Sons of Single-payer: Why California Doesn't Need More Government in Health Care

Executive Summary

In November 1994, California voters overwhelmingly defeated Proposition 186 (73% - 27%), an initiative that would have placed every man, woman, and child's health care needs in California in the hands of a government run and controlled system. Now, the same labor organizations that were behind Proposition 186 are back with the same agenda, but with a different twist. Due to a difference in political agendas, the Service International Employees Union (SEIU) have sponsored Proposition 214, with the California Nurses Association (CNA) actively pushing Proposition 216. While the two initiatives contain similar language seeking to impose additional regulations and bureaucracy on the health care industry within California, the CNA version goes even further with the imposition of four specific taxes disguised as "fees." While these taxes will be levied against health care businesses, common sense dictates that these unnecessary costs will only be passed on to consumers and taxpayers alike. Californians should also bear in mind that both the SEIU and CNA are competing against each other to organize health care providers in California.

If Propositions 214 and 216 pass, here are some examples of the consequences Californians can come to expect:

• An increase of 14.5 percent in health insurance costs for employers, totaling nearly $3 billion per hear, $8.2 billion in reduced economic activity, and approximately 60,000 lost jobs by 2003.
• Small employers (100 or fewer employees) that provide health insurance would see their costs increase by approximately $1 billion.
• No overall improvement in the quality of health care.
• California taxpayers would pay hundreds of millions of dollars each year to fund new state bureaucracies charged with administering the initiatives' new rules and regulations.
• The staffing levels of every health care provider, i.e. hospitals, doctor's offices, outpatient clinics, long term care nursing homes, etc. would be dictated from bureaucrats in Sacramento.

Background

On November 5, 1996, California voters will once again be confronted with special interest initiatives purporting to improve the quality of health care in California. They are Propositions 214, the "Health Care Patient Protection Act of 1996," qualified by the Service Employees International Union (SEIU) and 216, "The Patient Protection Act," qualified by the California Nurses Association (CNA), hereinafter referred to as "214 and 216." A review of both initiatives reveals that a more accurate title for either one would have been "The Organized Labor and Trial Lawyers' Job Protection Act." Before Californians head to the polls, there are two important facts that bear keeping in mind:

• Bi-partisan efforts led to significant reforms in the health insurance market this past year in Sacramento and Washington, D.C.
• The power and self-serving interests of organized labor that backed the failed Clinton
• Health Plan and subsequent California single payer initiative in 1994 have resurfaced and are the architects of 214 and 216.

While Californians have expressed concerns over the rising costs of health care, they have seldom, if ever, raised the issue of whether there is an adequate number of nurses staffing an almost empty hospital ward on any given day.

Introduction

In a sharp response to double digit health care inflation during the 1980s, it is clear that California is well into the midst of a revolution in health care -- the revolution of managed care. It is these cost increases, more than any real or perceived deficiency in America's health care, that has spawned the proliferation of managed care organizations, i.e. Health Maintenance Organizations (HMOs), Preferred Provider Organizations (PPOs), and Point of Service (POS) plans. In response to the demand for lower health care costs, free market forces have already begun to control the spiraling cost of health care. In the 1980s, average health care costs increased at an annual rate of nearly 11 percent. Since 1990, the rate of growth has been reduced to approximately 4 percent.1 Health insurance premiums in California's private sector have been held fairly constant between 1993 - 1995.

One major factor contributing to this recent reduction in growth has been the increased enrollment of workers by their employers in managed care organizations. In the private sector, these arrangements have proven to be less expensive than fee for service or the traditional indemnity insurance plans. Some of the reasons for managed care's increased popularity among employees and employers are:

• Primary Care: Almost all HMOs cover their members for an unlimited number of primary care visits.
• 21 percent of HMO members pay zero out of pocket costs for primary care visits. 49 percent make a Copayment of $5 for primary care visits. 98 percent of HMOs' best selling benefit packages require no deductibles for primary care visits, and 97 percent require no coinsurance.
• Hospitalization: Virtually all HMO members are covered for hospitalization, 95 percent with no limitations whatsoever on coverage. Almost three quarters of HMO members pay no deductibles, or coinsurance for hospitalizations.
• Prescription drugs: 99 percent of members covered by HMO's best selling plans have prescription drug coverage, usually with copayments ranging from $5 - $15.
• Premiums: The average single coverage premium for an HMO's best selling benefit package rose only 6.7 percent between 1992 and 1993. The average family coverage premium increased 6.5 percent.
• Diversification: HMOs continue to offer an increasing array of packages of benefits to enrollees. 52 percent of HMOs now offer PPO products, up from 27 percent in 1990. 42 percent of HMOs now offer indemnity products compared to 24 percent in 1990.
• Point of Service: More than half of HMOs offered point of service options in 1993. Enrollment in POS plans account for roughly 7.5 percent of total HMO enrollment.
• Inpatient utilization: HMO members were hospitalized only about 2/3 as often as the overall U.S. population.
• Administrative and marketing costs: Weighted administrative and marketing costs averaged 10.6 percent of total operating revenues in 1992. 25 percent of HMO members were in plans where administrative and marketing expenses accounted for 6.3 percent or less of total operating revenues.

