Author: Lucien Wulsin

ITUP’s Thoughts on the Basic Health Plan Option

ITUP’s goals for California’s implementation of the Affordable Care Acts are: 1) to cover as many uninsured as possible; 2) to build a strong and successful Exchange to buy more affordable coverage for small employers and privately insured and uninsured individuals; and 3) to develop integrated safety nets that compete on a level playing field on the basis of their price and quality.

The Basic Health Plan (BHP) is an option under the Affordable Care Act for individuals in the 133-200% income range; it could be closer to the design of the Medi-Cal program with lower out of pocket costs for subscribers than the traditional commercial insurance products.[1] It might also be closer to the design of the Healthy Families program, which has low copays, but is closer in design to standard commercial insurance.

The BHP option being discussed now in California could be a valuable design to meet one, and possibly two of these three ITUP goals, while weakening the third (the Exchange). First, lower premiums to subscribers through a BHP could attract more participants.[2] Second the BHP may be attractive to local health plans and give them an environment in which to develop integrated safety net delivery systems.[3] We are concerned that there could be too little competition in a BHP and thus less incentive for the plan networks to excel on price and quality.[4] A BHP may weaken the Exchange by shifting close to a million subscribers out of the Exchange and into the Basic Health Plan. [5]

We suspect that both of the following propositions are likely true: 1) lower costs to potential subscribers potentially associated with the BHP will result in more participation,[6] and 2) restricting subscribers’ choice among the private sector providers will result in less participation.[7] We have no idea of the respective balance between the two tendencies.

Big Underlying (and Understated) Issues

We think that much of the dispute about BHP is really a dispute about the respective merits and demerits of Medi-Cal and private insurance. Part of that dispute is about philosophy and program design, and part of that dispute is really about market share of different types of providers in the two very different types of coverage. Because BHP and the Exchange are still largely unknown, it is easy to pigeon-hole or caricature them with all the features one may like/dislike about the Medi-Cal program or private insurance.


There are a lot of Medi-Cal and other state and local program patients with incomes over 133% of FPL[8], and quite a lot of these patients are seen in the safety net.[9] Medi-Cal is a two-tier reimbursement system that works reasonably well for the safety net, due to its DSH and FQHC reimbursement features, but not at all well for the private doctors.[10]  Medi-Cal does not work well for private doctors because one of its primary cost containment tools has been cutting physician rates, which hurts access.[11] If the BHP is roughly equivalent to Medi-Cal, there will be weak private provider participation, and this is likely to result in lower subscriber participation as well.[12]  On the other hand, safety net providers and advocates are more likely to accept merger of existing state and county programs into a BHP like model than into a private insurance model of care.

Private Insurance

The typical model of a private insurance plan does not work too well for low and moderate income subscribers either, because its primary answer to rising costs is higher and ever less affordable out-of-pocket costs for consumers.[13]  Private insurance works well for the private sector providers but with limited participation by the safety net.[14] Private insurance has high value to doctors because it pays them so much more than Medi-Cal does.[15] Private insurance also has high value to its subscribers because it offers broad access to a range of private doctors.[16] Safety nets do not participate in private insurance to a significant degree in part because the competition among providers for these patients is intense and in large part because so few low-income patients have individual private insurance.[17]

The problem with these caricatures is that they do not capture the complexity of either system, nor their increasing convergence. Private insurance in California is mostly in managed care with a choice of HMOs being the dominant form of coverage.[18] The Exchange is likely to offer a similar range of plan types, with HMO’s likely to be the preferred option for lower income patients. Medi-Cal offers a choice of commercial insurance and local public plans. Healthy Families offers a somewhat broader range of commercial and public plans.

So what does the BHP have to offer that is or could be different? This is unclear as we do not have one; however, Healthy Families is the closest model and a model that has been reasonably well liked by both the public and private sector doctors and other providers, by parents and by private and public health plans. There is also opportunity for plan and provider creativity in benefit design and quality and outcome incentives due to the big gap between Medi-Cal rates and typical commercial insurance rates.[19] Medi-Cal underpays doctors[20] and hospitals[21], commercial insurance over-pays providers due in part to the cost shift for uncompensated care.[22]  Stan Dorn’s report for the Urban Institute quantifies this gap at about $1000 per member per year.[23] The opportunity for the BHP is to design more affordable coverage for lower income uninsured, using the funds associated with this gap to design better coverage and more effective provider payments. This is the same opportunity afforded to the Exchange in its roles as a savvy purchaser and a price negotiator. So what does the BHP add? An additional purchaser attuned to the safety net? Two weaker purchasers, instead of one stronger purchaser? A different set of policies for the individuals with incomes between 133% and 200% of FPL?[24]

For the full report, please download the following file:

[1] The Exchange subsidizes premiums and out of pocket for individuals and families on a sliding fee scale basis so that lower income persons pay no more than 2% of family incomes for their share of coverage. In the Medi-Cal program, individuals and families pay nothing for their coverage. In Healthy Families, parents pay for their children’s programs, beginning at $7 per month per child and increasing with the parent’s income. In California’s AIM program, pregnant women pay 1.5% of their income for coverage.

