BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                          SB 810 (Leno)
          
          Hearing Date: 01/19/2012        Amended: 05/10/2011
          Consultant: Brendan McCarthy    Policy Vote: Health 5-3
          _________________________________________________________________
          ____
          BILL SUMMARY: SB 810 establishes the California Healthcare 
          System (CHS), an entity that would provide health care coverage 
          for all Californians.
          _________________________________________________________________
          ____
                            Fiscal Impact (in thousands)

           Major Provisions        2012-13      2013-14       2014-15     Fund
           
          Premium Commission     Hundreds of thousands to millions per 
          General
                                    year

          Implementation Costs   Annual costs of $200 billion to $250 
          billion                General    

          _________________________________________________________________
          ____

          STAFF COMMENTS: SUSPENSE FILE. AS PROPOSED TO BE AMENDED.
          
          Health insurance and coverage in California is currently 
          provided by a web of public and private providers. Medi-Cal and 
          the Healthy Families Program are state and federally funded 
          programs that provided coverage to low-income aged, blind, and 
          disabled, families, pregnant women, and children. The federal 
          government administers Medicare, a health insurance program 
          available to Americans aged 65 and over and other eligible 
          individuals. Private insurance in the form of health care 
          service plans or insurance policies is generally paid for by 
          employers and enrollee premiums. Additionally, there are public, 
          private, for-profit and non-profit clinics, hospitals, 
          laboratories, physicians, and other providers.
          
          SB 810 establishes the California Healthcare System (CHS), a 
          single-payer health care system that would provide coverage for 
          which all 37 million Californians would be eligible. 








          SB 810 (Leno)
          Page 1


          Essentially, this bill would combine under one administration 
          existing state-administered health care programs with the 
          privately funded insurance industry, and the state's uninsured. 
          The CHS would, on a single-payer basis, negotiate with providers 
          or set fees for health care services and would pay claims for 
          those services. 

          This bill would prohibit the existence of a health care service 
          plan contract or health insurance policy, except for the CHS, 
          that would be sold in the state that provided for the same 
          services as the system. This would reduce the California health 
          plan and insurance industry to either third-party administrators 
          for the system or entities that would provide coverage for 
          benefits not covered by the system. It would be administered by 
          the California Healthcare Agency under the control of a 
          Healthcare Commissioner appointed by the Governor and confirmed 
          by the Senate.

          This bill would require the commissioner to seek all necessary 
          federal policy and financing waivers, exemptions, agreements, 
          and legislation to implement the CHS. This bill would provide 
          that if the system does not receive federal or local permission 
          to transfer revenues to the Healthcare Fund for existing 
          federal, state or local governmental programs, the system's 
          responsibility to provide health care services would be 
          secondary.

          Implementation
          This bill would create various offices and boards to aid in the 
          administration of the CHS, including a Premium Commission that 
          would determine the cost of CHS, develop an equitable and 
          affordable premium structure, and consider the existing 
          financial simulations and analyses of universal health care 
          proposals, such as that completed by the Lewin Group in January 
          2005 of SB 921 (Kuehl, 2004). The other offices within the 
          California Healthcare Agency would be: the Healthcare Policy 
          Board, the Office of Patient Advocacy, the Office of Health 
          Planning, the Office of Health Care Quality, the Healthcare 
          Fund, the Public Advisory Committee, the Payments Board, and the 
          Partnerships for Health.

          This bill would require that the premium structure be 
          means-based and generate adequate revenue to implement CHS, 
          ensure that all income earners and employers contribute an 








          SB 810 (Leno)
          Page 2


          affordable amount of premiums, maintain the current ratio for 
          aggregate health care contributions from employers, individuals, 
          government, and other sources, provide a fair distribution of 
          monetary savings achieved from the single payer system, 
          coordinate with existing and ongoing state and federal funding 
          sources, comply with federal requirements, and include an 
          exemption for employers and employees who are subject to a 
          collective bargaining agreement and participate in a 
          Taft-Hartley Trust Fund.

          This bill would specify that only the provisions relating to the 
          Premium Commission would become operative on January 1, 2012, 
          and that the remaining provisions would become operative on the 
          earlier of the date that the Secretary of California Health and 
          Human Services Agency states that sufficient funding exists to 
          implement the CHS and the date that the state received a federal 
          waiver of federal health care reform requirements. 

