Since November 2006, we have worked together to improve our broken health care system. I introduced SB 48 in December 2006, later yielding to the Speaker’s bill in recognition of our mutual commitment to “get something done.” A lot of progress ensued. Many interests became engaged. Regrettably, however, I cannot support ABX1-1 or its companion initiative.

This bill – which is before the Senate, and the initiative, which is not – would create the third-largest program in state government, surpassed only by K-12 education and Medi-Cal. Under any circumstances, but especially in light of the state’s $14.5 billion budget shortfall, we have the fiduciary responsibility to approve a health care coverage plan that is both self financing and fiscally sound and a moral responsibility to protect from harm those who already have health care coverage.

That’s why I asked the Legislative Analyst’s Office for its independent analysis. Its report, released last Tuesday, has identified significant General Fund risks. The Health Care Reform (HCR) plan proposed would grow faster than the revenues chosen to pay for it. If the underlying assumptions are wrong, even by small margins, the potential shortfall could devastate a state budget already teetering on insolvency.

Many other fundamental fiscal concerns were highlighted during the Senate Health Committee’s in-depth hearing on the proposal. Specifically:

- The HCR Plan Is Structurally Under Funded. The LAO analysis shows that under the most optimistic scenario, at the second year of implementation (2011-12), spending outpaces revenues by $354 million, with a growing annual deficit thereafter. The program only balances by collecting revenues before its 2010 implementation date. Beyond that, if premiums are higher or grow faster than projected, the program could be severely under funded. As noted by the LAO, the General Fund is the “ultimate backstop” for the HCR proposal.

- The State’s Fiscal Crisis Could Exacerbate the Structural Shortfall. The LAO notes that the Governor’s 2008-09 budget runs counter to the HCR proposal. Specifically, he would cut Medi-Cal and the Healthy Families program by over $1.1 billion (GF). Of this amount, the HCR proposal would require the expenditure of $180 million to restore cuts proposed for payments to hospitals. These added costs could exacerbate the HCR proposal’s structural shortfall by raising the program deficit in 2011-12 to $534 million, growing annually thereafter.

In addition to proposed cuts to hospitals, the Governor’s budget would eliminate or reduce other existing programs that provide health care services to vulnerable Californians. For example, the Governor’s budget plan would reinstate Quarterly Status Reports for Medi-Cal eligible children, a change that assumes a savings of $83.5 million by making 150,000 children ineligible. Another proposed cut saves $115 million by eliminating adult dental services. Sound public policy suggests that the Legislature should decide on restoring these base programs before creating new ones, whether they start today or in the next decade.

- Other Fiscal Risks and Cost Pressures. The LAO identifies over $1.5 billion annually in other financial risks and cost pressures. These include uncertainties relating to federal funds, how extensively employers use the pool, the number of uninsured who would seek coverage, long-term health care inflation, adverse health selection, tax-credit implementation and enforcement of the individual mandate.

The LAO report notes that the structure of the HCR proposal may allow employers to “game” the minimum spending requirement by making their employees eligible for purchasing pool coverage. Professor Gruber told the LAO that the net effect of this on bottom line revenues could range from 5% to 15%. Even at the mid range, that adds $200 million to the cost in 2010-11.

- The “Trigger On” Mechanism Offers Inadequate General Fund Protection. The LAO raises concerns that the mechanism is too vague and gives too much discretion to the Director of Finance (DOF), with too little legislative recourse. The language is unclear how or when a “reasonable financial projection” would be prepared. What factors, for example, would a DOF use to estimate? Would it reflect the benefit level and premium costs for coverage offered through the purchasing pool? Further, based on the LAO’s projected deficits, it is questionable whether DOF could ever responsibly claim funding was “sufficient” to “trigger on” the program. But once triggered, the program would have serious fiscal effects.

- The “Trigger Off” Mechanism Provides Limited Options to the Legislature. Once the program is started, the DOF could “trigger off” the plan if it faced insolvency. New revenues would require a two-thirds vote of the Legislature. Indeed, I understand, at the behest of the California Hospital Association, the initiative’s proponents are considering a language change to the initiative that would make it even harder for the Legislature to make necessary adjustments to the financing. Absent increasing revenues, the remaining options would include reducing benefits or raising the premiums for low-income families or anyone else who finds themselves in the state plans.

No legislature would knowingly put itself in such an untenable position. It is irresponsible and clearly biased towards the executive.

- Employers Could Shift Workers into Financially Unstable Plan. The plan creates an incentive for employers to drop current health care plans and to go into the state program. Because the employer fee is capped at a lower rate than many employers pay now, there is a strong incentive for employers to drop their current coverage. Californians who currently have employer-based coverage could find their health insurance subject to the ebbs and flows of the General Fund, just like every other state program.

The state Senate has limited options to resolve concerns raised in the LAO report; key financing provisions and the “Trigger Off” mechanism are found in the initiative, which is not within the Legislature’s purview. We all appreciate the many difficult compromises proponents made in drafting their initiative. But, their decision in effect to lock in a financing structure independent of the program’s expected growth rate is especially troubling.

If program solvency demands more money, there are only two options: A two-thirds vote of the Legislature or another vote of the people. In contrast, AB 8 contained a “safety valve” provision that authorized MRMIB to adjust the percentage of employer contribution. AB 8 also required employers to meet a minimum spending threshold for both full-time and part-time employees, thereby increasing purchasing pool revenues and reducing the opportunity to manipulate coverage for those employed part time.

Some have suggested that the Senate should pass ABX1-1 and let the voters decide. But in view of these aforementioned unanswered fiscal questions, such action would not be appropriate. First, such action would belie serious fiscal and program reservations. Second, the unusual legislation-initiative you have proposed effectively means that health care reform will be decided by whichever clever television advertising is most convincing. Finally, once pursued, there is little chance of repairing the financing mechanism. Either way, it is a poor way to make complex, far-reaching public policy such as health care for all our residents.

We remain committed to prudent health reform with a sound self-funding scheme and subject to established state budget priorities and commitments. In fact, as we confront the state’s $14.5 billion shortfall, the Legislature should consider passing many elements contained in ABX1-1.

Tobacco Tax. Higher tobacco taxes could minimize severe budget cuts in critical health care programs that serve children as well as other programs, such as community health clinics, that serve the uninsured.

Hospital Provider Fees. These could leverage federal funds to maintain and increase Medi-Cal reimbursement rates to hospitals. Although the state’s agreement with the federal government bars such a fee mechanism until 2010, the California Hospital Association and the Department of Health Care Services could begin finding options that may be feasible and politically acceptable now.

Data Transparency. There is broad agreement to overhaul the way the state uses health care data to improve quality and control costs. These stranded costs are a substantial fiscal drain.

Medical Loss Ratios. Health plans and insurers should be required to spend a minimum 85% of premiums on health care benefits.

Prohibit Incentives to Deny Coverage. Outlaw bonuses by health plans and insurers given to according to the number of claims that are reduced or denied.

Reform and Restructure the Major Risk Medical Insurance Program (MRMIP). Individuals denied coverage due to pre-existing conditions are eligible for coverage through MRMIP. More comprehensive reforms that achieve guaranteed issue are possible. AB 2 (Dymally) is a good start.

Prohibit Hospital Balance Billing. Take insured patients out of the middle of payment disputes between non-contracting hospitals and health plans. This prohibition should also be extended to physician charges.

In conclusion, we are mindful of our collective goal: health coverage for all Californians. We have come a long way to solve some of the most intractable policy problems imaginable. The significant progress we have made can assure swift future steps when the state’s budget and economic climate improves. Both of you have my respect and appreciation for your tireless leadership.