[2] See Leighton Ku, The Effect of Increased Cost Sharing in Medicaid: a Summary of Research Findings (Center on Budget and Policy Priorities July 7, 2005) at and Congressional Budget Office, Key Issues in Analyzing Major Health Insurance Proposals (December 2008) at

[3] The local health plans are the logical plans to develop an integrated provider network. They may not be as well positioned to compete in the Exchange due to their lack of broker networks and lack of variation in plan design as they would in a BHP where there is greater uniformity of plan design and less reliance on an independent broker network. Local health plans have competed successfully with their commercial counterparts in the Healthy Families program where the language skills and site locations of local safety net providers give them marketing advantages. The $3 premium differential may also be a marketing advantage, albeit a small one.

[4] In a Medi-Cal style plan, there is a choice of one (COHS), two (Two Plan models) or four (GMC) plans. Due to the relative lack of private sector providers, the DSH and FQHC subsidies for safety nets and the absence of financial consequences for price inefficiencies and quality shortcomings, the safety net providers would have fewer competitive incentives to excel on price and quality than in an Exchange model which is expected to highlight price and quality variations through transparency of plan and eventually provider price and quality measurements.

[5] Kominski and Wise, Basic Health Plan, What Would it Mean for California (California HealthCare Foundation, April 27, 2012)

[6] Cost issues clearly impact enrollment. See n. 2.

[7] Reputational issues are quite significant in impacting enrollment as well. Nearly all of those eligible for Medicare enroll although they must pay a part share of the costs of coverage. See January Angeles and Matthew Broaddus, Federal Government Will Pick Up Nearly All Costs of Health Reform’s Medicaid Expansion (Center on Budget and Policy Priorities, March 28, 2012) at  Take-up rates for employment-based coverage are about 85% even though employees must pay a part (20% and more) of the costs of coverage. See Lavarreda et al, The State of Health Insurance in California (UCLA Center for Health Policy Research, February 2012). On the other hand, take-up rates for Medi-Cal are estimated at closer to 60% despite the low to no cost of coverage to the subscribers. See Sommers, B. and Epstein, A, Medicaid Expansion, the Soft Underbelly of Health Care Reform (November 25, 2010) N Eng J of Med 2010; 363:2085-2087. Massachusetts and Pennsylvania had a 80% participation rate, California a 60% participation rate and Oregon and Florida a participation rate of slightly over 40%. And over 60% of California’s uninsured children are eligible for Medi-Cal (no cost) or Healthy Families (low cost). See California HealthCare Foundation, California Health Care Almanac: Medi-Cal Facts and Figures, September 2009.

[8] See Wulsin and Yoo, Medi-Cal Transformation (Insure the Uninsured Project, January, 2012) at and Kiwon Yoo, The Exchange and Public Program Integration (Insure the Uninsured Project, July 26, 2011) at

[9] See Yoo, 2006-2009 Overview of California’s Uninsured (Insure the Uninsured Project, November, 2010) at; 39% of community clinic visits are by Medi-Cal patients which account for 49% of clinics’ patient revenues. Roughly 30% of BHP eligibles currently use the safety net, 37% use private providers and 31% have no usual source of care; Kominski and Wise, Basic Health Plan, What Would it Mean for California (California HealthCare Foundation, April 27, 2012)

[10] Wulsin and Yoo, Medi-Cal Transformation.

[11] Ibid.

[12] Ibid.

[13] National Opinion Research, California Employer Health Benefits Survey (California HealthCare Foundation, December 2011) at Insurance premiums are increasing five times faster than the CPI and employers are responding by dropping coverage, cutting benefits, increasing employees’ coinsurance, copays and deductibles.

[14] Only 6% of community clinic patients have private insurance and that accounts for only 4% of community clinic revenues even though 57% of all Californians have private coverage. See Yoo, Overview of California’s Uninsured.

[15] Rough estimates are that private insurance pays doctors and hospitals at least 20% more than Medicare and Medicare pays at least 20% more than Medicaid.

[16] In a number of specialties including family practice and internal medicine, participation rates are 50% of less. See California HealthCare Foundation, California Health Care Almanac: Medi-Cal Facts and Figures, September 2009 at for a comparison of Medi-Cal and Medicare participation rates by specialty. But there are some doctors in practices with high income patients who are abandoning private insurance as well for boutique medical practices.

[17] Only 15% of individuals with incomes less than 133% of FPL have private insurance while over 85% of individuals with incomes over 400% of FPL have private insurance. Lavarreda et al, The State of Health Insurance in California

[18] Fifty-four percent of California employees are in HMOs. California Employer Health Benefits Survey. By contrast, 3/4 of the individual market subscribers are in PPOs, for the most part with much smaller benefit packages. CHCF, California’s Individual and Small Group Markets on the Eve of Reform (California HealthCare Foundation, 2011) at

[19] Stan Dorn of the Urban Institute estimates that in California, there is about a 20-25% gap between the cost of Medi-Cal coverage for a new eligible and the costs of equivalent coverage through the Exchange. Dorn, Basic Health Program: Issues for California (August 9, 2011) at

[20] California HealthCare Foundation, California Health Care Almanac: Medi-Cal Facts and Figures

[21] According to OSHPD, state hospitals administered $2.9 billion in bad debt and charity care in 2010.

