State Must Take All Its Medicine for Flawed Health Plan to Work

Under legislation passed late Friday and awaiting Gray Davis’ signature, if you work in a California company with more than 20 employees you will have health insurance by 2007.

The bill now on the governor’s desk would make California only the second state, after Hawaii, to mandate that employers pay for health-care coverage.

All good in theory. Unfortunately, the legislation also encourages price gouging and possibly employee layoffs.

The plan’s fatal flaw is the absence of cost controls. Employers would be required to pay the premiums, but there is nothing to stop insurers, doctors, hospitals and pharmaceutical companies from charging as much as they like for medical services.

The plan was pushed through the Legislature by an unlikely coalition of labor unions, HMOs, doctors and hospitals during the one year that Davis could not afford to veto it.

By insuring up to 1.5 million more people, the legislation would mean more business for the coalition’s partners, all of which refused to submit to regulation themselves.

Despite this major flaw, Davis still should sign the legislation, but he should also direct the Legislature to establish cost controls before the plan’s implementation.

If he doesn’t, he risks, among other things, employers trying to dodge exploding health-care costs by downsizing to avoid the law’s requirements.

For example, the legislation requires businesses with 200 or more workers to cover employees and family members by 2006, but many companies simply might fire enough of their workers to wind up with only 199 employees.

Because the plan anticipates that businesses with more than 20 employees would cover their workers by 2007, many companies might decide to limit their workforce to only 19 people.

If California is to become a national model for establishing employer-based health coverage, the Legislature must rein in costs so that employers and employees -- who pay 20% of the cost -- can actually afford the product they’re being required to buy.

Regulating costs should include requiring state approval for HMOs and insurers to raise their premiums, similar to auto insurance.

Earlier this year, the HMO industry defeated a bill to give the state the right to approve or deny premium increases before they take effect, as now occurs with auto insurance. That proposal must be revived. In Hawaii, similar regulations were adopted after health costs there skyrocketed.

Hospital and doctors’ charges should be standardized so that everyone receives a comparable amount for similar procedures. Maryland did this three decades ago, and it’s one of the few states where the hospital system is not overburdened or insolvent.

Bulk purchasing should be encouraged. Under the new legislation, companies would have a choice of paying directly for insurance or contributing to a state pool that would provide health insurance.

This state pool will suddenly have great power to purchase prescription drugs at bulk discounts, so it should be a requirement that the state take advantage of this new clout. Canadians pay one-third of the cost for their prescription drugs relative to the United States because of the power of bulk purchasing.

This state purchasing pool also should be open to every Californian. The self-employed and unemployed should have the opportunity to buy insurance from the state purchasing pool at regulated prices too.

At the same time, the purchasing pool could develop a network of physicians and hospitals that bypasses insurers and HMOs to avoid paying overhead costs and contributing to profit margins. A public alternative to the private market could create huge savings and cost competition.

There is a lot the nation can learn from California’s bold move toward employer-based coverage. Without cost controls, however, the only lesson will be how the state can help HMOs, doctors and hospitals make more money.