By GLENN A. MELNICK

Gov. Arnold Schwarzenegger and his team have proposed a bold and imaginative health reform plan for California. A centerpiece of the plan is an income based subsidy for families to purchase health insurance. This policy recognizes a basic fact health care is expensive and not everyone makes enough to afford to buy health insurance protection.


A University of Michigan study in 2000 estimated that the average insured American will spend $316,000 on health care over their lifetime (half before they hit age 65). The total is closer to $450,000 when one factors in the today's higher medical prices and administrative costs of health insurance. Not everyone can afford this. For example, someone who makes $10 per hour (20th percentile in California) earns $20,000 per year or about $800,000 over 40 years. Health insurance would be more than half of total earnings. Many families simply will not earn enough over their lifetimes to pay for all the essentials and have enough left over to cover the additional cost of health insurance. While there are already two major subsidy programs for health insurance, MediCal and Medicare, they are no longer enough, as evidenced by the 6.5 million Californians without coverage. The governor's proposal recognizes this economic reality and includes a new subsidy along with a requirement that all Californians purchase health insurance.


The plan's estimated price tag to California taxpayers of supporting a permanent subsidy, however, is far too low. It relies on too many favorable assumptions. One assumption is that hospitals and doctors will charge lower prices to private insurance companies such as Blue Cross in the future since they will no longer have to provide free or highly discounted care to the previously uninsured population. However, health care providers operate much like any other business they prefer to charge higher rather than lower prices and thus they are unlikely to lower their prices much if at all. In fact, it is more probable that prices will rise, at least in the short run, as this large, newly insured population of 6-plus million starts using their new health insurance cards, generating a surge in demand while supply is fixed. We are not going to see, for example, an immediate increase in hospital beds, doctors or nurses just higher health care prices resulting in higher, not lower premiums for everyone.


Business decision

Another element of the proposal is a mandate that employers either provide coverage to their workers or pay 4 percent of payroll into a state fund. This mandate will trigger all companies to evaluate how much they spend on health care as a percent of payroll and if it is more than 4 percent, some will make a rational business decision to drop coverage and pay the new 4 percent tax. This will lead to reduced private coverage and more workers and their families in the state covered fund which will need to be subsidized by taxpayers. Another important assumption in the plan is that the federal government will provide an ongoing, multi-billion dollar subsidy to California (and other states who would likely follow) to underwrite subsidized coverage expansion. Given the federal budget deficit, it is at least equally likely that congress will eliminate this financing source to the states.


While the governor's proposal is noble in its aims, it must also be realistic and transparent in its financial planning. We are being asked to sign on for a long term commitment that is only likely to increase in scope and cost as time goes on, since health care costs in California will continue to outpace wage gains. As we debate this important issue in coming months we should keep in mind that policy makers, in their enthusiasm to enact new programs, often underestimate future costs and we should all work to make sure that we generate complete and accurate information on the true costs of the plan so that we can fully understand its full long term effects on both access to health care and on California's economy.


Glenn A. Melnick is professor and Blue Cross of California Chair in Health Care Finance at the University of Southern California, and the director of the Center for Health Financing, Policy and Management at USC. He is an occasional contributor to the Business Journal.

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