[22] The amount of cost shifting to private insurance is a matter of some dispute; a commonly used figure is that about 10% of private insurance premiums is due to the cost shifting of hospital uncompensated care costs. I have been skeptical about this larger figure as I believe that most hospital uncompensated care costs are shifted to public programs. See Holahan and Hadley, The Cost of Care to the Uninsured, What do We Spend and Who Pays for It? (Urban Institute, 2004) at

[23] Dorn, Basic Health Program: Issues for California and Using the Basic Health Program to Make Coverage More Affordable to Low Income Households: a Promising Approach for Many States (Urban Institute, September 2011)

[24] Under the ACA, the essential benefits would not be different, however copays and deductibles could be and so could provider reimbursement rates. The Wise/Kominski report assumes that a BHP could and would offer lower subscriber premiums. This could help with affordability, but then create a large cliff as an individual’s premiums would spike when their income reaches 200% of FPL.

ITUP Guide to the Constitutional Challenges to the ACA

The ACA expands coverage to the uninsured and assures continuity of coverage for the insured in several ways:

  • First it expands Medicaid to all US citizens and long time legal permanent (5+ years) residents with incomes less than 133% of the Federal Poverty Level ($14,000 for an individual);
  • Second it creates the Exchange, a purchasing pool for small businesses and individuals, and it subsidizes coverage through refundable tax credits[i] to low wage small employers and individuals with incomes between 133 and 400% of FPL (i.e. $14,000 to $44,000 for an individual). The undocumented are ineligible to purchase through the Exchange; citizens and legal permanent residents are eligible to purchase;
  • Third it requires all insurance companies to guarantee issue and renew their coverage for individuals and small employers, regardless of pre-existing conditions – i.e. no more pre-existing condition exclusions for any individuals or employee; and
  • Fourth individual citizens and legal permanent residents are responsible to enroll in coverage through their employers or through the coverage expansions above or pay a small tax penalty, beginning at $95 a year (this is the “individual mandate”).[ii] There are exemptions for unaffordability, financial hardships and religious objections among other reasons. Young invincibles and those with financial hardships or unaffordability have an option of catastrophic coverage; for all others the minimum essential coverage is referred to as “bronze” coverage that would cover at least 60% of expected medical expenses.[iii] An individual who has less coverage than bronze, can at their option be “grandfathered” – i.e. retain their existing coverage without incurring financial penalties.

The Supreme Court is going to hear four issues about the constitutionality of the Affordable Care Act (ACA): 1) ripeness, 2) individual responsibility/mandate, 3) Medicaid expansion’s impact on the states and 4) severability. Since you are all likely to hear lots of questions, this is an effort to make these issues understandable to the interested layperson. In the background is a great deal of political “sound and fury”. The named plaintiffs include the state of Florida and the National Federation of Independent Businesses and the defendants include the Secretary of the US Department of Health and Human Services, Kathleen Sebelius.

The full text is available in the download below:

[i] A refundable tax credit and a premium subsidy are the same thing; there is bi-partisan agreement on the concept of these refundable tax credits, which have been tried a few times by Congress with reasonably good success. The ACA credits pay for the difference between a designated percent of an individual’s income and the cost of basic coverage. That percent increases with income from 2% to 9.5% of income. The cost of basic coverage is pegged to the second lowest priced available plan that covers at least 70% of basic health costs. So there are strong incentives to carefully shop on the basis of price comparisons.

[ii] The flat dollar amount equals $95 in the first year of coverage (2014), $395 in the second year and $695 in the third year and is capped thereafter at the growth in the medical CPI (Consumer Price Index).

[iii] The typical employer plan covers 80% of expected medical costs. What does bronze mean? It means the insurer would pay 60% of expected medical expenses and the individual would pay 40%. So if the average health cost is $5,000 annually, the plan would pay $3,000 and the individual $2,000. This is achieved through copays and deductibles that an individual must pay to the doctor or hospital when receiving medical care. To prevent financial hardship and medical bankruptcies, the ACA annually caps an individual or family’s maximum out of pocket exposure (about $6,000 for an individual and $12,000 for a family) and eliminates lifetime and annual dollar benefit caps.

Summary of FY2012-13 Health Budget Proposals

1. MRMIB will be eliminated and its programs (Healthy Families, AIM, MRMIP and PCIP) will be shifted into the Department of Health Care Services (DHCS). Roughly 457,000 children will lose Healthy Families eligibility and shift to Medi-Cal in 2012-13. Managed care reimbursement rates will be cut by 25.7%.

2. DMH (Department of Mental Health) and DADP (Drug and Alcohol) will be eliminated and most community and county mental health and substance abuse programs are shifted into DHCS. Actually, under realignment, these services are shifted to the counties, but state oversight shifts from DMH to DHCS.

3. Every Woman Counts (Breast Cancer Screening and Treatment), Prostate Cancer Screening and Treatment, and Family PACT will shift from Department of Public Health (DPH) to DHCS.

4. The Medi-Cal caseload will grow to from 7.7 to 8.3 million, a growth of 612,000 eligibles, primarily due to the shift of Healthy Families children.

5. Medi-Cal managed care will grow as Medi-Cal patients in 28 small rural counties will move from fee for service Medi-Cal into Medi-Cal managed care (a combination of 2 plan models and COHS systems). Savings are $8.8 million in 2013-14.

6. Dual eligibles (those with Medi-Cal and Medicare coverage) in the state’s largest counties will also shift from fee for service into managed care.

7. IHSS (In Home Support Services) and nursing home care will also shift from fee for service into managed care.

8. The General Fund savings from the shift from fee for service to managed care will be nearly $680 million in 2012-13 and nearly a billion in the following budget year.