Half of all HMO members were in plans that spent 11 percent or less of their operating revenues on administration and marketing.

Managed Care - Its Evolution and Impact in California

Many health analysts believe that America's generous third-party payer system, (under which neither the patient nor the physician had any financial incentive to deliver or demand cost effective care), was the driving force behind the explosive costs of health care in the 1980s. By paying health care providers a predetermined fee per patient, HMOs have been able to alter the incentive structure for doctors, forcing them to consider cost and focus on preventive care. In turn, managed care plans are accumulating an increasingly larger share of the insurance market by being able to pass on such savings to employers. For example, the Federal Employee Health Benefits Plan (FEHBP) which covers the President, Vice President, Members of Congress and their staffs, and every federal employee and their dependents, is a system in which enrollees voluntarily enroll in the health plan of their choice. Over 40 percent of the program's participants have voluntarily enrolled in some form of a managed care plan. It is estimated that by the end of 1996, approximately 18 million Californians, (54 percent of the state's population) will be enrolled in some form of managed care. This large market share provides managed care companies increased leverage to negotiate discounted fees with all types of health providers, i.e. family practice, specialists, pharmaceutical companies, and hospitals. In turn, employers and employees are now experiencing declines in their health care costs. Figures I and II illustrate the rate of increased enrollment in managed care and the decrease in the rate of health care inflation in the late 1980s and the early 1990s.

By reducing costs for employers and employees, the managed-care revolution has dissipated much of the momentum for comprehensive health care reform among the public. Still, the managed care revolution has not been well received by at least two powerful groups in the health care sector -- doctors and nurses -- who have experienced a reduction in demand for their services and thus, have suffered decreases in their incomes and bargaining power. With 16 cents out of every health insurance premium dollar going directly into hospital labor costs, it should come as no surprise that patients, employers, and hospitals are seeking more efficient ways to utilize inpatient hospital care.

As managed care plans continue to absorb an increased number of enrollees, they will also seek to emphasize the importance of new medical technologies, and the increased use of coordinated and preventive care. It is widely believed among health policy analysts that unnecessary hospital stays and expensive treatments can be avoided through the use of early detections. Figures III and IV illustrate the positive effects that managed care has had on hospital utilization. As figure III shows, from 1970 to 1993, hospital utilization, measured by discharges per 1000 people, dropped nearly 17 percent and days of care per 1000 people dropped more than a third.

In addition, as illustrated by figure IV, outpatient surgeries as a percent of all surgeries increased more than 200 percent from 1980 to 1993, surging from 16.4 percent in 1980 to 54.9 percent in 1993. These reductions in unnecessary hospital stays revealed an excess capacity in the health care sector, with hospital occupancy rates dropping form 78 percent in 1970 to 67.6 percent in 1993.3 According to the California Legislative Analyst Office (LAO), roughly half of the hospital beds in California were unused in 1994.4 As a result of these market pressures, "[s]ome hospitals have downsized, merged, or closed; and many hospitals are seeking ways to reduce costs in order to compete for business more effectively. Since staffing is a major cost, hospital cost control efforts often focus on reducing staff and using less expensive personnel in place of more expensive personnel where possible (using nurses' aides rather than nurses, for example)."5 In order to understand why the consolidation and downsizing of hospitals is necessary throughout California, it is important to review the chain of events that brought about these changes.

After the end of World War II, two significant events occurred in the health care sector. First, was the increased construction and expansions of hospitals throughout the country. As government funding for hospital constructions increased, so did the level of hospital related services. Second, was the ruling from the Internal Revenue Service that employment based health benefits would, without limit, be free of federal income and Social Security taxes. The unintended consequence of this "free benefit" was a drastic increase in the rate of utilization of health care services, with employees completely unaware of the true costs of the health services they were receiving.

However, beginning in the 1970s, the government began to shift its focus from hospital construction to controlling costs. The Medicare program began to set fixed prices for services and altered cost based incentives. New technologies, medical procedures, and increased utilization of outpatient services have also contributed to fewer and shorter hospital stays. Another factor that has contributed to the merger and consolidation of hospitals is their inability to sustain continued under-reimbursements from the federal government for treating Medicare, Medicaid, and uninsured patients.

