop their coverage, leaving less healthy insureds in the pool. That is placing “tremendous stress” on the pool, Markovich said. “You have all heard of the death spiral (of adverse selection). We are absolutely experiencing some of that stress right now.”
Cindy Ehnes, the director of the California Department of Managed Health Care, noted during her seven-year-long tenure managed care plans attempted to preserve their troubled individual markets through risk selection — what Ehnes termed “cherry picking and lemon dropping.” Next, Ehnes explained, payers imposed high deductibles hoping to shift more risk to consumers and drive down the utilization of medical services. Now with the individual market facing structure failure, that strategy has played out, leaving only steep premium hikes as a last, desperate measure to keep the market solvent. That’s why premiums are high and headed higher despite high deductibles. People paying high deductibles naturally expect their premiums to be substantially lower than those with low or no deductibles. When they don’t see lower premiums in proportion to their high deductibles, they understandably drop coverage figuring they’re getting poor value for their premiums. That in turn takes more premium dollars out of the pool, forcing insurers to raise premiums even more just to stay afloat.
Not surprisingly, payers bearing the bad news of fat premium increases are coming under withering criticism from the consumer groups, the media, regulators and policymakers. Ehnes noted — and I would agree — simply chastising “greedy” payers isn’t going to help. There’s far more to it than that.
The aphorism “everything happens at the margin” directly applies to the health insurance crisis. In the health insurance market, that margin is the low end of the market: individuals who buy coverage on their own and the small group segment — those employing less than 50. This is the most troubled region of the health insurance market where the risk spreading mechanism that is the core principle of insurance is the weakest.
That’s why the Patient Protection and Affordable Care Act (PPACA) includes a mandate that all individuals have some form of health coverage. This controversial requirement is the focus of Congressional misgivings over the PPACA and some federal court rulings finding the mandate unconstitutionally compels people to engage in commerce.
Modeled after reforms enacted in Massachusetts several years ago, the mandate essentially creates a government enforced pool of insureds so there are more “lives” as they called in the insurance business across which to spread risk of claims. Too few people and the pool tends to fall into a death spiral called adverse selection, leaving only the highest — the most adverse — risks remaining. Too many dollars end up going out to pay claims and too few are replaced in the form of premiums.
The PPACA also addresses the troubled individual and under 50 employee group market by establishing state health benefit exchanges. The exchanges will begin operating in 2014 and are designed to aggregate purchasing power among insurance buyers in these market segments. Compared to the large employer group market, individuals and small businesses have little or no purchasing clout that can help them bargain with insurers and health plans for lower premiums.
But even midsize and large employers are seeing their premiums rise nearly ten percent in 2011. Due to their weak purchasing power, the increases are far steeper in the small group and individual markets, rising so rapidly in the latter they now nearly equal the amount of a mortgage payment for people in their fifties and early sixties.
If premiums driven by rising medical costs keep increasing at their current rate, it calls into question the utility of the health benefit exchanges. By the time the exchanges set up shop in 2014, premiums could be so high that few employers of less than 50 people will be able to affordably provide health coverage. That would leave primarily individuals buying coverage through the exchanges. That raises the question of whether premiums will be affordable for these individuals, even with income-based subsidies. If not, that could lead many of them to conclude it’s a better deal to go bare and pay the penalty for not having coverage.