9. Managed care will shift to annual open enrollment where a beneficiary can change plans only once a year.

10. FQHC reimbursements for community clinics will be reformed for a savings of $28 million in 2012-13 and $58 million thereafter.

11. IHSS to the elderly and disabled will be cut by $292 million as hours are cut 20% and eligibility would be eliminated for recipients with other family members living at home. The remaining program ($1.4 billion General Fund) will be moved into Medi-Cal managed care.

12. CalWorks eligibility for very low income parents and children will be cut by 45%; eligibles will decline from a projected 597,000 families to 324,000 families.

The state budget context: the 2011-12 budget closed the state’s budget deficit from over $20 billion to about $4 billion through realignment to counties, elimination of redevelopment agencies, cuts in programs, such as reductions in CalWorks grants to less than their 1987 levels, cuts in reimbursements to some providers of 10%, etc. This year’s 2012-13 budget deficit is projected at $9.2 billion. The Governor proposes to close it with $4.2 billion in new program cuts and $4.4 billion in temporary new taxes. Of the new cuts, $946 million would come from CalWorks, $842 million from Medi-Cal, $164 million from IHSS, $544 million from schools and $447 million from child care programs. The new revenues are from a temporary increase in the state income tax on high earners, ranging from 1-2% and a temporary increase in the state sales tax of 0.5%. These proposals would appear on the November 2012 ballot for voter’s decisions. The temporary revenues are for the most part dedicated to funding public safety realignment to the counties and to school funding. K-12 education General funds would increase by 11.8% to $38 billion after many years of cuts. Higher education funding would increase by 11.4% to $8.7 billion General Fund after several years of state cuts and tuition hikes. Health and Human Services funds would be cut by 1% overall to $26.4 billion General Fund on top of several years of state funding cut.

The economic context: The state and national economy are slowly recovering from the financial crisis of 2008 and the Great Recession. Job growth is slowly recovering. Most of the job and income gains are in the high wage, high tech sector, and the construction and housing sector are still in serious trouble due to foreclosures and falling home prices.

The Governor’s budget proposal is available online, and this summary is also available for download.
FY2012-13 Budget Proposal Summary FY2012-13 Budget Proposal Summary.pdf

Thoughts on the Sevensky v. Holder Ruling and the Constitutionality of the ACA

If you want a lucid and easily understandable analysis 0f the constitutionality of the ACA, read Judge Silberman’s opinion and analysis in Sevensky v. Holder #11-5047 (DC Court of Appeals November 8, 2011). The issue the court is addressing is whether the individual mandate/shared responsibility is unconstitutional under the Commerce clause because it impacts individuals who may wish to be uninsured or cannot afford the cost of premiums, irrespective of the Exchange’s tax credits and hardship exemptions. Also please see ITUP’s earlier blog posts on this issue.

Most of the DC Circuit Court of Appeals decision is a discussion between the majority and dissent as to whether the case is premature due to the distinction between a tax and penalty under the federal Anti-Injunction Act. You may want to ignore that portion unless you are a lawyer steeped in the jurisdiction of federal courts over tax policy.

The portion of the decision worth reading for the layperson is Section 3 of the court’s decision. Judge Silberman, writing for the majority, points out that the test of whether the Constitution’s Commerce Clause requirements are satisfied is the collective impact of millions of uninsured and underinsured Americans on interstate commerce, not the impacts on a given individual who may choose to be uninsured.

I have excerpted the following.

1) “Appellants’ primary argument why the individual mandate exceeded Congress’ enumerated powers is that Congress cannot require individuals with no connection to interstate commerce, and no desire to purchase a product, nevertheless to do so”.
2) “The Government counters … Congress can regulate even purely local intrastate economic behavior so long as in the aggregate, it substantially affects interstate commerce. The manner in which consumers pay for services in the interstate health care market is such an example. Because virtually everyone will, at some point, need health services, no one is truly inactive, and the health services market is inextricably intertwined with health insurance. Congress found that that those who do not purchase health insurance, and instead self insure, almost inevitably take health care services they cannot afford. Hospitals by virtue of federal law and professional obligation, provide these services, and as a result, $43 billion in annual costs are shifted to the insured through higher premiums. That in turn makes health insurance less affordable, and increases the total number of uninsured.”

Judge Silberman first reviews the text of the Constitution and the definitions in common currency at that time. The Commerce Clause, Article 1, §8, cl. 3, states “The Congress shall have power to regulate commerce with foreign nations, and among the several states.” At the time the Constitution was fashioned, to “regulate” meant as it does now, “to adjust by rule or method,” as well as “to direct”. To “direct,” in turn, included “to prescribe certain measures: to mark out a certain course” and “to order; to command.” In other words, to regulate can mean to require action and nothing in the definition appears to limit that power only to those already active in relation to an interstate market. There is therefore no textual support for the appellants’ argument.”

The court then reviewed the relevant Supreme Court case law and found that Wickard v. Filburn was the closest controlling precedent. In that case, a farmer was growing wheat in excess of his allotment under the Agricultural Adjustment Act of 1938 not for sale in the market but to feed his family and livestock. “The Supreme Court unanimously rejected this claim. It held that growing wheat for personal consumption, not for sale in any market, could affect the national price and therefore was within Congress’ commerce power.”

