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The California Senate and Assembly have until the end of the legislative session, (September 14, 2007) to pass AB 8 and enact major changes to the private sector health care financing system. Governor Schwarzenegger is working to alter AB 8 before he signs it into law. Their reforms will likely:
- increase the cost of health insurance in California;
- reduce the number of people insured;
- force private health insurance companies out of the California market; and,
- cost tax payers and employers billions of dollars.
The Problems with California Assembly Bill 8 (AB8)
- AB 8 expands eligibility to government health insurance programs such as Medi-Cal and Healthy Families to include low income children and adults. Ostensibly the cause for the “health care crisis” is that the California government and the Federal government do not pay the full cost of care for the people currently enrolled in these programs. Increasing eligibility and enrolling more people and paying hospitals and doctors too little to treat these patients will force more and more doctors to not accept Medi-Cal patients. Tragically for all Californians increased enrollment and under payment for services will likely force many hospitals to close and not service anyone. Speaking directly to the problem of government under payment for services, the California Hospital Association states “Medi-Cal and the Healthy Families program should cover the cost of care for their enrollees and not expect private payers to pay for government underpayments through a cost-shift hidden tax.” (Principal # 14, Principals for Universal Health Care Coverage in California, February 2006, http://www.calhospital.org/Download/PrinciplesforUniversalHealthCareCoverageinCalifornia-Jan07.pdf.) Expanding enrollment into these programs as AB8 proposes to do, will make a bad situation worse.
- AB 8 requires health insurance companies to “Guarantee Issue” individual health insurance. This means that people can obtain health insurance when ever they want to. This will destroy California’s very vibrant market for affordable health insurance. Guarantee issuance of individual health insurance policies will allow people to wait until they get sick or injured to enroll in health insurance. Removing the incentive for people to purchase health insurance while healthy creates a pool of very sick people (high utilization.) (This is classic “adverse selection.” Go to the middle of this page to see “What’s adverse selection?” http://www.benefitscafe.com/sgInformation.html ) When this happens insurance companies either raise premiums to cover the high claims or they exit the market and people have little choice and high premiums. States with guarantee issue health insurance (where there is no medical underwriting) have very high rates for individual policies. New York & New Jersey are examples
- AB 8 requires employers to spent 7.5% of their Social Security payroll on health insurance or they must pay a 7.5% “fee” for employees to obtain coverage through a state run “purchasing pool.” This is referred to as “Pay or Play.” Most uninsured workers are in low-wage jobs and 7.5% of a low wage will generate an insufficient amount of money to pay for the cost of their health insurance. The Major Risk Medical Insurance Board (MRMIB) will manage the State’s health insurance “purchasing pool” and will have to raise the “fee” to pay for coverage should the 7.5% tax generate too little money. All employers – not just those in the state purchasing pool would have to increase the amount they pay for health insurance to comply with the higher mandate. AB 8 creates no legislative oversight on MRMIB’s ability to raise the “fee” on employers. This is taxation without representation. In order to pay the mandatory fee/tax for health insurance employers will either raise prices for their goods and services and/or fire employees. This will damage California’s economy and force job losses.
- AB 8 creates a state-run health insurance “Purchasing Pool.” There is no evidence that purchasing pools lower health insurance premium. California’s prior experience with the small group pool (HIPC / PacAdvantage) actually charged more for health insurance than non-pool plans. (See: Health Insurance Pool of California: the first five years, http://content.healthaffairs.org/cgi/reprint/19/5/158.pdf and Comparison of Small Group Rates in California: HIPC vs. Non-HIPC, http://www.chcf.org/documents/insurance/hipcrates.pdf) A government run pool can only operate by limiting choices and flexibility for consumers (e.g., no HSA compatible plans in the pool.) Each time MRMIP raises the employer “fee” those participating in the pool would have a health insurance rate increase. Each time an employer in the pool gave an employee a pay raise, the employer would pay more for health insurance. Unlike private sector health insurance, participants in the pool could not change plans or insurance companies to off-set increases in health insurance premiums. The “fee” increase would reduce company earnings and employee wages. There is no reason to create a government run purchasing pool for health insurance.
- AB 8 mandates that insurance companies limit their Medical Loss Ratio (MLR) to 85 percent. Conversely insurance companies can only spend 15% of health insurance premium on: customer service, provider contracting (lowering cost of care,) chronic disease programs, HIPAA & regulatory compliance, appeals, administrative costs, distribution & education for new products, taxes & profit and other costs. This creates an unfair advantage for not-for-profit health plans (Kaiser, Blue Shield) because they don’t pay taxes – yet their premiums are the same as for-profit carriers. This creates an unfair advantage for multi-state carriers because they can spread administrative costs across states. This creates an unfair advantage for staff model HMOs (Kaiser) which own hospitals and medical groups and can hide administrative costs in MLR. This eliminates incentives for carriers to innovate, provide good service, or reduce costs since they would not reap the benefit of improvements. This does not allow for future regulatory changes which could increase the administrative burden of carriers. This creates perverse incentive for carriers to offer only high priced plans to increase profits and money available for administrative expenses. For example: 15% x $500/month premium = $75, while 15% x $100/month Premium = $15. To pay for fixed costs insurance companies would charge higher premiums and generate more money. Insurance companies will eliminate commission payments to agents to enroll individuals and small groups because there will be insufficient money to service this portion of the market. Individuals & small business owners will not have an expert to help them make very important decisions when purchasing and using health insurance. Mandating a Medical Loss Ratio will not lower the cost of health care – which drives the cost of health insurance. It is not needed. Medical Loss Ratio limitation will increase the cost of health insurance and eliminate enrollment advice & assistance for individuals and small businesses.
Here is the bottom line on AB 8, California Health Care Reform Legislation:
- Health insurance is expensive because medical care is expensive.
- Miraculous medications, complicated surgeries, and high-tech diagnostic equipment save lives and give California the best health care system in the world.
- Costs associated with treating chronic illnesses related to life style (e.g., diabetes, heart disease, hypertension, stress, obesity) account for 75% of medical costs.
AB 8 does nothing to reduce the cost of medical care and thus will not solve the problem of high health insurance premiums.
This Power Point presentation details the problems with Assembly Bill 8 (AB8):
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