In 1992, hospitals lost $26 billion for providing such services, but were able to maintain their operating levels through cost-shifting from private paying patients, and increasing outpatient revenues. However, with the health market becoming increasingly competitive and hospitals continually competing for managed care patients by lowering prices, the ability to cost shift funds from private paying patients is decreasing. The combined problems of empty hospital beds, reduced reimbursement levels from government programs, and discounts provided to managed care plans, have forced hospitals to maintain their financial stability through mergers, acquisitions, and joint ventures. This is viewed by many health analysts as a positive improvement since the added leverage has provided a "checks and balances system of sorts" against managed care plans' ability to completely dominate the health care industry. Furthermore, these adjustments made by hospitals often increase their efficiency by reducing excess capacity, eliminating duplicative services, and increasing their ability to bargain with managed care.

While health analysts will continue to debate the merits of managed care, studies thus far have indicated that the presence of managed care in California has resulted in lower hospital costs.5 Regardless of the level of managed care's presence in a city, (high, medium, low) data accumulated over a three year period show that the quality of care in these areas have not been compromised. Key findings of this study include:

• The presence of managed care has not resulted in higher mortality rates or complication rates. In fact, risk adjusted mortality rates in high managed care markets were 5.25 percent below the national average.
• Discretionary hospital costs are lower in highly managed care markets. Hospital costs in high managed care markets were approximately 19 percent below hospital costs in low managed care markets.
• Nationwide, hospital costs increased approximately 1.44 percent in the most recent year of the study versus 5.59 percent in the prior year. Costs actually decreased in the high managed care markets as a group.

The Pacific Region (including California), followed by the Mountain Region, leads the country in cost efficiency with an average hospital cost 16.4 percent below the national average. The Pacific Region includes several cities in California which are considered to be the nation's most advanced managed care markets.

Other facts overlooked by proponents of propositions 214 and 216 are the issues of patient satisfaction in managed care plans and their ability to control health care costs. Since 1990, the number of enrollees in California HMOs increased by 44 percent, from 9 million members to approximately 13 million in 1995. An increasing percentage of the Medicare eligible population are enrolling in Medicare through managed care plans. The American Association of Retired Persons, (AARP), the nation's most powerful and influential lobbying force for the elderly, is in the process of screening and reviewing managed care plans that they will endorse and recommend to their membership.

Closer to home, recent polls indicate that patient satisfaction remains solid behind managed care plans. In a recent survey conducted by the Los Angeles Times, 92 percent of California HMO enrollees rated their health plan as either "excellent or good," compared to 86 percent of Californians who were enrolled in traditional indemnity plans. Significantly, 88 percent of California's Medicare recipients enrolled in some form of managed care plan rated theirs as either "excellent or good" in providing an adequate selection of doctors, hospitals, and medical services. With respect to value for health services rendered, the average national HMO premium was $148 per month for single coverage, and $394 per month for families in 1994. That same year, the average national fee for service premiums were $181 per month for single coverage, and $463 per month for families.

A review of markets in California with varying degrees of managed care penetration indicates that the presence of managed care has not resulted in higher mortality rates. This is significant in light of data which show that over the same time period, major cities in California experienced increased levels of cost-effective hospital care. An analysis of nine geographic regions throughout the U.S. shows that the Pacific Region which includes California, is the most cost efficient. With the exception of Salinas, CA., cities in California with varying degrees of managed care penetration experienced lower hospital costs when compared to the national average.

Impact of Proposition 214 and 216

While there are legitimate concerns surrounding the practice of managed care, Propositions 214 and 216 will do nothing to improve the quality, efficiency, or delivery of health care on which Californians have come to expect and rely. If passed, these initiatives would have deleterious effects on California's health care sector and ultimately, the Golden State's economy. While doing nothing to make care more widely available, Propositions 214 and 216 will:

• Significantly increase the role of government in health care by granting state agencies the power to tell doctors offices, clinics and hospitals how many employees and what skill mix they must maintain;
• Establish nominal price controls which have an unmitigated worldwide history of failure.
• Increase the cost of health insurance for Californians by nearly 15 percent totaling more than $3 billion per year7 by increasing insurers' administrative costs, building state bureaucracy, and greatly restricting the degree to which insurers can employ proven management techniques, such as utilization review and utilization management.
• Create a lawsuit lottery, allowing anyone, even those who haven't been treated by a health care provider or health plan, to sue for increased spending by health providers.8
• Cost the state up to 60,000 jobs by 2003, by increasing the cost of doing business in California and thus driving employers to other states.9

The Real Issues Behind Propositions 214 and 216 - Job Protection for Nurses and Trial Lawyers

At the heart of Propositions 214 and 216 are sections that seek to mandate an arbitrary level of health care providers in all health facilities. These propositions put the California Director of Health Services in charge of staffing levels at all hospitals, clinics, doctor's offices, and other health facilities. Article 8, section 1399.930 (a) in proposition 214 mandates that "all health facilities shall provide minimum safe and adequate staffing of physicians, nurses and other licensed and certified caregivers." Chapter 8, section 1796.08 (b) in proposition 216 goes even further than 214 by requiring the Department of Health Services to issue regulations establishing standards to determine the numbers and classifications of licensed or certified direct caregivers. These provisions are seemingly benign -- after all, who would advocate for unsafe staffing levels. In reality, however, they are intended to benefit only one group, the nurses. This particular group of health providers will now place their job security in the nurses union's ability to convince state bureaucrats of their importance and "necessity." As a result of this surreptitious maneuver, hospitals and health plans will be required to maintain an arbitrary number of nurses on staff -- even if other qualified health providers are available and able to provide the same kind of quality care in a more cost efficient setting outside of a hospital.

