The Alan Katz Health Care Reform Blog

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LAO Report on ABX1-1 Identifies Risks

Posted by Alan on January 22, 2008


California’s non-partisan Legislative Analyst’s Office (LAO) has weighed in on the fiscal impact of Assembly Bill X1-1, the compromise health care reform package negotiated by Governor Arnold Schwarzenegger and Assembly Speaker Fabian Nunez. The LAO report is expected to be influential in the State Senate which, in addition to considering ABX1-1, is facing tough decisions to address the state’s $14+ billion deficit. And it will no doubt be a hot topic of conversation during the Senate Health Committee’s upcoming hearing on the legislation.

The Legislative Analyst’s Office Report on ABX1-1 is, appropriately, couched in academic, unemotional prose. Their assignment was to assess the fiscal impact of the bill, not the soundness of its policies. There are nuggets in the report that proponents will like, but overall the report is a devastating blow to ABX1-1’s chances of passage. The LAO estimates the legislation would not only have a negative financial impact on the state’s 2008-09 budget, but is likely to require at least $4 billion more than the bill’s proponents estimate over the first five years of its operation.

Because of time constraints, and the complexity of the issue, the LAO could not thoroughly review every financial impact of ABX1-1. So it focused on the financial soundness of the state-run purchasing pool the bill establishes because it is one of the largest fiscal components of the legislation. It found that even given proponent’s overly optimistic projections, the pool would be running at a deficit. 

ABX1-1 proponents claim the cost of covering individuals in the government-run purchasing pool will be $250 per person per month (pmpm). The LAO report notes this figure is taken from the low end of various cost scenarios developed by a private consultant hired by the supporters. The consultant considered several benefit packages and estimated their cost to the pool. “The premium scenarios ranged from $246 pmpm to $330 pmpm. Thus, the $250 pmpm assumed in the proponents’ overall cost estimate is very near the bottom end of the range of possible benefit packages identified by their own consultant.”

The LAO noted that a 2007 study by the California Employer Health Benefits Survey found employers pay monthly premiums of about $374 for each employee. It questioned the state’s ability to achieve costs its $250 premium target without “setting the minimum benefit level substantially below the average employer-provided benefit level.”

In assessing the legislation’s impact on the state’s finances, the LAO used two cost estimates: the $250 pmpm optimistically suggested by the bill’s proponents and another at $300 pmpm. This higher figure still assumes the state is able to negotiate a discount approximately 20 percent below what employers pay, so it is difficult to call even the LAO premium assumption pessimistic.

Using the $250 estimate, the LAO concluded “there are sufficient revenues to support the program in the first year of operation (2010-11). However, by the fifth year of the program (2014-15), annual costs exceed revenues by $300 million.” Because tobacco tax and employer fee revenues are collected prior to the start of the program covering anyone, the LAO estimates the program will still have a “positive cumulative fund balance” after five years.

When the $300 pmpm cost is used, however, the LAO predicts the state-run pool’s costs will exceed revenues by $122 in the first year of opeation “and this shortfall increases to $1.5 billion by the fifth year of the program.” The LAO estimates the cumulative fund balance would climb to almost $4 billion by the end of this period, even with the early collection of the tobacco tax and employer fee revenue.

But wait, there’s more.

The LAO identified “a number of other fiscal risks and cost pressures. These risks total another $1.5 billion annually. Several of these items, however, are substantially more speculative than the impact of the average monthly cost per enrollee to the pool’s operation. For example, if proponents of ABX1-1 have significantly underestimated the number of uninsured in the state (by, say, 500,000 residents), there could be hundreds of millions of dollars additional costs to the program. Whether they have underestimated the number of uninsured is not known, however.

Others risks are less speculative. As the California Association of Health Underwriters and the National Association of Insurance and Financial Advisors-California cautioned in a letter to Senate President Pro Tem Don Perata recently, medical costs are likely to grow far faster than payrolls and wages. Because ABX1-1 relies on these slower-growing sources for a significant portion of its revenues, over time a shortfall is likely.

The LAO concurs. It estimates that “a 0.5 percent per year increase in medical inflation above that assumed by the proponents would result in potential annual costs by the fifth year of implementation of $300 million, or a cumulative net cost to the state by 201-15 of approximately $1 billion.” It’s important to recognize that the LAO is warning of an additional increase in medical inflation — the cost of health care, not the cost of insurance.  

As if the long term financial impact wasn’t enough, the LAO also expressed concern that ABX101 would have a negative impact on the proposed 2008-09 budget to support implementation activities by state agencies.

ABX1-1’s advocates are already mounting a defense against the report. The Associated Press reports Daniel Zingale, a key health care advisor to Governor Schwarzenegger, as defending the $250 pmpm estimate as sound and that having $300 million in uncovered costs in the fifth year was small compared to the overall size of the program.

Steve Maviglio, a spokesman for Speaker Nunez, told the AP that there would be cost risks associated with any health care reform plan. “‘Our job now is to move forward with bringing California closer to the goal of universal coverage and to work hard to avoid, contain and manage any realistic fiscal risks associated with the plan,’ he said in a statement. ‘The best tool we have for doing that continues to be the plan’s explicit provision that if funds aren’t available the plan doesn’t take effect.'”

The LAO also recognizes that any health care reform legislation as far-reaching and complex as ABX1-1 is subject to fiscal risk. It also can be argued that the LAO’s assumption, the one predicting a nearly $4 billion cumulative shortfall over five years, is optimistic. And then there’s the additional risks and their potential costs to the program.

What California’s State Senators will need to consider is whether a $4 billion gamble in the face of the state’s current $14.5 billion budget crisis — not counting the minimum $1.2 million required to fund health care obligations to state worker retirees — is a bet they’re willing to make.

Reasonable people can — and will — argue that the potential benefits of near universal coverage is worth the risk. But unless something comes along to undermine the credibility of the LAO report, the magnitude of the bet cannot, and should not, be ignored.

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