Health Costs Hinder Overhaul

he demise of California's proposed health-care restructuring underscores a difficulty states face in achieving universal insurance coverage: their inability to slow the upward trajectory of health-care costs, analysts said.
The defeat of the $14.9 billion bill backed by Gov. Arnold Schwarzenegger and Assembly Speaker Fabian Núñez is a setback for state initiatives, but doesn't necessarily damp prospects for national reform, they said. That is because California's enormous uninsured population and shaky fiscal health made it a poor prospect for change.
"The conversation in California was more about trying to find ways to pay for coverage rather than to fundamentally change the health-care system and get at its big cost drivers," said Marian Mulkey, senior program officer at the California HealthCare Foundation, an Oakland, Calif., nonprofit organization. States don't have the "policy levers in their arsenal to do that kind of fundamental reform, when you consider how much of health care is driven by federal financing."

"It was only because of the enormous leadership and personality of the governor that they got as far as they did," said Paul B. Ginsburg, president of the Center for Studying Health System Change, a nonprofit in Washington. "With the economy souring, it became clear that this was way beyond California's fiscal capacity to pull off." Even if lawmakers had passed the bill, its fate was uncertain because it required approval by voters in a ballot initiative.

The California bill, hammered out by the two leaders, cleared the state Assembly in December, but failed to pass out of a Senate committee Monday. The plan would have covered about 70% of the state's 5.1 million uninsured residents through a combination of state subsidies and mandates on individuals and employers. All state residents, above certain income thresholds, would have been required to buy health insurance, but the cost was uncertain. Employers would have been required to contribute toward their workers' health benefits, or pay into a state fund.

Ms. Mulkey said by focusing on coverage expansion, without mechanisms to curb rising costs, California put itself in "that fast lane of health-care spending" increases. It wasn't clear that state funds would have been able to match program costs because health-care costs continue to increase faster than the rest of the economy. Cost management will likely require constraints that only the federal government can impose through the Medicare program because it accounts for such a huge share of overall U.S. health-care spending, she said.

"Some of the potential policies to address costs aren't really available to the states," agreed Dr. Ginsburg. Only the federal government can make changes in the tax treatment of health insurance, for instance. The federal government has the power to change the way it pays physicians. It is also better positioned to evaluate new technologies and drugs to determine whether they add enough value to justify higher costs.

The California bill's critics said its cost-containment mechanisms were weak. Many lawmakers were unconvinced that middle-class families would be able to afford insurance. Some families might be forced to choose between buying food or clothes or paying for this health-care coverage, state Sen. Leland Yee said. "I can't in good conscience put that kind of cloud over any family," he said.
Achieving universal coverage in California might be tougher than nearly anywhere else, said Len Nichols, a New America Foundation health economist who advised Mr. Schwarzenegger. In California, support for a single-payer, government-run health-care system is particularly strong, especially among labor groups. Republican lawmakers in California were adamantly opposed to tax increases, while some Republican lawmakers in Washington are willing to consider options, Mr. Nichols said.

Write to Rhonda L. Rundle at rhonda.rundle@wsj.com