The number of physicians in a hospital has never been a concern of health care advocates or policy makers. Even the Clinton health plan which sought a government takeover of the U.S. health care system left the issue of adequate staffing levels up to local authorities and administrators. Voters need to question a law that would place new powers and authority in a regulatory agency to come up with an arbitrary level of "adequate nurses" in a health facility. Proponents of Propositions 214 and 216 have failed to demonstrate why a government imposed staffing standard is necessary. Indeed, a study conducted by the National Institute of Medicine points out that very little information is available regarding the relationship between nurse-patient ratios and the quality of care that is affected by that ratio.

Although standards of care and practice are common across settings, staffing levels and mix must meet the unique needs for each community, and thus cannot be dictated statewide. Common sense dictates that nursing and other staffing needs are unique to each diverse health care organization and the community it serves. Furthermore, these levels and the particular skill mix must evolve along with changing delivery systems and technologically driven improvements in patient care. Today, health care is delivered much differently than it was even a few years ago. It is increasingly being delivered outside the hospital setting, in patients' homes, community health centers, clinics, and outpatient facilities. By moving health care workers such as registered nurses into different care environments, health care plans are simply trying to "keep up with the times." As patients, employers, and health providers seek more efficient ways to deliver the best care possible, they must adapt to a constantly changing health care environment.

The Cost to Taxpayers

Propositions 214 and 216 would increase Californians' health care costs by as much as 14.5 percent, or nearly $3 billion annually. These cost increases will come from (1) the increased administrative costs all insurers would have to incur to produce the reams of paperwork required by the law, and (2) the loss of proven management and health delivery techniques, such as utilization review and utilization management. One of the initiatives, Proposition 216, does not attempt to hide the added costs by levying excessive new taxes on the transfer or merger of health plans and provider groups. Under the guise of creating a "Public Health and Safety Fund," various fees are assessed on health plans which seek to improve the ways in which they provide health care. As will be explained in a later section of this report, (Proposition 216's New Taxes) these fees are taxes in disguise with one goal in mind -- to thwart any improvements in the health care.

Increasing Administrative Costs

A favorite tactic employed by opponents of managed care is to decry the HMO industry's supposed excessive administrative costs. It is certainly true that all things constant, lower administrative costs are better than higher administrative costs. It is also true that a dollar spent on detecting fraud which saves a company $10 dollars in future expenditures that have no medical value, is money well spent. Such administrative costs actually increase the quality of care and lowers costs to patients. In the free market, where companies must compete on the basis of price and quality for their customers, HMOs have the strongest possible incentive to keep administrative costs to a minimum. If they incur unnecessary costs, whether they be advertising or excessive executive compensation, they will be forced to increase the price of their product and thus lose customers, revenues, and market share.

There is a source of administrative costs, however, that may not hold any value either to providers or health care consumers: administrative costs that are incurred while complying with burdensome government regulations. Ironically, while propositions 214 and 216 decry "excessive administrative overhead,"10 these two initiatives would actually increase the non-productive administrative costs that HMOs and other health insurers must incur. Examples of budget busting paperwork requirements include:

• Requiring health facilities to compile "reports of the daily staffing patterns utilized by the facility and a written plan for assuring compliance with the staffing standards required by law."11
• Requiring health facilities to provide a "written explanation of the current method for applying the standards in determining safe staffing levels, and daily reports of the staffing patterns utilized by the facility . . ."12
• Requiring each private health care business with more than 100 employees to file with state bureaucracies:
• "data or studies used to determined the quality, scope or staffing of health care services, including modifications in such services,"13
• "statements of any financial interest greater than 5 percent or five thousand dollars ($5,000), whichever is lower, in any other health care business or ancillary health care service provider."14
• "A description of the subject and outcome of all complaints, lawsuits, arbitration, or other legal proceeding brought against the business or any affiliated enterprise . . ."15

In a twist of irony, Article 9 of Proposition 216 -- "Disclosure of Excessive Overhead of Health Insurers," would actually increase the very ill it seeks to expose, administrative costs, by forcing insurers to go to great lengths to breakout these costs and file them with a myriad of state bureaucracies.

