An analysis of the California healthcare reform proposal being considered by the state shows that expenses will outstrip premium revenue and that the plan could pose other fiscal risks and uncertainties.
The analysis, reported earlier this week by Elizabeth Hill of the state's Legislative Analyst's Office, supports some of the concerns echoed by consumer action groups that the plan would prove costlier than original estimates.
California's assembly passed the healthcare reform legislation, the Health Care Security and Cost Reduction Act, shortly before the end of the year. The bill still must be passed by the state's senate and by its voters through referendum. The bill was accompanied by a related initiative, the Secure and Affordable Health Care Act of 2008.
The report states that the proposal "would create one of the largest programs in state government and directly affect virtually every Californian."
The analysis used two different sets of assumptions of premiums to study the impact of the reform plan. Results found that anticipated premiums for the program may be set too low.
Under the first, which would require $250 per month per person in paid premiums, there are sufficient revenues to support the program in the first year of operation (2010 to 2011), but by the fifth year of the program annual costs would exceed revenues by $300 million.
"Despite annual costs exceeding revenues in the fifth year, the program still has a positive cumulative fund balance because the collection of tobacco tax and employer fees start before program costs are incurred," analysts wrote.
However, under an assumption of $300 in premiums per month per person, costs exceed revenues by $122 million in the first year of operation, and the shortfall increases to $1.5 billion by the fifth year of the program. The fund balance shows a deficit of almost $4 billion by the end of the period, even with the early collection of the tobacco tax and employer fees. Costs are higher for this proposed program because it includes more expansive drug program benefits.
The analyst's office also said it "identified a number of other fiscal risks and uncertainties which could negatively affect the fiscal solvency of the plan by more than an additional $1.5 bilion annually." These include federal funding uncertainties, a higher-than-expected healthcare inflation rate, the effect of adverse health selection and the effects of including a higher number of uninsured in the pool.
The analysis noted that implementing health reform would require several state agencies to begin work in the 2008-2009 fiscal year, even though Gov. Arnold Schwarzenegger's proposed budget calls for staff cuts to cope with an expected $14.5 billion budget deficit. "In some cases, the governor's budget appears to run counter to the proposals in the healthcare reform plan," the report indicated.
Supporters of the initiative said the report includes information that shows it's a viable option for reforming healthcare financing in California.
"We believe this report reinforces the overall soundness of the approach and financing for healthcare reform," said Steve Maviglio, deputy chief of staff to assembly speaker Fabian Nunez. "Any plan, including single payer and doing nothing, contains major risks. Just as insurers shouldn't cherry pick who they cover, opponents of healthcare reform shouldn't cherry pick comments from the LAO report to help make their case for maintaining the status quo."