Model for Mandated Coverage Exists, but Costs Are Unknown

By LAURENCE DARMIENTO
Staff Reporter

While many details of the landmark health care bill that passed the Legislature this month will need to be worked out over the next two years, those who helped craft SB 2 already know much about what the final product might look like.

The bill was designed to create a system that will resemble PacAdvantage, a privately operated health care purchasing pool that was created by the state in 1993 for small businesses.

The plan allows businesses with up to 50 employees to buy a variety of off-the-shelf products provided by several carriers that negotiate market rates with the pool.

SB 2's backers discarded simpler options that would have limited consumers' choices or involved more state control, including more aggressive rate setting.

"PacAdvantage is a model that has already been used, and already in place," said Dr. Michael Ashcraft, chief health deputy to state Sen. Jackie Speier, D-Oakland, who co-sponsored the legislation. "The whole idea of this bill is to build upon the existing (health care industry) framework."

If signed into law, the bill will require employers with 200 or more workers to provide health insurance for their employees and dependents, starting in January 2006. The following year businesses with 50 to 200 employees must also cover their workers, but not dependents.

Those who do not provide coverage would be required to pay an undetermined monthly fee for state-provided health coverage. (Businesses with more than 20 workers would not be required to provide coverage until the state provides an unspecified tax credit.)

Outline emerges

While legislators and interest groups will have much to say about what the plan looks like, final authority will rest with the Managed Risk Medical Insurance Board, the state agency that administered the PacAdvantage plan until it was handed over to the private sector four years ago. The board still manages several government health programs, including the Major Risk Medical Insurance Program, which helps insure individuals with pre-existing conditions who can't buy coverage individually.

Lesley Cummings, its executive director, declined to comment on what action the board might take, but said the legislation requires it to hold hearings to take public testimony.

"There are a lot of options out there in terms of how purchasing pools are structured, and our purpose will be to give the employers and employees out there the best coverage at the best cost," she said.

Still, with such powerful groups such as the California Medical Association and the California Association of Health Plans, an insurer trade group, pointing to PacAdvantage, it appears as if the state plan will at least be similar. "This is how we would envision it. There are multiple plans that would have an opportunity to participate," said Steve Tough, executive director of the health plans association.

Currently, PacAdvantage provides health insurance coverage to 13,000 businesses, including 128,000 employees and their dependents, who have a choice of HMO, PPO and other plans offered by Kaiser Permanente, Health Net Inc., Blue Shield of California and several regional carriers.

Clark Miller, a plan spokesman, said officials there were unaware that it is being considered as a model, but he said that it has served its members well. "You have a situation where small employers can offer their employees a good range of options, while maintaining simplicity of administration," he said.

The pool was initially created to help small business buy health insurance at lower rates during the rise of premiums in the early 1990s by pooling their purchasing power.

Still, its rates have averaged 5 percent to 7 percent higher than those offered to low-risk employers on the open market, said Mark Mathias, head of the health care practice in Los Angeles for Marsh, the country's largest insurance brokerage. That's because the pool includes higher-risk businesses, such as those with a high number of older employees.

"They have an additional layer of administrative costs and must take all comers," Mathias said.

Details, details

Perhaps the most important detail to be worked out beyond format is how much businesses will be charged if they don't provide their own coverage. On average, the current cost of providing health insurance per year is $2,400 per employee and $7,000 for an employee with dependents.

Under the legislation, employers will have to cover at least 80 percent of the total cost of their workers' premium, whether they buy it themselves or enter the pool. The fee charged by the medical insurance board is not supposed to be artificially high or low, but to simply cover the cost of care plus a small administrative fee, Ashcraft said.

Despite efforts by business groups to water down the state benefit package, it will have to meet minimum state standards already in place with commercial plans.

Still, there are some significant decisions ahead that could affect cost. The board could decide to simply average all costs and develop a uniform per-employee fee statewide. Or it could do what PacAdvantage does and take into account other factors, such as where a business is located and the age of its workforce.

In the end, the intent of the legislation is to provide employers with a reasonable choice between buying their own coverage or entering the state pool. The idea is that the pool, if it's competitive at market rates, should help keep down premiums for all by bringing a new, large provider of insurance into the state marketplace, Ashcraft said.

However, there is controversy over whether the legislation will lower health premiums. Some critics say that by mandating coverage but not including explicit price controls it could actually drive up costs. In a nod to the issue, companion legislation also before the governor would establish a commission that would examine ways to lower health care costs while improving quality of care. A report would be due by January 2005.

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