Tying the Hands of Health Care Businesses with Government Twine

While the two propositions would certainly entangle health care businesses in red tape and require them to pass on these added costs in the form of higher premiums to enrollees and patients, the largest financial effects, and those most readily quantifiable, will come from the restrictions on health businesses' abilities to innovate in the areas of staffing, utilization management, and utilization review. The staffing requirements discussed above will certainly add to facilities' health costs, not only in the administrative costs required to comply with the law, but also, in so far as the requirements are effective, in health care businesses having to pay salaries for individuals they would otherwise not employ. More significantly, however, are the costs incurred by health care businesses who can no longer use proven cost management techniques such as utilization management and utilization review. The Barents Group, LLC, a policy economics group specializing in health policy, estimates that the prohibition of these and other practices would increase overall HMO costs by as much as 14.5 percent, increase PPO/POS costs by as much as 9 percent, and increase traditional fee-for-service costs by as much as 4 percent.16 These costs would be passed on directly to health consumers, be they individuals, businesses, or state and local governments.

Additional Costs to be Shouldered by Taxpayers

It is beyond dispute that Propositions 214 and 216 will increase Californians' health care costs in the private sector, which will ultimately be borne by individuals in reduced wages and reduced employment opportunities. These initiatives will also have substantial effects on the costs of state and local governments, including agencies such as the California Department of Corrections, which runs a sizable health care operation through the state prison system. In addition to the increased spending funded by the new tax revenues, the measure would result in unknown additional costs, probably in the range of tens of millions to hundreds of millions of dollars annually. This is due to the measure's effects on the state's and local governments' costs of directly operating health programs as well as purchasing health care services.17

By abolishing many practices employed by HMOs and other health insurers to provide cost-effective care, these initiatives will add considerable costs to state and local governments. Ironically, a significant portion of these additional costs will be attributable to administrative costs that are incurred by hospitals and health plans when forced to comply with the regulations as called for in Propositions 214 and 216. Unless these added costs are offset by increased taxes, they will produce a reduction in other tangible services provided by the state. Roughly 350,000 Californians get their health insurance through the California Public Employee Retirement System (CALPERS). Eighty-two percent of these individuals are enrolled in HMOs and 13 percent in PPOs.18 Assuming that the costs of Propositions 214 and 216 would be passed on in the form of higher premiums, Barents, LLC estimates that the ‘[o]verall costs to the state would rise from the baseline of $810.4 million to approximately $915.1 million."19 In addition, local governments whose employees are not insured through CALPERS will also face significant cost increases. In analyzing the data from four state and local entities (Los Angeles Unified School District, San Diego School District, City of Los Angeles, and Los Angeles County), Barents found that their health costs will increase by as much as 12.1 percent, totaling more than $57 million.20

There is one state run health system that merits discussion -- the California Department of Corrections. While this branch of government is not thought of as a "health care provider" in the traditional sense, it will be affected by the regulations found in Propositions 214 and 216. In this case, "health care consumers" are convicted felons. These "consumers" will have standing to sue the state of California as they seek to enforce the provisions regarding adequate staffing levels, and the right to a physical examination upon denial of treatment that has been deemed medically unnecessary, etc. In 1995-96, California taxpayers are slated to spend more than $465 million to keep its 141,000 inmates healthy ($3,298 per inmate). If the practice of utilization management is restricted as called for in Propositions 214 and 216, California taxpayers can expect to shoulder an additional $7 million per year to pay for the health care costs of convicted criminals.

Another factor leading towards higher costs are the staffing requirements in this measure which would also increase the costs of health facilities operated by the state and local governments, including "[U.]C. hospitals, state developmental centers and mental hospitals, prison and youth authority health facilities, state veterans' homes, county hospitals and clinics, and hospitals operated by shysters. The amount of this potential increase is unknown and could range from minor to significant, depending on the actual staffing standards that are adopted."21

Proposition 216's New Taxes

Proposition 216 will impose four new taxes on California health care businesses, three of which are designed to prevent the health care companies from evolving to meet their customers needs.

The "Community Health Service Disinvestment Fee" (Chapter 13, 1996.13 (1)(A) would levy a punitive tax for "any action involving the reorganization, restructuring, downsizing, or closing of health care facilities in a community undertaken by the private health care business . . . that results in a reduction of health fare services for the community."22 For the first five years from the date of the proposition's enactment, this tax would be based on "the bed reduction percentage (divide the number of licensed beds eliminated during the year by the total number of licensed beds at the beginning of year), multiplied by the facility gross patient revenue for the year, multiplied by one percent."23 This tax is designed to freeze inefficiencies in place and keep nurses staffing levels, and hence health care costs high. Recall that in California, roughly one out of two hospital beds in California is empty on any given day. Recall also that the initiative would put the government in charge of determining staffing levels at hospitals, doctors offices and clinics. It should hardly be surprising that staffing levels, as stated in former proposals by the California Nurses Association, are tied to hospital beds.24 By placing financial barriers to reducing beds, the nurses' union plans to use the coercive powers of government to ensure jobs for its members, whether they are needed or not.