          This bill prohibits any state entity from incurring transition 
          or planning costs prior to this determination, except the 
          Premium Commission. This bill would require the Premium 
          Commission to submit a recommendation for a premium structure to 
          the Governor and the Legislature on or before January 1, 2014. 
          The costs to the Premium Commission would be borne by state 
          departments and agencies that are members of the commission, 
          including the State Board of Equalization, the California Health 
          and Human Services Agency, the Employment Development 
          Department, the Legislative Analyst's Office, the Department of 
          Finance, and the Franchise Tax Board and would be funded by 
          either the General Fund or private funds. 

          Although the cost is unknown, it would be a substantial 
          undertaking requiring many hours of expert staff time to 
          determine the cost of a system and to determine a rate and 
          premium structure, as well as consult with stakeholder 
          organizations, policy institutes, and experts in health care 
          financing and universal health care models. Costs could be in 
          the high hundreds of thousands to millions of dollars in FY 
          2012-2013 and ongoing depending on the ongoing role of the 
          commission. This bill would require the Premium Commission to be 
          funded in the Budget Act of 2012.

          This bill would establish the Healthcare Fund, which would 
          consist of two accounts-one to pay annual state expenditures for 








          SB 810 (Leno)
          Page 3


          health care and another to maintain a system reserve. This bill 
          would provide that the premiums collected each year would be 
          roughly sufficient to cover that year's projected costs. This 
          bill would require the Commissioner of CHS to, during transition 
          to the system and annually thereafter, determine an appropriate 
          level for a reserve fund for the system.

          This bill would assume that all current local, state, and 
          federal trust fund monies used to provide health care coverage 
          to enrollees in state health care programs would be transferred 
          to the system. In many cases, it would be necessary to seek 
          federal waivers to ensure the continued receipt of federal 
          funds. For example, $27.9 billion of Medi-Cal's $40.6 billion 
          projected program budget are federal funds. The state must meet 
          minimum federal requirements to be eligible for federal matching 
          funds, known as the Federal Medical Assistance Percentage 
          (FMAP). California's current base FMAP rate is 50 percent 
          federal funds and 50 percent General Fund. The state is 
          receiving an enhanced FMAP rate of 61.59 percent federal funds 
          and 38.41 percent General Fund pursuant to the American 
          Reinvestment and Recovery Act for benefit claims from October 1, 
          2008, through December 31, 2010.

          Cost Projections and Previous Bills
          This bill is nearly identical to SB 810 (Leno) of 2010, which 
          was held in the Assembly.

          This bill is also nearly identical to SB 840 (Kuehl), which the 
          Governor vetoed in 2008 saying, "According to the Legislative 
          Analyst's Office, the bill is estimated to cost $210 billion in 
          its first full year of implementation and cause annual 
          shortfalls of $42 billion. To place this in proper 
          perspective-our state budget deficit this year started at $24.3 
          billion." Since this bill is nearly identical to SB 840, and as 
          such, would have a similar fiscal impact on the state, it does 
          not address the veto message.

          Additionally, in 2008, SB 1014 (Kuehl) was introduced as a 
          companion measure and a potential funding source for SB 840 
          (Kuehl, 2008) and was held in the Senate Revenue and Taxation 
          Committee. It contained 5 taxes:

           1) 1 percent tax on a taxpayer's taxable income that exceeds 
             $200,000, but is not over $1 million.








          SB 810 (Leno)
          Page 4


           2) Unspecified tax on self-employment income not less than 
             $7,000 and not over $200,000.
           3) Unspecified tax on nonwage income not in excess of $200,000.
           4) 3.78 percent tax on an individual's wages, but does not 
             include the first $7,000 or an amount of over $200,000.
           5) 8.17 percent tax on wages paid by every employer, except 
             those wages paid to an individual in excess of $200,000.

          The Lewin Group and the state's non-partisan Legislative 
          Analyst's Office (LAO), in response to SB 921 in 2004 and to SB 
          840 and SB 1014 in 2008, respectively, produced detailed fiscal 
          analyses on the concept of a single-payer health care entity in 
          California.

          The LAO report analyzed SB 840 and its funding mechanism SB 1014 
          (Kuehl, 2008), which would have imposed a combined 12 percent 
          tax on employers and employees, as well as other unspecified 
          taxes (the LAO estimated a rate of 11.5 percent) for the 
          purposes of providing a funding source for SB 840, as a 
          comprehensive "single-payer proposal" and assumed an 
          implementation date of January 1, 2011. The LAO estimated annual 
          costs of $210 billion in the first year of implementation, which 
          would grow over subsequent years to $250 billion in 2015-2016. 
          The analysis predicted a net shortfall of $42 billion in the FY 
          2011-2012, the first full year of implementation, and $46 
          billion in 2015-2016, due to a faster rate of growth for health 
          benefits costs relative to SB 1014 revenues. The LAO estimated 
          that it would take a combined tax of 16 percent on employers and 
          employees and 15.5 percent on the other taxes to mitigate the 
          predicted shortfall in revenues. The LAO estimate did not 
          include the 1 percent tax in SB 1014.

