Considering Massachusetts Financial Meltdown In Review Of Health Care Legislation
In a letter sent today to California Legislative Analyst Elizabeth Hill, a consumer group urged Hill, who is conducting an independent fiscal analysis of the state's health care legislation, to examine cost overruns hitting a similar program in Massachusetts and the lack of controls over insurer profiteering in the California measure. The full letter is available below.
In the letter, the Foundation for Taxpayer and Consumer Rights (FTCR) wrote:
"Proponents will argue that a provision in [California bill] ABX1 1 to cap insurer overhead and profit at 15% will control costs. But this cap is only half of the cost-control equation and, without rate regulation, may actually drive up premiums rather than control them. Insurers allowed to keep 15% of premium will have incentives to pay providers more, in order to keep more."
Hill was recently asked by Senate leader Don Perata to provide a fiscal analysis of ABX1 1, the joint proposal by Gov. Arnold Schwarzenegger and Assembly Speaker Fabian Nunez that would require all Californians to prove that they had private health insurance policies.
Under the Schwarzenegger/Nunez proposal, insurers would receive taxpayer funds with no accountability over the product they sell or the price they charge, said FTCR.
In the letter, FTCR wrote:
"The only publicly available current analysis of ABX1 1, by Assembly committee staff, contains no predictions for either cost increases or expected revenue increases/decreases. Massachusetts, however, is already struggling to control much higher than expected costs. ... Massachusetts estimates that the cost of subsidized plans by the end of the first year, July 2008, will be $147 million, or 30%, over budget. A similar increase in California (with at least 12 times the number of uninsured), would be $1.75 billion."
FTCR also pointed to much lower than predicted employer contributions in Massachusetts, as well as higher premium costs and lower benefits than expected. FTCR said that at a minimum, the Legislative Analyst's Office should recommend that ABX1 1 be amended to include premium regulation rules that currently apply to auto and other property/casualty insurance companies before forcing Californians to purchase their product. In the letter, FTCR wrote:
"Under Proposition 103, auto and property/casualty insurers must justify premium increases to the elected insurance commissioner and receive approval before raising rates. At a minimum it should be recommended that provisions be added to ABX1 1 to require health insurers to abide by the same oversight." Dear Ms. Hill,
We write to point out some weaknesses and omissions in current fiscal assumptions for the health care reform legislation, ABX1 1, and hope that you will take some or all into account in the independent fiscal analysis that Senator Perata has requested.
Under ABX1 1, the state must subsidize coverage purchased from private health insurers for low income Californians and provide tax subsidies to individuals earning between 250-400% of poverty and paying more than 5.5% of their income on coverage. The Foundation for Taxpayer and Consumer Rights supports the use of subsidies to provide access to health care for those who cannot afford coverage, but under ABX1 1, insurers would receive taxpayer funds with no accountability over the product they sell or the price they charge.
Massachusetts' real-world experience offers the most striking indicator of what may happen in California.
1. Spiraling program costs. The only publicly available current analysis of ABX1 1, by Assembly committee staff, contains no predictions for either cost increases or expected revenue increases/decreases. Massachusetts, however, is already struggling to control much higher than expected costs. For instance:
-- Massachusetts estimates that the cost of subsidized plans by the end of the first year, July 2008, will be $147 million, or 30%, over budget. A similar increase in California (with at least 12 times the number of uninsured), would be $1.75 billion.
-- There are a higher-than-expected number of enrollees in subsidized care. Massachusetts' budget projected 136,000 participants; 178,000 new enrollees are expected by July 2008. This indicates that estimates of the number of subsidy-eligible uninsured likely to enroll may be low in California as well.
-- Massachusetts' costs are projected to increase up to an additional 14% next year.
-- Massachusetts' budget for that state's health care program was based on a low-ball number of the uninsured. The Massachusetts Department of Finance and Policy reported the number of uninsured Massachusetts residents to be 355,000 while the Blue Cross Blue Shield Foundation found that number to be 571,000. Other estimates put the number of uninsured between 500,000 to 650,000. Similarly, a recent analysis of ABX1 1 cited the number of California's uninsured to be 5.9 million while other independent researchers have consistently found that number to be between 6.5 - 7 million.
