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January 2007

California Governor Unveils Comprehensive Reform Plan

On January 8, Governor Arnold Schwarzenegger (R) announced his new vision for creating “an accessible, efficient, and affordable health care system.” Governor Schwarzenegger’s plan is built on many of the same elements included in other state reforms such as those in Massachusetts and Vermont. The three cornerstones of his plan include:

  • Prevention, health promotion, and wellness
  • Coverage for all Californians
  • Affordability and cost containment

In order to address rising health care costs attributed to preventable disease and disability, Governor Schwarzenegger intends to implement ‘Healthy Actions Incentives/Rewards’ programs. These programs, accessible in both private and public programs, will provide rewards (e.g., premium reductions, gym memberships, etc) for individuals to engage in healthy behaviors. Additionally, in order to improve health outcomes and implement long-term cost containment strategies, the Governor is also proposing disease management for diabetes, programs to combat obesity and tobacco use, and strategies to improve patient safety.

As part of the proposal, the Governor outlined the steps necessary to achieve universal coverage for the 6.5 million Californians currently uninsured in the state, these include:

1. Individual Mandate: Emphasizing the importance of personal responsibility, all individuals will be required to have coverage. The state has determined that the minimum level of coverage per individual include a $5,000 deductible plan with a maximum out-of-pocket limit of $7,500 per person. This will be achieved by:

  • Subsidizing coverage for children up to 300 percent of the federal poverty level (FPL) via Medi-Cal, the state’s Medicaid program, Healthy Families program (SCHIP), and employer-sponsored coverage; 
  • Providing Medi-Cal coverage at no cost for uninsured legal resident adults below 100 percent FPL;
  • Creating a new insurance pool with subsidies available to uninsured legal resident adults between 100 and 250 percent FPL to be administered by the state; and
  • Coordinating coverage for undocumented individuals via county governments.

2. Financing: A Health Care Services Fund will be established and provide funding for the new coverage initiative. The $12 billion which are estimated to be needed annually to fund the reform plan will come from several different sources: 

  • Employers with 10 or more employees that do not offer coverage will be assessed an amount equal to 4 percent of payroll for the cost of employees’ health coverage;
  • While the state plans to direct $10-$15 billion to providers through increased Medi-Cal provider rates and other programs, hospitals and physicians will be required to pay back a portion of this ‘coverage dividend.’ Four percent of gross revenues from hospitals and two percent of gross revenues from physicians will help fund the program;
  • The state will redirect approximately $1 billion in medically indigent care funding for coverage; and
  • Federal financial participation for public programs will also fund a substantial portion (approximately $3.7 billion in new federal funds).

3. Cost Containment: Like the Massachusetts reforms, the governor’s plan also envisions putting into place requirements for employers to establish Section 125 plans to provide some tax savings for both employers and their employees. Individuals will also be able to make pre-tax contributions via Health Savings Accounts. The state intends to work with both providers and insurers to address efficiency and reduce costs. There will also be an emphasis on the implementation of health information technology and a goal of achieving 100 percent electronic health data exchange in the next 10 years.

Presenting this comprehensive plan for California is just the first step for Governor Schwarzenegger. In the coming year, the state legislature will deliberate on the plan. Should the state move forward, they will need to submit a waiver request to the Centers for Medicare and Medicaid Services (CMS) for approval before implementing changes to their public programs.