California Healthcare Reform: the Governor's new plan

One twelfth of the United States is poised to adopt a sweeping healthcare reform program, making some dubious assumptions about funding along the way.

Many voters remain uncertain of the answer to the key question: "How will the proposed healthcare reforms affect me?"

On October 9th, Governor Schwarzenegger released a revised version of the healthcare reform proposal he first offered in January.  There are differences between the initial proposal and the new plan, now a 220-page bill called "The Health Care Security and Cost Reduction Act."  The Act carries a price tag of $14 billion and would affect millions of California families and business owners.

Funding the Governor's Plan

Governor Schwarzenegger's plan ("The Act*") levies up to a 4% payroll tax on all employers with two or more employees, depending on payroll.  Only businesses with a payroll less than $100,000 would be exempt.  Business owners would be mandated to either spend this on private insurance or else pay into a new government entity created to manage health coverage-"The California Health Trust Fund." 

The Governor's plan carries a mandate for all Californians to buy a health insurance policy.  The "minimum health insurance level" that meets the state mandate is not specified, but benefits must include coverage for medical, hospital, preventive and prescription drugs. 

Catastrophic coverage plans would therefore not meet the requirement.

In addition, all Californians-working or not-would be required to spend up to 6% of their gross income on health coverage.  They would be fined if they chose not to purchase health insurance and then assigned to a plan enforced through wage withholding and the tax code.

The Governor's plan expects one of the financing sources for The Act to be premiums paid when "employees, currently eligible for employer-based coverage, choose to enroll in Medi-Cal" or other government-subsidized coverage rather than keep their private insurance plans.

An additional new tax included in the Governor's plan is a 4% tax on all California hospitals, generating over $2 billion for the State.  According to the Governor's 10/9/07 press release, this is justified by The Act's $500 million in additional funding for public hospitals: "California's public hospitals make significant financial gains under the new reforms."

Rising Demand and Payment Cuts

Under the Governor's plan, more than 900,000 Californians would be added to State-provided programs like Medi-Cal and Healthy Families.  Government-funded coverage would be provided to all children in low- and middle-income families regardless of residency status and all residents earning less than 250% of the Federal Poverty Level (FPL).  Tax credits would be offered to those with incomes up to 350% of the FPL.

Medi-Cal rates paid to doctors in California are some of the lowest in the U.S., based on 1969 data with only a single increase in the past 20 years.  The Governor proposes to increase Medi-Cal reimbursements to 20% lower than Medicare rates.  Medicare rates in central California are some of the lowest in the region, often 40% lower than private insurance.  Medicare is currently slated for a 10% cut in 2008, followed by a 5% cut for each of the successive six years.

Federal Funds Assumed Available

This financing depends on access to federal matching funds.  But the expansion of Medi-Cal and Healthy Families coverage under the Governor's Plan violates current Federal guidelines for States' eligibility for matching funds (due to the relaxed income requirements and coverage of undocumented immigrants).  Therefore, according to the Governor's plan, if "federal approval is not obtained, [the Medi-Cal rate increase] shall not be implemented."

Even if the a federal exception is granted, payment to doctors who accept Medi-Cal would be conditional on at least nine "performance and performance improvement measures."  These are only vaguely outlined in The Act, but include linking physician payments to the use of technology, promoting "healthy behaviors among Medi-Cal beneficiaries" and public reporting of health care data.

The Governor's plan would conform California's tax code to the federal code, eliminating California's current tax on Health Savings Accounts owned by individuals.

All employers would be required to establish "Section 125" plans to allow employees to use pre-tax income for health expenses.  Failure to do so would carry a penalty of up to $500 per employee.

Redirecting Funds

Financing the Governor's plan would require increased Federal government contributions ($5.5 Billion), including the "redirection" of $5.5 Billion in safety net funds currently used to fund Trauma Centers and emergency care.  County government safety net funds of $2 Billion would also be redirected to finance the Governor's plan.

Additional financing for the $14 billion plan would be derived from the new legislation's proposal to lease the California Lottery, generating up to $2 billion yearly to help pay for health care costs.  The Lottery funding source for healthcare would end in 15-25 years.

The California Lottery currently funds about $1.1 billion yearly in public school education, a sum that the Governor reports would be replaced by funding from the State General Fund.

California legislators are now making decisions that will significantly impact Californians who don't enjoy the luxury of healthcare coverage provided to elected officials. It is time for those who will be affected most by healthcare reform-California's families and business owners-to let their opinions be known.

Will California be a preview of what is to come for the rest of America?

* Formally known as the Health Care Security and Cost Reduction Act

Dr. Halderman  is a Board-Certified General Surgeon practicing in rural central California.
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