2. Premium increases. Proponents of the Massachusetts plan, including Jonathan Gruber of MIT (who also prepared the fiscal analysis for ABX1 1 and its precursors) predicted that comprehensive health insurance under state reforms would cost on average about $200 a month. In reality:
-- Only the cheapest policies for the younger insureds are available near that cost.
-- A 55-year-old purchasing through the Massachusetts state pool will pay up to $531 per month for basic coverage. More comprehensive coverage with lower out of pocket charges costs up to $906 monthly.
-- Insurers in Massachusetts have signaled their intention to seek double-digit price increases next year, though the state is asking for voluntary reductions.
-- ABX1 1 provides tax subsidies to a higher income level than Massachusetts, up to 400% of poverty level; cost increases in the private market will likely reduce state tax revenues more than the predicted $500 million in the latest Assembly analysis.
-- Premium increases in the unsubsidized market will exempt more families from mandatory purchase, leaving them uninsured. This will increase the amount of care needed by the uninsured, increasing the hospitals' burden of unanticipated and unfunded costs.
3. Revenue errors. Massachusetts was also far off the mark in predicting employer contributions.
-- In the program's first year, 518 contributing employers who do not provide health insurance owe just $5.3 million. The legislative estimate was $46 million when the mandate passed in 2006, and remained an optimistic $24 million when implementation began this summer.
-- Given that employer contributions are under $300 a year in Massachusetts, a similar shortfall in California would cripple the program immediately.
-- Some Massachusetts employers have avoided paying the fee under rules that exempt employers for providing minimal coverage to employees. In addition, half the employers surveyed by Massachusetts, far more than expected, reported that they were small enough (fewer than 11 employees) to avoid the requirement completely.
California is likely to be subject to similar unpredicted costs and revenue losses.
Proponents will argue that a provision in ABX1 1 to cap insurer overhead and profit at 15% will control costs. But this cap is only half of the cost-control equation and, without rate regulation, may actually drive up premiums rather than control them. Insurers allowed to keep 15% of premium will have incentives to pay providers more, in order to keep more.
-- Without direct regulation of insurance premiums, the 85/15 requirement in ABX1 1 will not control premium costs, subjecting California to the same price increases buffeting Massachusetts.
-- Insurers will have no incentive to control costs and the state has no power to directly do so. Higher premiums increase the dollar amount of the insurers' 15% share, while their absolute costs remain the same.
-- Doctors, hospitals and insurers will have common cause to raise rates at the expense of individuals and the state.
-- The 85/15 requirement also encourages gaming of the system, for instance to define as "medical costs" such administrative functions as phone banks that handle billing questions. This puts upward pressure on premiums.
-- According to the Kaiser Family Foundation, insurance premiums have increased 78% since 2001, compared to a 19% increase in wages and a 17% increase in inflation. Yet the risk of similarly increasing costs appears not to have been factored into proponents' financing formula for ABX1 1.
Another issue to consider is the impact of ABX1 1 on the state income tax revenue. The bill requires employers to allow workers to pay health insurance premiums on a pre-tax basis. Such pre-tax spending, estimated to be $2.1 billion by the governor, could dramatically undercut the state general fund.
Rate regulation, absent from ABX1 1, is the only proven curb on insurance costs.
Since 1988, property and casualty insurance rate regulation under Proposition 103 has saved California drivers $23 billion in premiums. Our consumer group's challenges alone have saved Californians $800 million in auto, home, and medical malpractice premiums since 2003.
Under Proposition 103, auto and property/casualty insurers must justify premium increases to the elected insurance commissioner and receive approval before raising rates. At a minimum it should be recommended that provisions be added to ABX1 1 to require health insurers to abide by the same oversight.
Auto insurance rate regulation has a proven record of success:
-- California auto insurance premiums have declined by 7% since voters approved Prop 103 in 1988, while rates nationally have increased 47%.
-- In the fifteen years following the passage of Prop. 103, California fell from 2nd most expensive state for auto liability premiums in the country to 21st.
-- At the same time, the stability of rate regulation has provided above-average profits for California insurers.