The court explained: “Appellant’s view that an individual cannot be subject to Commerce Clause regulation absent voluntary, affirmative acts that enter him or her into, or affect, the interstate market expresses a concern for individual liberty that seems more redolent of Due Process clause arguments. But it has no foundation in the Commerce Clause. The shift to the “substantial effects” doctrine in the early twentieth century recognized the reality that national economic problems are the result of millions of individuals engaging in behavior, that in isolation, is seemingly unrelated to interstate commerce. See Lopez, 514 US at 555-6. That accepted assumption undermines appellant’s argument; its very premise is that the magnitude of any one individual’s actions is irrelevant; the only thing that matters is whether the national problem Congress has identified is one that substantially affects interstate commerce.”

“ Broad regulation is an inherent feature of Congress’ constitutional authority in this area; to regulate complex, nationwide economic problems is to necessarily deal in generalities. Congress reasonably determined that as a class, the uninsured create market failures; thus the lack of harm attributable to any particular uninsured individual, like their lack of overt participation, is of no consequence.”

In closing the court said “a direct requirement for most Americans to purchase [health insurance] … certainly is an encroachment on individual liberty, but it is no more so than a command that restaurants or hotels are obliged to serve all customers regardless of race, that gravely ill individuals cannot use a substance their doctors described as the only effective palliative for excruciating pain or that a farmer cannot grow enough wheat to feed his family. The right to be free from federal regulation is not absolute, and yields to the imperative that Congress is free to forge national solutions to national problems.”

The Supreme Court is the final arbiter on the ACA, but it is reassuring that a judge well-respected by conservatives, applying the prior reasoning of Justice Scalia and the recommended analytical approach of Chief Justice Roberts found the ACA to be compliant with constitutional strictures.

The full ruling is available online, and this document is available for downloading as well.

Sevensky v. Holder Sevensky v. Holder.pdf

ITUP Comments on Exchange and Medicaid NPRMs

Re: Notice of Proposed Rule Making, CMS-2449-P, CMS-9974-P, and IRS REG-131491-10

Dear Secretary Sebelius

Thank you to you and your team for a excellent set of proposed regulations on the
Exchange and Medi-Cal program expansions, we would like to offer comments on
the following issues: 1) Medi-Cal simplification, 2) the relationship of Medi-Cal
and the Exchange, 3) relationship of the Exchange to Healthy Families, 4) the
interface of the Exchange and small employers, 5) the ability of the Exchange to
cover the flex workforce, 6) the Exchange and IT, 7) purchasing strategies in the
Exchange and 8) adverse selection in the Exchange, individual and small employer

The full text is available for download:
Exchange/Medicaid NPRM Comments Exchange/Medicaid NPRM Comments.pdf

Waiver Implementation Update (Oct 2011)

The §1115 waiver approved for California on November 1, 2010 provides a bridge and other vital infrastructure to coverage in 2014 and offers immediate support and relief to the financially hard pressed safety net system and the individuals they serve. Local communities face the challenge of implementing three new programs at the same time. They are at widely divergent starting points and their efforts need to lead to a unified statewide effort by 2014. This paper provides a snapshot overview of local implementation of the three following elements of the waiver.

In preparing this report, we reviewed county documents submitted to the state, the discussions at ITUP regional and issue workgroups and interviewed over 30 individuals involved in local implementation efforts. These are ITUP’s conclusions and characterizations should not be considered as the views of any individual, county, clinic, health plan or other entity.

Waiver Implementation Update (10/11/2011) Waiver Implementation Update (10/11/2011).pdf

Summary of the President’s Proposal for Economic Growth and Deficit Reduction

President Obama recently proposed $4 trillion in budget reductions over the next 10 years. This includes $1 trillion from the Budget Control Act of 2011, $1 trillion in savings from winding down the wars in Iraq and Afghanistan, $1.5 trillion in federal tax reforms (fewer loopholes, lower rates and alternative minimum tax (the Buffet rule) for persons making over $1 million a year) and $580 billion in cuts to entitlement programs. $320 billion would be cut from Medicare and Medicaid. This summarizes the Medicare and Medicaid cuts.

