Proposed Health Care Mandate
California’s Governor Schwarzenegger is proposing to fix what ails our health care system with a mandate that makes everyone, businesses and individuals alike, pay to provide health care insurance for the state’s uninsured residents. Hallelujah! Well, maybe. Before we get too excited, perhaps we should take a closer look at the proposal so far.
First, a few basic facts about the governor’s concept:
1) It mandates that all California residents buy health insurance. If they don’t, there will be penalties, including having their wages garnished to pay for it. But, for those who are unable to pay, the state will cover the cost.
2) Businesses with 10 or more employees will be required to provide insurance for their employees, or pay 4% of their taxable Social Security wages into a state fund that will subsidize uninsured workers.
3) Hospitals will be taxed 4% and doctors will be assessed 2% of their gross revenues to help pay for insurance to cover those who are uninsured, including all children and reportedly illegal alien workers.
4) Hospitals and health care insurers would be required to use 85% of premiums generated by the plan and health spending for patient care.
Most knowledgeable political observers believe that some form of the governor’s proposal will be approved by the legislature in 2007. If it is, it’s pretty safe to assume the governor will sign it. So, where does that leave us?
First, given the importance of the health care issue in the U.S., it’s worth noting that whatever happens in California is likely to be emulated by other states and probably the Federal government. So this is not just about the quirky Californians on the Left Coast, it’s important to everyone, whether they live in California or not.
However, before those who favor the proposal can relax, there is one major obstacle the legislation will have to hurdle, which is whether the mandated assessments are determined to be taxes or can be considered fees for services. Columnist Dan Walters, writing in the Sacramento Bee (January 12, 2007), notes, “The governor’s aides, however, use terms like ‘contributions’ or ‘dividends’ or ‘fees’ or ‘revenue sources’ to describe the levies and insist that they are not taxes, bolstering that contention with a lengthy legal analysis concluding that since the funds would be ‘recycled’ back into health care, they can be deemed fees under state Supreme Court decisions.”
This consideration is critical, because new taxes in California require a twothirds majority of the legislature for approval, whereas fees for services do not. And, there are still enough conservative legislators to block or significantly change any legislation to implement this proposal. So, assuming it does pass, it’s likely to face a protracted court battle before it can become effective.
However, putting politics aside for the moment, let’s just consider some of the likely impacts of this idea.
Funds Versus Bureaucracy
First, one of the major consequences of the plan is likely to be a very large bureaucracy to administer. How much of the money that goes into the special fund to help uninsured workers buy health insurance coverage will be consumed by bureaucratic overhead is anyone’s guess, but it’s likely to be a significant percentage.
And, requiring health insurers and hospitals to dedicate 85% of premium dollars or fees to patient service may literally force many of them to operate at a loss. How the 85% will be defined is not yet clear, but one thing for sure, the bureaucratic administration alone of such an idea would be an accounting nightmare, to say nothing of the economics of being forced to operate a business under such a constraint. It’s a clear example of ignorance about how businesses operate.
In addition, at least as far as hospitals and doctors are concerned, there are some significant problems with the idea of assessing them a percentage of their gross revenues to help pay for anything. They can’t afford it. For one thing, nationwide 25% of hospitals lose money, and in 2006 the 75% that are profitable averaged profit margins of only 5.2%. So, if they are assessed 4% of gross revenues, that would leave them with a razor thin margin, unless they increase their charges by the same 4%. However, for the most part, they can’t do that. Why? Because a very large percentage of hospital inpatient revenues is derived from Medicare or Medicaid (Medi-Cal in California) patients, and fees that can be charged for services to these groups are not determined by the hospitals. They are set by the government. The same for doctors.
Furthermore, a very high percentage of hospital patients are covered by Medicare, anywhere from 40% to 70% of inpatient admissions, depending on the facility, which leaves only a small percentage of inpatient fees that can be raised. And, of those, a large portion are paid by insurance companies, which negotiate lower than standard rates. This leaves a very small percentage of total hospital fees that could be increased. Conclusion: the 4% tax by the state, or at least most of it, cannot be passed on.
How it Works
Here’s how it works: The Health Care Financing Administration (HCFA), which administers the Medicare and Medicaid programs, has established a system of payments to hospitals and doctors that’s based on the agency’s sole determination of what the charges should be for various services, for which they generally pay only 80% of their own scheduled rate. Nice deal, if you can get it. You decide how much a service is worth without regard to the cost of providing it, then pay only 80% of that amount.
The situation is much the same for Medi-Cal patients. The state simply decides how much they will pay for patient care, without regard to the cost of providing the services. And, Medi- Cal payments are notoriously low. So much so, that many doctors simply will not treat these patients, except in cases of emergency. The state’s payments are so low and so difficult to collect that many doctors don’t even bother to bill for their services to Medi-Cal patients. Assessing hospitals and doctors a percentage of their gross revenues to provide insurance for patients for whom the government underpays can only make the situation worse.
The theory behind the governor’s proposal seems to be that hospitals will be able to recover the cost of the uncompensated care they typically write off and that this will cover the 4% of gross revenues they will be assessed. In California, uncompensated care averages from 3.2% to 3.4% of their operating expenses. This would not, in fact, cover the 4% assessment, which would still leave the hospitals in the position of losing money on the exchange, that is, the tax on gross revenues vs recovery of the cost of uncompensated care. (Source: Highlights of a Government Accounting Office study, GAO-05-743T, May 26, 2005, “Uncompensated Care and other Community Benefits”).
The Consequences
As for the doctors, government mandates and regulation are already making their lives so difficult that many of them are looking for some way out: Early retirement, a career change of some sort, turning to “concierge” practices, etc. It’s not unusual for many of them to work very long hours, 8:00 a.m. to 8:00 or 9:00 p.m. five and six days a week just to keep their practices going.
What this means for the proposed California plan is that the tax or fee, call it what you will, that will be levied on hospitals’ and doctors’ revenues to provide health insurance for those who are uninsured, will simply have to be absorbed by them. And, as noted earlier, for those who may be profitable, it will leave them with razor thin profit margins. For the others, it will simply increase their losses.
As for other businesses, those with 10 or more employees, or at least most of them, will have three options for handling the 4% of their “taxable Social Security wages” that they will be required to pay into the state fund: (1) If they are not already doing so, they can avoid the tax by providing health insurance coverage for their employees, most likely at a higher cost, (2) they can raise their prices, or (3) they can lay someone off to cover the costs.
There’s much more, but without belaboring the point, this is a very bad idea that makes me wonder just how much real input was gathered from those groups who will be paying the tab: hospitals, doctors and small businesses. But, that’s just my opinion.
Harris Sherline was board chairman and CEO of Santa Ynez Valley Hospital for six years. This column is the opinion of the writer and not necessarily the opinion of the publisher.