          The LAO assumes that the state would realize savings due to 
          reduced physician and hospital administration costs and that the 
          system would be able to operate at relatively low administration 
          costs. The analysis also assumes that federal, state, retired 
          state employee health contributions, and local government 
          contributions would shift to the single-payer system.

          The Lewin Group's analysis of SB 921 estimated costs would be 
          $167 billion in 2006 and would increase to $280 billion in 2015. 
          The group assumed similar tax revenues to those later proposed 
          in SB 1014 in 2007.









          SB 810 (Leno)
          Page 5


          Both the Lewin and LAO reports cited potential administrative 
          savings under a single-payer system, but their estimates 
          differed:  the Lewin report estimated administrative costs of 
          1.9 percent of health benefit costs, a rate that is similar to 
          that of the Medicare program, versus a rate of 12.7 percent for 
          private insurer administration. The LAO report estimates system 
          administrative costs of 3.9 percent in the first year of 
          implementation and 2.9 percent after 5 years. This bill would 
          require that system administrative costs not exceed 10 percent 
          of system costs in the first 5 years of transition and would 
          limit them to 5 percent of system costs within 10 years of 
          completing transition to the system. This bill would also 
          require the commissioner to establish a budget to support the 
          training, development, and continuing education of health care 
          providers needed to meet the needs of the population and the 
          goals and standards of the system.
          
          Conclusion
          It is likely that the costs associated with the implementation 
          of this bill would result in costs similar to those projected in 
          both the LAO and Lewin Group analyses-roughly $200 billion to 
          $250 billion upon implementation and increasing annually 
          thereafter. Since this bill would set in statute the framework 
          for a single-payer health care system and would require the 
          Premium Commission to determine the actual cost of the system, 
          develop a rate structure, and make recommendations to the 
          Legislature, there would be considerable cost pressure of 
          approximately $200 billion dollars annually to fund full 
          implementation. Since no revenue source is currently identified, 
          it would be pressure on the state General Fund. The initial 
          Premium Commission costs would likely be in the hundreds of 
          thousands to millions. Additionally, there would be transition 
          costs from the current health care system to a single-payer 
          system, including implementation of a claims payment system, 
          electronic medical records, labor market disruptions, reduced 
          tax revenue, and job loss from insurance companies.

          There would be ongoing General Fund pressure in the millions to 
          billions of dollars because this bill would provide that the 
          General Fund would be responsible for providing loans to the 
          Healthcare Fund in the event of a shortfall or the delayed 
          passage of the state's annual Budget Act. This bill would also 
          permit the Commissioner to use reserves and to borrow funds in 
          such a situation and to take cost control measures.








          SB 810 (Leno)
          Page 6



          The LAO analysis cautions the state to consider the volatility 
          of the proposed revenue source. In harder economic times, 
          revenues would decrease and place stress on the system. 
          Additionally, per Proposition 98, roughly 40 percent of any 
          additional tax revenue goes directly to education funding. A 
          constitutional amendment would be required to circumvent 
          Proposition 98. The Premium Commission would want to consider 
          this when proposing a funding source.

          Also, an outstanding issue is whether or not Medicare would be 
          included in the system. This bill would require the system to 
          use Medicare revenue if it obtains federal authorization. The 
          LAO cites data from the federal Centers for Medicare and 
          Medicaid Services (CMS) from 2004 that indicated that federal 
          spending for Medicare beneficiaries in California totaled about 
          $32 billion. The LAO estimate assumes that Medicare would remain 
          a separate system. It is unknown whether the state would be able 
          to retain 100 percent federal funding for Medicare recipients 
          receiving their care under the single-payer system. Other 
          discrete sources of revenue could include a shift of existing 
          tobacco tax revenues to the system.

          Since California would be the only state in the United States to 
          offer coverage to all state residents, there is the potential 
          for the underinsured and uninsured to migrate to California from 
          other states in order to obtain coverage. This bill would 
          provide for a waiting period if the Commissioner determines that 
          migration is an issue. Although this would increase the 
          population for which the system would provide coverage, 
          presumably any new residents would be paying into the system.


          The proposed author's amendments would eliminate a deadline for 
          the Senate confirmation of the Commissioner and add coauthors.