1. Prohibit pay for delay agreements by pharmaceutical manufacturers in order to increase the availability of generics
2. Reduce the exclusivity period for brand name biologics
3. Streamline FEHB pharmacy contracting
4. Recover overpayments to Medicare Part C. Dedicate penalties for non-adoption of EMRs to deficit reduction. Require prior authorization of advanced imaging. Update (i.e. selectively reduce) Medicare payments for advanced imaging. $5 billion over the next decade
5. $25 increase in Part B deductible in 2017, 2019 and 2021 for new beneficiaries. $1 billion over the next decade.
6. Home health copay of $100 per home health episode for new beneficiaries beginning in 2017. $0.4 billion over the next decade.
7. Part B premium surcharge beginning for new beneficiaries in 2017 for those purchasing comprehensive Medigap policies that negate the cost sharing incentives of the Medicare program. $2.5 billion over the next decade.
8. Reduces the Medicare allowance for bad debts from non-payment of copays and deductibles from 70% to 25% in 2013. $20 billion over the next decade.
9. Reduces Indirect Medical Education add-on payments by 10% beginning in 2013. $9 billion over the next decade.
10. Reduce excessive payments for rural hospitals. $6 billion over the next decade.
11. Encourage more efficient post-acute care. $40 billion over 10 years
a. Adjust payment updates for certain post-acute providers
b. Equalize payments between SNFs and inpatient rehab facilities for the same treatments of specified conditions
c. Set criteria for use of higher cost inpatient rehab facilities
d. Reduce SNF payments by up to 3% beginning in 2015 for excessive, preventable hospital readmissions
12. Align Medicare drug reimbursements to the Medicaid program policies beginning in 2013. $135 billion over 10 years.
13. Increase Part B and D premiums for higher income beneficiaries in 2017. $20 billion over 10 years.
14. Set the growth rate target for the Independent Payment Advisory Board at GDP + 0.5% (currently GDP + 1.0%)
15. Reduce Medicaid fraud and abuse. $1.4 billion over the next decade
a. 3rd party liability
b. Enforce drug rebate agreements
c. Track high prescribers and users of prescription drugs
d. Prohibit states from using federal funds as the state Medicaid match
16. Allow states to use benchmark benefits for optional Medicaid eligibles over 133% of FPL
17. Permit state innovation waivers under ACA to begin in 2014 (rather than 2017)
18. Phase down Medicaid provider taxes beginning in 2015. $26.3 billion over the next decade
19. Blended matching rate for Medicaid, CHIP and Medicaid expansions beginning in 2017. $26 billion over 10 years.
20. Durable medical equipment payments under Medicaid may not exceed Medicare payments. $4.2 billion over 10 years.
21. Reduce federal Medicaid DSH payments. $4.1 billion over 10 years
22. Income for purposes of calculating Exchange and Medicaid financial eligibility includes Social Security payments. $14.6 billion over 10 years
23. Reduce the Prevention and Public Health Fund to $13.8 billion. Savings of $3.5 billion over 10 years.

Source: Office of Management and Budget, Living Within Our Means and Investing in the Future, The President’s Plan for Economic Growth and Deficit Reduction (September, 2011) at

My Thoughts on Deficits

We cannot live with them; we cannot live without them. Classical Keynesian economic theory explains that government must deficit spend during an economic recession to restore growth, then run a surplus during boom times to prevent over-heating the economy and stoking inflation. During economic recessions, we need to spend on the unemployed and cut tax rates for those who promote job creation. Spending for infrastructure builds the base for further economic growth.

We are at a historic low for federal government revenues — 14.4% of Gross Domestic Product — a revenue level we have not seen since 1950. We are a historic high for federal government expenditures — 25.3% of GDP — a level of spending not seen since the Second World War. If we do nothing with the tax code and spending programs, revenues will rise to 19.3% and expenditures will drop to 22.6%, a budget deficit of 3.3% of GDP. You can review the history of taxes and spending at here. The rise in overall health spending accounts for the greatest part of long term structural deficits. This includes the per capita growth in Medicare, Medicaid and the tax expenditure for private health insurance. Under the leadership of President Bill Clinton, the nation increased taxes, reduced spending rates and moved from large deficits to a healthy surplus. We emerged from a recession, had robust and broad economic growth, followed by a serious speculative bubble on Internet stocks and a recession.

Under the leadership of President George W. Bush, the nation cut taxes in a manner skewed towards upper income tax payers, increased military spending due to two wars and domestic spending due to coverage of prescription drugs for seniors. We emerged from another recession, had healthy economic growth followed by a large speculative real estate bubble and the most severe economic and banking crisis since the Great Depression. TARP was enacted to salvage the financial system. Under the leadership of President Barack Obama, the nation cut taxes equally for all Americans as part of ARRA, then extended the Bush tax credits temporarily and temporarily reduced payroll taxes for employees. Military spending continued unabated due to two wars. TARP was used to salvage the domestic auto industry as well the nation’s banks. ARRA was targeted to building physical and human infrastructure and helping state and local governments weather their loss of revenues due to the recession. ACA passed; it will offer affordable coverage for all American citizens and pay for the expansion with equal measures of spending cuts and increased tax revenues.

Our nation is now at the precipice of default on the national debt at a time of still high unemployment and slow economic growth that are the residue of our latest recession. The prospect of default is due to the need to raise the nation’s debt limit, but it also coincides with our need to achieve long-term deficit reduction. This presents an important opportunity to set the nation’s future on a sound track. We could also precipitate a severe national and global recession if we fail to act wisely.

Acting wisely means we must neither increase taxes nor cut spending precipitously at a time of slow recovery when the potential for a double dip recession is real. Acting wisely means we must trigger phased-in spending cuts and tax increases to take effect when the economy is in strong recovery. Acting wisely means cutting spending and closing tax loopholes that are not achieving their objectives. Acting wisely means we must bend the cost curve; health spending must be slowed through serious payment reforms in Medicare, Medicaid and private insurance that pay for improved health outcomes, not by denying care and coverage to our nation’s citizens. Acting wisely means we must develop a sounder, fairer tax system, rather than one riddled with confounding loopholes and inequities to the immediate advantage of some but the disadvantage of all. Acting wisely means that when we must choose to fight wars, we must eventually pay for them with increased revenues. When we expand health benefits, we must adopt offsetting cuts and revenue increases. Acting wisely means acting now before precipitating an entirely foreseeable and preventable economic catastrophe.

