Gov. Arnold Schwarzenegger has introduced an ambitious plan that would make health insurance coverage mandatory in California. At an annual cost of about $12 billion, he proposes to cover about 5 million of California's estimated 6.5 million uninsured residents, including children residing in the state illegally, and he charges just about everyone who has skin in the game to pay for it. Funds now earmarked to support county health care programs would be redirected and fees would be imposed on physicians, hospitals and businesses to help expand coverage.

No one should be surprised that such a bold move on the part of our state's top elected official would draw criticism. What follows is a collection of concerns raised by the governor's bold plan.

-The foundation of the plan appears to violate existing federal law governing employers' self-funded group health plans. The governor proposes to require employers with 10 or more workers to pay 4 percent of their payrolls into a state insurance pool if they do not offer a state-prescribed minimum package of health insurance benefits. A Maryland Court of Appeals panel for the Fourth Circuit earlier this month upheld a lower court decision to overturn a state law there on which the governor's plan is patterned. Maryland lawmakers attempted to require employers with 10,000 or more employees to spend at least 8 percent of payroll costs on health care or contribute to a state fund for the uninsured. Any state-sponsored comprehensive coverage mandate will invite similar legal challenges because of the federal statutory pre-emption on state regulation of self-funded plans set up pursuant to the Employee Retirement Income Security Act of 1974 (ERISA).

-The plan could trigger other legal challenges as well. The governor may call his plan's funding strategy "fees" or "coverage dividends," but a chorus of stakeholders and members of his own political party defines his levies on employers, doctors and hospitals as "taxes." And that sets the stage for legal challenges if passage of his plan is obtained without securing a two-thirds vote of the Legislature.

Complicating this further is the federal prohibition against provider taxes, a string attached to the federal funds received by the state to support its Medi-Cal program. Federal officials would have to agree that the doctor and hospital gross income levies (2 and 4 percent, respectively) are not taxes.

Alternatively, federal officials could waive or eliminate their provider tax prohibition. Either circumstance provides yet another opportunity to derail the plan, as many physicians and hospitals disapprove of this "unconscionable 'sick tax'" funding approach. Many oppose this part of the governor's plan "on principle," but most disapprove because the gross income assessments to be paid by doctors and hospitals would benefit those medical providers who currently treat more Medi-Cal and uninsured patients at the expense of those who treat few or low numbers of these patients. Doctors and hospitals serving richer communities would subsidize medical care provided in poorer communities under the governor's plan.

-The plan also calls for a redirection of county funds collected from vehicle license fees and sales taxes, which may require an amendment to the state constitution and redirection of 40 percent of taxes received by education pursuant to Proposition 98. Most assuredly, the interest groups representing taxpayers and the education community are mindful of this and will act in the interest of their constituents as the plan advances.

-Should the governor's plan be enacted and withstand these challenges, the 4 percent of wages charged to employers who do not provide health care coverage is at most half the amount needed to cover the cost of health insurance premiums for the uninsured workers employed by these businesses. If not increased, this would create a new under-funded government entitlement program and motivate employers to pay the new fee in lieu of continuing to provide coverage for their workers. That would likely require funding to be increased annually to offset premium cost increases linked to increases in the cost of medical care, which have been quite hefty.

-By increasing Medi-Cal payments to doctors and hospitals by $4 billion annually, the governor proposes to end the estimated 17 percent cost to insurance premiums caused by the state's underpaying doctors and hospitals for treating state-funded patients. He further proposes to constrain cost growth by overlaying progressive approaches to preventive health, chronic disease management, the accelerated application of information technology, and by requiring that at least 85 percent of the health care premium dollar paid to health plans and hospitals be dedicated to patient care. It is not clear, however, when or how employers or subscribers would see any health insurance premium cost reductions resulting from any of these strategies.

-Further, the amount of cost relief or cost growth constraint to be realized from these strategies is difficult to measure. Real cost containment requires us to deal head on with the two health care tsunamis that Bill Plested, president of the American Medical Association, referred to in his recent interview with the Business Journal. The pressures that advances in medical technology (including pharmacology) and the aging of our population places on the cost of health care are enormous. Any coverage expansion plan that does not tame these forces will leave us with a system burdened by ongoing cost increases vastly outpacing the overall inflation rate. Measurable and reliable health care cost containment features must be included or funding shortfalls will be generated annually, leaving future governors and Legislatures hard-pressed to find new funding sources or to increase the cash call on individuals, employers, county governments, doctors and hospitals currently charged under the governor's plan.

Jim Lott is executive vice president of the Hospital Association of Southern California.

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