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.
Obama administration apparently concerned over failure of individual market before 2014 reforms are in place
The Obama administration is apparently concerned over the possibility the individual health insurance market will implode before insurers must take all comers and the purchasing exchanges of the Patient Protection and Affordable Care Act kick in at the start of 2014.
In my previous post, I speculated that unsustainable annual premium increases averaging 20 percent in the individual market could push the segment to a tipping point of market failure before 2014 arrives. Health and Human Services Secretary Kathleen Sebelius evidently shares that concern based on remarks she made to the Reuters news service this week. The Reuters dispatch notes Sebelius, a former Kansas insurance commissioner who earlier this year lambasted individual health insurers for imposing steep premium increases, has adopted a more conciliatory tone toward the industry. Perhaps as a former insurance regulator, she now sees the business model of individual insurers — and possibly that of small group writers as well — in a potential life or death struggle leading up to 2014.
Sebelius suggested continued rate increases — which insurers say reflect the pass through effect of rising medical costs and utilization — could trap the individual market in a downward spiral of premium increases followed by policyholder cancellations and nonrenewals and more premium hikes. “If they lose more and more market share as we move toward 2014, it’s not really good for them,” Sebelius said.
As rates go up, individuals who believe they are relatively healthy will be more and more inclined to drop their coverage, especially when monthly premiums begin rival the amount of mortgage payments. This unvirtuous cycle — which I’ve dubbed “adverse deselection” — would leave as policyholders the most medically risky individuals who are likelier to use more and higher cost medical services, prompting more rate increases. Earlier this year, Anthem Blue Cross told California lawmakers this dynamic partly justified the insurer’s request for individual premium increases averaging around 25 percent for 2010, an amount that was subsequently lowered to 14 percent in a revised filing with the California Department of Insurance last month.
When President Obama took office last year and declared health insurance reform as a top domestic priority of his administration, he affirmed it would preserve employer-based coverage. He rejected calls for a Canadian-style single payer system, branding it too radical and disruptive.
Nevertheless, the reform legislation that could come up for a final vote this month in Congress implicitly acknowledges an erosion of employer paid health care coverage in the United States. It does with a focus on buttressing the individual market as an alternative for those who don’t get coverage through their jobs. While this market segment currently covers only about five percent of the working age population, that number is likely to grow as more small employers stop providing health coverage to their employees. The legislation lacks an “employer mandate” requiring small employers — defined as those with 50 and fewer employees — to slow that trend.
Instead, the reform bill appears designed to prop up the individual market, buttressing it as an alternative for those without employer-based coverage. It does so by expanding the risk pool with a mandate that everyone but the very poor have coverage and requiring individual insurers to take all applicants including those with pre-existing medical conditions.
Individual insurers will have a larger number of insureds to share the risk and generate premiums. But they will also have sicker people in the pool with costly chronic conditions like diabetes they can no longer turn away. The question going forward if the reform bill is signed into law is whether that approach is actuarially sustainable given continued projected increases in medical care expenditures and whether premiums can remain affordable even with subsidies. It’s a critical question given the Obama administration’s reliance on the individual market to fill the coverage gap created by a shrinking small employer group insurance market.