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Health reform fight heats up in California

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SACRAMENTO, Calif.--The stage is set for what could be the final battle in the California Legislature this year on whether state lawmakers will pass and Gov. Arnold Schwarzenegger will sign comprehensive health care reform legislation.

Gov. Schwarzenegger launched that drive in January when he outlined a universal health care coverage plan that would be funded in part by an assessment on employers not offering health care coverage. The plan also would require all residents to have health insurance.

Since then, both the Assembly and Senate have passed somewhat different bills and late last month the two top Democratic lawmakers agreed on a merged bill. The merged bill still needs final approval and, if passed, Gov. Schwarzenegger's signature, which could be in doubt, observers say.

The merged bill lacks the coverage mandate that was the foundation of the Schwarzenegger bill. Additionally, it would require employers to pay an amount equal to 7.5% of payroll on health care, an amount nearly double that proposed by the governor and one that angered business groups.

"Instead of providing leadership in tough economic times, leaders in the Legislature approved a multibillion-dollar health care tax on employers," Allan Zaremberg, president of the Sacramento-based California Chamber of Commerce, said in a statement.

Unless the individual mandate is restored, the measure may go down in defeat or be vetoed if passed, industry observers predict.

Moreover, any pay-or-play edict that becomes law is sure to be challenged by employers under the Employee Retirement Income Security Act. Another key issue is whether an assessment on employers to fund health reform could be considered a fee or a tax. Under California's state constitution, a tax requires a two-thirds majority to pass.

Among other provisions, the merged bill would:

c Give California's existing Managed Risk Medical Insurance Board authority to adjust the employer fee as needed to ensure the plan's fiscal solvency.

c Require all employers to establish Section 125 plans to enable employees to pay health insurance premiums on a pretax basis.

c Mandate that insurers guarantee coverage to all California residents without serious medical conditions.

c Restructure and boost funding to the existing high-risk pool for individuals with serious medical conditions with an additional assessment on health plans.

If passed, Assembly Bill 8 would take effect beginning in 2010.

Although the measure resembles 2003 pay-or-pay legislation backed by former California Gov. Gray Davis that voters later repealed, its principal sponsor is confident A.B. 8 will stick this time.

"We're functioning under a much different environment than when S.B. 2 was passed," said an aide to Assembly Speaker Fabian Nunez, D-Los Angeles. "In that situation, Gray Davis was under the specter of a recall. You had Democrats controlling both houses of the legislature and a Democrat in the governor's office. We have different dynamics now."

"This does really echo Gray Davis' plan from 2003," said J.D. Piro, an attorney at Hewitt Associates Inc. in Norwalk, Conn. "One of the things Schwarzenegger got elected on was his opposition to it. If there are differences to this mandate, I'm finding it difficult to find out what they are. Moreover, if it does pass the legislature, it does seem primed for an ERISA challenge or for businesses to balk at it, or both."

Kathleen Murray, a principal and attorney at Mercer Health & Benefits in San Francisco, agreed.

"I have heard rumors that the business community may be considering a referendum as they did in 2004," Ms. Murray said. "I'm seeing rumblings of an ERISA challenge. As this gets more serious, we're likely to see more discussion."

Other sources say it is doubtful A.B. 8 will withstand Gov. Schwarzenegger's muster without an individual mandate, a principal element of a proposal the governor unveiled earlier this year and a component of the Senate bill with which A.B. 8 was merged. S.B. 48, sponsored by Senate President Pro Tem Don Perata, D-Oakland, had required that individuals whose income exceeds 400% of the federal poverty level purchase health care coverage unless their share of the premium exceeds 5% of their household income.

A spokesman for Speaker Nunez explained that lawmakers removed the mandate because they don't know how much the insurance would cost, unlike the employer assessment, which is a finite amount.

"The governor's plan focuses on 'shared responsibility,' said one of Gov. Schwarzenegger's aides. "If everyone would benefit from having all Californians insured, then everyone needs to be part of the solution."

Removing the individual mandate also weakens any attempt at addressing the uncompensated care issue, said Chris Wadley, vp at Aon Consulting in Los Angeles.

"That's a fundamental issue. Do we make everybody do it one way or another, or do we just focus on taking a bite out of the apple--be it a big bite--and dealing essentially with people who have employment and through the business community?," Mr. Wadley said.

Another sticking point is the guaranteed-issue component of A.B. 8. Although both A.B. 48 and the governor's proposal included a similar requirement, they also contained an individual mandate intended to prevent the possibility that only those who need coverage buy it, observers point out.

"We don't want insurance companies to have their rolls full with individuals who are sick. We want healthy people to have insurance, too," Gov. Schwarzenegger's spokeswoman said.

Although the California Assn. of Insurance Cos. has not taken an official position on the new A.B. 8, a spokeswoman for the Sacramento-based organization said: "We are not supportive of guaranteed issue without an individual mandate because it will drive prices up for everyone."


What each California proposal would do

Schwarzenegger proposal:

  • Require all state residents to have health insurance coverage

  • Require all employers with 10 or more employees that do not offer health coverage to pay a fee equal to 4% of payroll

  • Subsidize premiums for low-income individuals with state funds

    n Impose new assessments on hospitals and doctors

  • Require health insurers to use 85% of premiums on patient care

  • Conform state tax treatment of health savings account contributions to federal law

  • Expand eligibility for the state Medicaid program

    California Assembly Bill 8:

  • Require all employers--regardless of size--that do not offer health coverage to pay a fee equal to 7.5% of payroll

  • Give state medical insurance board the authority to adjust the employer fee as needed to ensure fiscal solvency

  • Subsidize premiums for low-income individuals with state funds

  • Impose assessment on health plans to reinsure high-risk pool for individuals denied coverage because of medical condition

  • Require health insurers to spend 85% of premiums on patient care

  • Require employers to establish Section 125 plans to let employees pay health insurance premiums on a pretax basis