Thinking About Children’s Coverage

We need to thank the Brown Administration for their efforts to provoke all of our best thinking on the best way to cover California’s children in 2011, 2014 and onward. They propose to shift the 900,000 Healthy Families children into Medi-Cal beginning January 2012. Healthy Families covers uninsured children with family incomes between 100% ($22,350 for a family of four) and 250% of FPL ($56,250 for a family of four). The predicted General Fund savings are anticipated to be roughly $30 million this year and $100 million annually thereafter. The General Fund savings are matched by federal fund savings of $200 million annually.

The Administration’s proposal is driven by state budget exigencies that cannot be ignored. The savings are achieved based on the assumption that Healthy Families pays $100 per child per month for health, dental and vision, while Medi-Cal would pay about $75 per child per month. One reason for the premium difference is lower payments to doctors/dentists and thus less access to participating providers in Medi-Cal. On the other hand, Medi-Cal does cover more benefits with lower copays and other out-of-pocket costs than Healthy Families. Other differences are that Medi-Cal contracts with fewer health plans, offers less plan choice, and has a more complex, costlier and slower enrollment process. Some groups are quite supportive of this proposal due to the stronger legal protections and entitlement features of Medi-Cal. Others are opposed due to the cuts in reimbursement and access. The Administration is seeking solutions to Medicaid’s limitations to dental and rural access, as well as the program’s application and enrollment challenges.

Under federal reform in 2014, federal funds will be available to cover most of California’s uninsured , whereas, now they are only available for a portion of California’s uninsured children. In 2014, federal funds will be available to help pay for coverage for uninsured families with incomes up to 400% of FPL ($88,000 for a family of four), which are currently only available for parents up to 100% of FPL ($22,000 for a family of four) and children up to 250% of FPL ($56, 250 for a family of four). Federal reform would have “bright line” eligibility at 133% of FPL ($29,790 for a family of four) between the Medi-Cal program (public insurance) and the Exchange (private insurance). In fact, the description of public insurance vs. private insurance is somewhat misleading in California, as both programs contract with health plans, private and public. But the inescapable difference here in California is that Medi-Cal pays lower rates and private insurance pays higher rates; therefore Medi-Cal has had greater difficulty in securing participation by private doctors and dentists.

My vision is as follows: we should keep parents and their kids in the same program, with the same plan, the same family doctors and the same provider network. This is simpler for families, for doctors and for program administrators. As a practical matter, that would mean uninsured families with incomes of less than $30,000 for a family of four would be eligible to participate in Medi-Cal, and families with incomes above that level would participate in the Exchange (where refundable tax credits help pay their premiums and cost sharing). The Exchange would then administer the Healthy Families program for children with family incomes 133-250% of FPL, and Medi-Cal would cover uninsured children with family incomes less than 133% of FPL beginning in 2012.

Some have suggested different eligibility standards/rules for children as distinct from their parents. In my view, the same income threshold and counting of income should be used for all to make the programs so much easier to understand and administer.

The legislature is also considering the federal option to develop a Basic Health Plan. This could be designed to look like Medi-Cal, or a slimmer “benchmark” package of benefits, or it could be more comparable to Healthy Families. This option could be constructed to weaken participation in the Exchange, or it could be administered as one of the options offered to subscribers by the Exchange.

What should happen to other California programs for children, such as CCS (California Children’s Services), AIM (Access for Infants and Mothers) or CHDP (Child Health Disability Prevention Program)? They should follow the same split, moving programs for lower income children into Medi-Cal and higher income children into the Exchange.

What should we do in the interim (2011-2014)? We could carefully transition most of the MRMIB (Managed Risk Medical Insurance Board) programs (Healthy Families, AIM and MRMIP) and staff into the newly formed Exchange and the Healthy Families children in families with incomes less than 133% of FPL into Medi-Cal.

Thoughts on the Basic Health Plan

The ACA permits states to cover individuals with incomes between 133 and 200% of FPL through a Basic Health Plan (BHP).[i] States who choose to do so would receive 95% of what the federal government would have paid for their coverage through the Exchange. This is based on the Washington Basic Health Plan that was a signal success in that state.[ii] California could seek federal approval of a Basic Health Plan that builds off its Medi-Cal program or its Healthy Families program. [iii] BHP could be administered by the Exchange, by MRMIB or by the Department of Health Care Services.[iv] It could be the sole choice for subscribers with incomes between 133 and 200% of FPL or it could be one of the coverage options offered in the Exchange that would be more attractive to local safety nets.

Conceptually, a Basic Health Plan would look more like the Healthy Families program for children than like commercial private insurance. This means lower out of pocket (smaller copayments and low or no deductibles) but tighter utilization controls (by providers and plans) on the use of medical services.

1) Simplicity of integrating programs
The Exchange will be purchasing private insurance, which typically has substantial copays and deductibles and higher provider reimbursement rates than Medi-Cal.[v] The Medi-Cal program by comparison has nominal copays, broader benefits and lower reimbursement rates. The Basic Health Plan might be Medi-Cal-like with lower copays, but it could pay plans and providers at higher reimbursement rates than Medi-Cal (e.g. 95% of commercial rates). This could ease the integration of some aspects of Medi-Cal (such as medically needy and pregnancy only coverage) that reach some individuals in the 133-200% of FPL income brackets and Healthy Families (for children 133-200% of FPL). Alternatively, Basic Health Plan could be built off the Healthy Families program that already covers children and then could expand to add in their parents and other low-moderate income adults. While BHP could simplify as described above, it could also add another level of complexity – adding in an intermediate program between Medi-Cal (0-133%) and to-be-revised Exchange (200% of FPL and up).

