The Alan Katz Health Care Reform Blog

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Posts Tagged ‘Jonathan Gruber study’

AB 8 and Unintended Consequences: Funding the Pool — Part II

Posted by Alan on August 20, 2007

In an earlier post I pointed out how medical costs rise at a faster rate than wages, meaning the 7.5 percent payroll fee/tax imposed by Assembly Bill 8 would, over time, need to be dramatically increased. (The sponsors call it a fee so only a majority vote is required to pass  the bill; opponents call it a tax so a two-thirds vote of both houses of the Legislature is required. I call it a fee/tax because, well, why not?).

In reality, however, the 7.5 percent levy is inadequate from the first day of operation.

Proponents of AB 8 disagree with this claim. They cite a study by Jonathan Gruber, Ph.D of the MIT Department of Economics which, among other conclusions, seems to show that AB 8’s 7.5 percent fee/tax will not only cover the costs of the purchasing pool (called Cal-CHIPP), but generate a reserve as well. But there’s a gaping hole in the Gruber study. Apparently Dr. Gruber assumed plans in the purchasing pool would be reimbursing providers at MediCal rates — which are substantially below what commercial carriers normally pay physicians, hospitals and other providers. The study consequently used an average monthly cost of providing participants medical coverage through the pool of $224.

However, it is highly unlikely doctors and hospitals will accept these reduced fees from Cal-CHIPP, which is expected to attract as many as four million participants. Many doctors won’t accept any, or at least any additional, MediCal patients. They claim they lose money on such patients.

Which means that projected $224 average monthly premium Dr. Gruber used should be compared to what’s out there in the real world. According to a California Health Benefits survey, the premium for a single adult in California through a group plan in 2006 was $379 (of course, rates in 2008 will be higher than those in 2006).

Meanwhile, Cal-PERS, the state-run pool which insures state employees and officeholders recently published 2008 rates for its plans. They range from $351 to $742. Then consider that it is very likely the custodians of Cal-CHIPP, the Managed Risk Medical Insurance Board (MRMIB) will be heavily pressured to provide benefits in their pool closer to those offered through Cal-PERS than through MediCal.

The result is that the average cost of a participant is likely to be at least 57 percent higher than anticipated in the Gruber study. Which means MRMIB will be forced to substantially raise the fee/tax on employers to cover this higher cost. There goes the reserve. And there goes a 7.5 percent fee/tax.

In most instances, increasing a fee/tax would require the approval of the Legislature. Yet, in what some are calling an acknowledgement that a higher levy will be needed, AB 8 empowers MRMIB to raise the rate on its own. As much as it deems necessary.

And what it deems necessary is likely to be a lot, starting on the first day MRMIB opens Cal-CHIPP for business.

 Note: AB 8 was amended on August 20, 2007. It now appears MRMIB may increase the fee/tax only once per year. This post was modified on August 21st to reflect this change.


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