The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

California Health Care Reform Package Already Underfunded?

Posted by Alan on January 15, 2008


Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez have already started the process of qualifying an initiative to fund their health care reform compromise legislation. Their hope is that the State Senate will pass the bill, Assembly Bill ABX1-1, soon and voters will approve their ballot measure in November of this year. Both the Governor and Speaker have claimed their health care reform package will be a boon to the state’s hemorrhaging budget.

“Our health care reform plan will bring billions of dollars of badly needed money to our health care system and ensure that future Governors will not have to make the decisions we are being forced to make today,” is the way Governor Schwarzenegger put it in a press release issued by his office last month..

The Legislative Analyst’s Office (LAO) will report soon on its review of the legislation’s impact on California’s finances. This report will carry substantial weight with Senators as they consider the health care reform package. Senator Sheila Kuehl has postponed a hearing on ABX1-1, originally scheduled for January 16th, until no sooner than January 23rd to allow time for the LAO to submit the report and provide lawmakers with some time to digest it.

It’s unknown how precise the LAO report will be in presenting conclusions. Will it highlight some problem areas, but offer nothing definitive? Or will it dive deeply into the financing and evaluate the reliability of each source not only now, but in the future.

For example, consider the funding sources tied to payroll. Approximately $2.7 billion of the $14.4 billion needed to fund ABX1-1’s comes from taxes (some call them fees) businesses would pay on wages. Historically, the cost of health care, and consequently the cost of health care coverage, has increased far more rapidly than wages. Since most of the provisions of ABX1-1 won’t take effect until 2010 — and it could be even later if law suits force a delay — the difference between wage and medical inflation rates could mean ABX1-1 is, in a very real sense, already underfunded.

No one knows with certainty at what rate payrolls and health care costs will increase over the next two years. But we can look back. What would have happened if ABX1-1 was signed into law in 2005 and implemented in 2007?

According to Tom’s Inflation Calculator, $1.00 of payroll in 2005 was worth $1.06 two years later. However, $1.00 of medical care in 2005 cost $1.08 in 2007. Two cents doesn’t sound like a lot, but when multiplied 2.7 billion times it represents a $54 million shortfall.

This calculation accounts for just the two years between now and when ABX1-1 is expected to take effect. Expand the time horizon another three years and the delta increases dramatically. $1.00 in wages in 2002 grew to $1.13 in 2007. But $1.00 in medical costs grew to $1.23 during that time. Multiply the ten cents difference by 2.7 billion and the shortfall is $270 million.

Of course, past performance is no guarantee of future results. And supporters of the health care reform compromise would argue that its provisions will help slow the rate of medical care costs and, to the extent it results in reduced premiums, could free up dollars for higher wages. Maybe. Maybe not. That’s certainly the goal, but there’s no guarantee. And if it’s not, where will the funds come from?

That depends, partly, on whether the payroll tax is considered a tax or a fee. If it’s the latter, a majority of the legislature could increase the percentage of payroll businesses would be obliged to spend on health services or pay to the state. Interestingly, the higher the fee, the more likely companies are to simply provide the coverage themselves. This, in turn, would require a still higher tax rate — I mean fee percentage.

The fact that the reform package’s funding may be inadequate should not, in and of itself, be considered a fatal flaw. It is fatal only if it’s ignored. Recognizing and addressing the risk of underfunding now, before a day of reckoning arrives, is what’s required. 

We’re seeing what happens to state finances when budgeting problems are ignored. Let’s hope the current budget crisis is not repeated when it comes to financing health care reform.

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