The second tax is a fee, set at ten percent of transferred assets, for any "health care business or ancillary health care service supplier" which changes its status from a "California Public Benefit Corporation to any other form of business entity."25 The third punitive tax which serves to prevent change is the "Merger, Acquisition, and Monopolization Fee." A 1 percent tax would be levied on a company's assets in California if they merge or combine forces to streamline care and provide more efficient services to their enrollees. Like that of the first tax, the purpose of the second and third tax is to simply freeze the current and often inefficient health care system in place. It should come as no surprise that Proposition 216 serves the self interest (job protection) of its sponsors, the California Nurses Association -- albeit at the expense of unsuspecting patients.

The California "Lawsuit Lottery" - Added Incentives and Avenues for Frivolous Lawsuits

While the quality of health care will not improve in the wake Propositions 214 and 216, the number of lawsuits related to the health care sector certainly will. Language in both propositions ensures that convicted criminals in addition to law abiding citizens, will be able to file lawsuits seeking the enforcement of their newly granted rights under Propositions 214 and 216. "Health care consumers shall have standing to intervene in any proceeding arising from this division. Any person may also go directly to court to enforce any provision of this division, individually, or on behalf of the public interest."26 In brief, the health care sector in California will become subject to two new scenarios. First, hospitals, doctors' offices, and clinics will be required to maintain staffing levels as mandated by state bureaucrats. Second, any patient will be able to file a lawsuit seeking an increase in the level of staff at the place they receive their health services.

Propositions 214 and 216 Fail to Distinguish "Business Relationships" vs. "Medical Communications"

Advocates of Propositions 214 and 216 constantly cite their ban on gag clauses in health care contracts that are allegedly used to bar physicians from discussing treatment options with their patients. Notwithstanding the redundancy and mootness of these claims given new state laws and federal guidelines regulating patient - provider communications, the language pertaining to "gag clauses" in Propositions 214 and 216 are so vague and ambiguous, it is all but certain that numerous interpretations will arise and eventually find their way into a courtroom.

Conflicts of interest between patients and their physicians are not a new subject. Since the traditional fee for service arrangements have always been viewed as a golden pot for doctors, where excess was rewarded, the focus has now shifted to managed care organizations where utilization review and utilization management has arguably gone towards the other extreme of the spectrum.

Physicians have a duty to disclose all aspects of possible treatments, i.e. risks versus benefits, and other medically reasonable alternatives, even those not financially covered by a health plan. While freedom in "medical communication" is certainly laudable, Propositions 214 and 216 reach far beyond this and instead, undermine the very foundation of network based health plans by revoking the private right to contract, a fundamental principle of the free market.

The innovative methods that health plans have developed to assure quality will be placed in jeopardy. Other methods to determine the appropriateness of treatment will be negated. The result will be a dramatic increase in health care costs that will be shouldered by employers, taxpayers, and patients.

While this kind of provision sounds appealing on a superficial level, closer analysis reveals that the alleged "goals and objectives" of this language are already in existing California state law. Section 1367 of the California Public Health and Safety Code requires that managed care organizations or other health plans "shall be able to demonstrate to the Department of Corporations that medical decisions are rendered by qualified medical providers, unhindered by fiscal and administrative management."

Section 2 of Proposition 214 and Article 2, Section 1796.2 of Proposition 216 are so vaguely worded, the likelihood of future litigation is all but certain. They read, " No health care business shall attempt to prevent or discourage a physician, nurse, or other licensed or certified caregiver from disclosing to a patient any information that the caregiver determines to be relevant to the patient's health care." This wording is so vague that it would be possible for a laboratory technician to notify a patient of his/her lab results without any approval or knowledge by the patient's doctor. Any precautionary steps requiring accuracy checks or verification of test results could be side-stepped. Even more important, the doctor-patient confidentiality relationship could be violated.

Propositions 214 and 216 Duplicate Existing State, Federal, and Private Market Reviews Assuming Consumer Protections

Propositions 214 and 216 pose a serious threat to the delivery of high quality affordable health care. They add costs, and new statutory and regulatory impediments that will adversely affect the quality of care. Standard health plan contracts already include non-interference provisions requiring that nothing in the contract can require a provider to take any action inconsistent with professional judgment regarding the patient's medical care and treatment.