2) Lower cost
BHP could be lower cost to low and moderate income persons as the co-premiums, copays and deductibles would be less than in private insurance through the Exchange. It could be lower cost to the government at 95% of Exchange costs. Lower costs to plans could also be achieved due to lower transactional costs by avoiding the selling and administrative costs associated with the sale and purchase of private individual insurance. A win-win-win is possible.

3) Familiarity
Medi-Cal is a very familiar program needing little explanation for low-income populations and the safety net providers and plans. Healthy Families is somewhat less well known, but does have a strong track record and positive brand familiarity for children over the past dozen years.

4) Lower out of pocket
Medi-Cal has very low copays (compared to private insurance) and no co-premiums and no deductibles. Healthy Families has no deductibles, somewhat higher copays and co-premiums with limits on out of pocket exposure. The Exchange will have sliding scale limits on co-premiums and out of pocket exposure. All of these programs have no copays on preventive services of demonstrated clinical effectiveness. Past research found that out of pocket causes consumers to stint their use of health services; to the extent that unnecessary care is reduced, this is a good result, but this can also operate to the detriment of low-income consumers who under use prevention.[vi] In recent years, there have been trends towards ever higher out of pocket responsibilities for consumers that have led some to drop coverage and others to stint on needed care. [vii] Lower or no co-premiums is likely to increase program participation. [viii]

1) Lower payments to providers and thus less robust provider networks
Medi-Cal pays many providers significantly less than does private insurance and partly as a result fewer providers are willing to see Medi-Cal patients. If the BHP were to mirror Medi-Cal rates, it would have a similar experience; however if it paid at for example 95% of private insurance reimbursement, it is likely to assure adequate access.[ix]

2) Uneven playing field for privates and publics
Medi-Cal payments for doctors and hospitals are often far less than private insurance, less than Medicare and not uncommonly below the average cost of delivering services. Federal and state policies assure that some clinics (FQHCs and look-alikes) and some hospitals (counties and UC’s) are paid at cost and some hospitals (DSH and DSH look-alikes) receive supplementary payments to offset their uncompensated care. This creates a highly uneven playing field in the Medi-Cal program.[x]

3) Negative perceptions of Medi-Cal
Some have negative perceptions of Medi-Cal because it is a public program, others because it grew from welfare programs and the stereotypes associated with them, and still others from the history of red tape associated with enrollment of subscribers and delayed and low payments of providers. While Medi-Cal is a very different program today than its inception,[xi] a Basic Health Plan could be an opportunity to shed much of the red tape and programmatic complexity[xii] and create a positive image with providers and subscribers.

4) Fewer plan and provider choices
A smaller number of plans and providers participate in Medi-Cal, and in some communities there is poor access to doctors and especially specialists. Healthy Families has had better participation of plans and doctors. Paying providers and plans at 95% of private insurance rates is likely to attract ample participation.

[i] ACA §1331

[ii] For a thorough analysis of Washington’s BHP, see Oregon Health Policy and Research, Study of Washington State Basic Health Plan (June 2002). Program enrollment had increased to 136,500 in 2002. The program is under financial stress due to declining state tax revenues and increasing enrollment due to the recession; the state legislature froze enrollment and is transitioning the residual program to a program financed through a federal waiver. Enrollment caps and budget cuts had cut enrollment to 56,000 by January 2011 with 136,500 on a wait list. See Washington State Medicaid Receives Federal Approval of National Health Care Reform Bridge Waiver.

[iii] See Dorn, The Basic Health Program Option Under Federal Reform (Urban Institute, March 2011) at

[iv] SB 703 (Hernandez) would administer the program through MRMIB; it might be more effective to put the program in the Exchange.

[v] The Exchange has refundable tax credits on a sliding fee scale to offset the higher out of pocket for low and moderate-income subscribers.

[vi] See Ku, The Effects of Copayments on the Use of Medical Services and Prescription Drugs in Utah’s Medicaid program (Center on Budget and Policy Priorities, November 2004) at, and Newhouse (Copayments and the Demand for Medical Care: the California Medicaid Experience). Bell Journal of Economics, 9:192-209 (1978)

[viii] Ku. The Effects of Increased Cost Sharing in Medicaid: a Summary of Research Findings (Center on Budget and Policy Priorities, July 2005) at

[ix] While the comparative levels of provider payment are important in securing provider participation; the design of provider payments can and should be far more important in improving patients’ health outcomes.

[x] This does not need to be replicated in BHP. It should also be mentioned that the private commercial insurance markets have not been singularly welcoming to participation by safety net providers.

[xi] Cash assistance (SSI and TANF) recipients make up only a fraction of program participants and the bulk of Medicaid program spending has been on long term care where many nursing home residents using the program are from middle income strata who simply cannot afford the enormous and sustained annual costs of nursing home care.

[xii] The Exchange eligibility will be built on modified gross income as reported on federal tax forms with no asset tests and a simplified computer based application and eligibility verification process. Medi-Cal and Healthy Families should be quickly moving in the same direction.

Thoughts on the Basic Health Plan Thoughts on the Basic Health Plan.pdf