Rx for health care crisis?
Who pays, who benefits in reforming health care

By Stuart Leavenworth -
Published 12:00 am PDT Sunday, April 29, 2007, Sacramento Bee

State politicians who are often accused of dodging tough issues are debating a doozey this year -- health care reform.

Acutely aware that their constituents face rising medical costs, closure of emergency rooms and employers who are dropping insurance coverage, Gov. Arnold Schwarzenegger and Democratic lawmakers seem determined to perform what the governor calls "radical surgery" on the
current health care system.

Now we'll find out if they can handle the sight of blood.

At its core, health care reform involves a potentially painful shifting of costs and responsibilities for both employers and individuals. While business leaders are hiring tax lawyers and health finance experts to understand the possible implications, many Californians are probably pondering a more basic question: How would these plans affect me?

About six weeks ago, several of us on the Bee Editorial Board thought it would be useful to answer that question. The time seemed ripe for a chart that would show how different types of individuals and different groups of employers would be affected by the major reform proposals.

Our task was somewhat painful in itself. For one thing, at least six different leaders and coalitions -- the governor, Sen. Sheila Kuehl, the Democratic leaders of the Senate and Assembly and their
counterparts in the Republican Party -- have floated plans for fixing how health care is financed and delivered. Some of the plans are fairly detailed; others remain a work in progress.

Ultimately, we decided to compare the two most detailed and comprehensive plans -- those put forth by Kuehl and Schwarzenegger. If nothing else, these two proposals illustrate the divergent philosophies driving the health care debate.

A Democrat from Santa Monica, Kuehl wants to eliminate the private insurance industry and pool all money now spent on health care into a single government fund. This fund would finance a "single-payer" system of health care available to all state residents, a variation of Canada's universal health care program.

Schwarzenegger, on the other hand, wants to maintain the private insurance system and make individuals and employers more responsible for obtaining and providing coverage. Employers who don't currently help cover employee health costs would be required to offer insurance,
or pay into a state pool that would cover low-income Californians.

Our charts highlight who might pay or benefit under various reforms, but we acknowledge that such diagrams have their limitations. Charts are designed to show numbers, not nuances. For instance, these charts won't tell you much about the quality of care you would receive under these plans, only how much you would pay for it. But if the bottom line matters to you, this is a good place to start.

Q: What do these charts show for individuals?

A: Generally, individuals with low or mid-level incomes would gain access to cheaper health care under either plan, although Kuehl's plan would help certain groups more. Retirees who aren't old enough to receive federal Medicare benefits, such as Grandma Mary, would get comprehensive coverage at a cheaper cost under Kuehl's plan than the governor's plan.

By contrast, employees earning higher incomes -- such as the two-earner Thomases -- would end up paying more in payroll taxes under Kuehl's plan than they currently pay in premiums.

Kuehl's plan redistributes income from those who earn more to those who earn less and those who don't have insurance or are underinsured. The governor's plan also redistributes income, but not to the degree of Kuehl's plan.

Q: What do these charts show for employers who now provide insurance?

A: In terms of costs, neither proposal would have a huge impact on employers who currently subsidize insurance for a large percentage of their employees. With the governor's proposal, companies would continue to pay for the employer-share of health insurance premiums, although
some could see tax breaks if their employees treat health benefits on a pretax basis.

Under Kuehl's plan, employers now spending 8 percent of their payroll on health care benefits would send an equivalent amount of payroll tax to a fund that covers all Californians. Employers paying more than 8 percent for employee health care would see savings. Kuehl's plan
assumes that the loss of the middle man -- private insurance companies -- will drive down overall health care costs and produce savings for many employers and individuals.

Q: What about employers who don't provide insurance?

A: Health care reform could be costly for those businesses. Consider Mr. Big Box. Under the governor's proposal, all of Mr. Big Box's employees would be required to obtain insurance. They would likely choose the company's health plan, since it is subsidized. Covering those additional employees would increase costs for Mr. Big Box by several million dollars. Mr. Big Box would have to pay more under Kuehl's plan, too, but not as much as the governor's plan would
require.

Small businesses that currently don't pay for employee health plans would get hit, too. A small business like Patty's Pedicures with a $250,000 payroll would have to pay $10,000 in taxes under the governor's plan and about $14,000 under Kuehl's plan.

Q: What are the "unknowns" in these plans?

A: One big question concerns the governor's plan and its requirement that employers provide insurance, or pay 4 percent of payroll into a pool to help cover the uninsured. This mandate could face legal challenges. Even if it didn't, some critics fear it could create incentives for some employers to stop providing health care coverage. Most employers currently spend more than 4 percent of payroll on employee health care. So if they were given an option of covering all employees or paying 4 percent into an insurance pool, some might choose to drop their current coverage and reduce costs by paying into the pool.

Kuehl's plan, by contrast, is vulnerable to future increases in health care costs. Her plan, Senate Bill 840, specifies the medical treatments and services that would be available to everyone, and it bans co-pays or deductibles for two years. But if overall health care costs rise beyond the available funds created by payroll taxes and other sources, government administrators will either have to cut back on services, require co-pays and deductibles, or raise taxes to avoid deficits.

Both plans also could affect the employment of low-income workers. If employers were suddenly forced to pay an 8 percent or 4 percent payroll tax, some would cover those costs by holding down wage increases or cutting back on their work force. Workers, of course, are already
vulnerable to layoffs. With expanded insurance coverage -- either single-payer or the governor's approach -- they could at least be assured of health care during tough times. But there is no free lunch -- or free health care -- in either of these plans.

Q: How would the insurance industry fare under these plans?

A: The health insurance industry would cease to exist in California under Kuehl's plan. With the governor's proposal, insurers would be required to spend 85 cents of every dollar on health care -- instead of spending it on administration, marketing or other purposes -- and would
have to cover everyone, regardless of health status.

Q: What are the political prospects for these plans?

A: Kuehl's plan, without the tax increase it relies on, passed the Legislature last year but the governor vetoed it. She has brought it back this year with SB 840 and believes it will become law one day, possibly under the next governor. Schwarzenegger's plan hasn't yet been put into bill form; nor does it have an author. But its provisions could become part of a compromise bill, either in this legislative session or the next.

Q: What other major proposals are out there?

A: Senate President Pro Tem Don Perata has introduced SB 48, which would require employers to spend a certain percentage of payroll on employee health or pay into a state fund to expand coverage. Assembly Speaker Fabian Nunez has his own legislation, Assembly Bill 8, which
takes a similar approach but focuses first on providing universal health care for children. Neither Perata nor Nunez have yet provided the details necessary for their plans to be put into chart form.

Republicans in the Senate and Assembly also have unveiled proposals to use tax credits, health savings accounts and changes in Medi-Cal to expand coverage. Both approaches attempt to shore up the existing system without using new taxes or fees.

Q: How was this chart assembled?

A: We worked with the staffs of Schwarzenegger and Kuehl to come up with a representative mix of individuals and businesses affected by the current health care system. We then worked with the governor's office and Kuehl's office to show how their two plans would affect those individuals and businesses. We also vetted the information with outside experts.

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