Furthermore, the state of California has recently enacted legislation to strengthen these provisions. This past session, the California legislature in a bi-partisan move, passed two separate bills that will prevent health plans from including language in their contracts with providers that interferes with their ability to communicate with the patient regarding his/her health care. On July 23, 1996, Governor Pete Wilson signed into law California Senate Bill 1847 making it illegal for health plans to restrict communication between doctors or other health care professionals and their patients.27 Furthermore, current law provides that health plans "shall be able to demonstrate to the Department of Corporations that medical decisions are rendered by qualified medical providers, unhindered by fiscal and administrative management."28 Furthermore, another bill that was signed into law this past year was Assembly Bill 3013 (AB 3013) which states, "Health plans may not interfere with the ability of a physician or surgeon or other licensed health care provider to communicate with the patient regarding his or her health care."

Californians need to question the motives behind Propositions 214 and 216 and ask if such extreme measures are necessary. Since the quality of care should remain first and foremost a concern and priority among Californians, voters should be reminded that consumer protections and quality assurance provisions are already provided for under the existing state, federal, and private regulatory framework for managed care and health plan providers. At the federal level, the HMO Act provides for consumer protections and quality assurance in federally qualified HMOs. Health plan standards contained in this federal statute are also used by reference in the Medicare program for health plans seeking qualification to offer managed care options to senior citizens.

The federal HMO law (Title 13 of the Public Health Service Act) provides a set of federal standards for HMOs in the areas of health service delivery system, financial viability, marketing activities, and organizational status. Some of the qualifications an HMO must satisfy in order to be a federally qualified HMO include: an ongoing quality assurance program which considers health outcomes, provides review by physicians and other health care professionals of the process of providing care, uses systematic data collection, provides for interpretation of data and institutes needed change, provides enrollees with written information about benefits and coverage, procedures to obtain services, payment rates, grievance procedures, service area, participating providers, cost sharing requirements, and protect enrollees from financial liabilities which are obligations of the HMO.

In the private market, the National Committee for Quality Assurance (NCQA) and the Joint Commission On Accreditation Of Healthcare Organizations (JCAHO) are organizations that establish standards and accreditation procedures for the managed care industry. These groups have been leaders in studying outcomes measurement, ensuring that patient care is of the highest quality possible. Regular inspections by these independent review groups are routinely conducted to ensure that adequate patient protections are in place.

The Impact on Medicare and Medicaid

California voters also need to bear in mind that Medicare recipients could see increased costs: without increased quality or health care protection if the measures pass. In order for a managed care plan to obtain a contract to serve Medicare beneficiaries, it must either meet the standards of a federally qualified HMO or be designated by the federal Health Care Financing Administration (HCFA) as a competitive medical plan (CMP). Among the requirements imposed on Medicare managed care plans relating to patient's interests are those pertaining to enrollee information requirements, marketing rules, benefit requirements, delivery system standards, internal and external quality assurance programs, enrollee grievances, etc. The Medicare law also establishes standards for the Medicare-select program (preferred provider Medigap policies) by addressing patient protection issues when beneficiaries receive care from providers that are part of a product's network. Federal law requires all Medicare select programs to notify patients about limitations on out of network coverage, coverage of emergency services when they cannot be obtained through the network, access standards to assure that services can be readily obtained through the network, and quality assurance standards to assure that the providers included in the network provide care that meets high professional standards.

Finally, senior citizens enrolled in managed care plans are provided additional protections in the Social Security Act. Sections 1876(i)(8)(A) and 1876(i)(8)(B) states that health plans seeking to serve as Medicare contractors must demonstrate "[t]hat the organization may not operate any physician incentive plan..." Section 1876(i)(8)(B) defines "physician incentive plan" to mean "[A]ny compensation arrangement between an eligible organization and a physician or physician group that may directly or indirectly have the effect of reducing or limiting services provided with respect to individuals enrolled with the organization."

Given the protections and regulations that are currently enforced by the federal government through the Health Care Financing Administration, it does not make sense to add unnecessary layers of bureaucracy and redundant rules which will only serve to increase the cost of health care to our state's senior citizen population. The increased administrative costs that will be borne by physicians, hospitals, and health plans will ultimately be passed on to senior citizens in the form of higher premiums, co-payments, and co-insurance levels.

Furthermore, California taxpayers can be certain that they will be asked to pay higher taxes to fund the increased costs associated with the state Medicaid program (Medi-Cal) if propositions 214 and 216 pass. As taxpayers are aware, the state expenditures that are dedicated to the Medicaid program are a major and growing portion of overall state spending. In 1990, Medicaid represented 37 percent of every state and local health care dollar.29

In an attempt to improve access to care for the underserved and to control rapidly rising health care costs, states have moved to implement and expand the use of managed care programs. California has been no different in this regard. Since 1972, California's Medicaid program has utilized managed care programs to offer a way of changing provider and beneficiary behaviors which may have contributed to rising costs in the traditional fee for service system. Like the Medicare program, health plans seeking contracts from the federal government to provide health services to California's needy have to satisfy a litany of state and federal requirements, ensuring that the quality of care received by the patient is a priority. It is projected that California's Medicaid population enrolled in some type of managed care environment will reach three million by 1997.

