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.