Since Propositions 214 and 216 require a "second" physical examination if a health plan disagrees with a recommended treatment, it will lead to a duplication of services, i.e. redundant first opinion, increased paperwork and administrative costs. While the private sector can arguably "absorb" these costs by passing them on to employers, employees, shareholders, or the general public, the Medicaid program cannot, because it must work within a fixed budget. California taxpayers have already expressed their frustration at the exploding caseload and costs of Medicaid. The increased costs for the Medicaid program brought about by Propositions 214 and 216, will result in either higher taxes or a reduction in services and access to health care for the poor and elderly. According to the non-partisan Legislative Analyst Office (LAO), the state Medi-Cal program could realize potential cost increases ranging from "[a] few million dollars to more than $100 million annually..."30

Conclusion

In light of the current state and federal regulations that are in place to ensure patient satisfaction and consumer protections, Propositions 214 and 216 are unnecessary as they will create unnecessary bureaucracies, add layers of regulation, and increase the costs of health care in California. While there are legitimate concerns with respect to the managed care industry, they are continually being addressed by those within managed care and government. During this legislative session, the California legislature passed two major bills which explicitly prohibit health plans from restricting provider-patient communications about medical care, (Assembly Bill 3013 and Senate Bill 1847). Furthermore,. the U.S. House of Representatives gave serious consideration to the merits of H.R. 2976, the "Patient Right to Know Act of 1996," legislation which seeks to prohibit health plans from interfering with health care provider communications with their patients. This bill was authored by a Congressman who is a practicing surgeon, Rep. Greg Ganske, M.D. (R-IA). Significantly, it shared wide bi-partisan support this past Congress and is expected to be at the top of the legislative calendar when the new 105th Congress convenes in January, 1997.

Californians must ask themselves who will benefit under Propositions 214 and 216. It is clear that patients, employers, employees, and taxpayers will not benefit under a scheme which needlessly raises the costs of health care. Instead, the beneficiaries of Propositions 214 and 216 will be nurses and service employee union members who enjoy the comfort of job protection and ease of staffing empty hospital beds, and the plaintiff's lawyers who will have newly created avenues to bring forth frivolous lawsuits.

The increased utilization and popularity of managed care plans in California continues to grow. It is estimated that 38.4 percent of California's population will be enrolled in a health maintenance organization (HMO) plan in 1996.31 Significantly, this high presence of managed care has not resulted in higher mortality or complication rates. Recent studies show that risk adjusted mortality rates in high managed care markets were 5.25 percent below the national average when compared to other types of health plans in those same markets.32 Of the nation's 50 largest cities, the San Francisco Bay Area leads with the most cost effective hospital care (San Francisco - 32 percent below the national average, Oakland - 46 percent below the national average, San Jose - 26 percent below the national average).33

In an era where public policy discussions continue to focus on alternatives at holding down health care costs, Californians need to ask themselves if they are ready to reverse that trend as dictated in Propositions 214 and 216.

By Michael Lynch, Public Policy Fellow and
John C. Liu, Director of Research and Policy

Endnotes

1. "Proposition 214: Health Care Businesses. Regulation. Consumer Protection. Initiative Statute," California Legislative Analyst Office, 1996, page 1.
2. 1995 Statistical Abstract of the United States, NO. 183, page 125.
3. "Proposition 214: Health Care Businesses. Regulation. Consumer Protection. Initiative Statute," California Legislative Analyst Office, 1996, page 2.
4 Ibid. page 2.
5. "The Impact of Managed Care on U.S. Markets," Educational Series, KPMG Peat Marwick LLP, Executive Summary, 1996.
6. "The Impact of Managed Care on U.S. Markets," Educational Series, KPMG Peat Marwick LLP, Executive Summary, 1996.
7. Barents Group, LLC, "Effects Of The CNA and SEIU Ballot Initiatives in California," Washington, D. C.: June 26, 1996 p. 11.
8. Proposition 214, Article 12; Proposition 216, Chapter 17.
9. Barents page ii.
10. Proposition 214 Article 1, 1399.990 (a) (11) and 216 Chapter 1, 1796.01 (l).
11. Proposition 214, Article 8, 1399.930, (d)
12. Proposition 216 Article 8, 1796.08 (d)
13. Quote from 214, Article 11, 1399.945 (b) (1). Similar language in 216 Chapter 9, 1796.09 9 (a).
14. Proposition 216 Chapter 9, 1796.09 (b) (1).
15. Proposition 216 Chapter 9, 1796.09 (b) (2).
16. California Legislative Analyst Office, "Proposition 216 - Health Care, Regulation, Consumer Protection, Initiative Statute," Sacramento, 1996, p. 7.
17. Barents, op cit. page 11.
18. Barents, op cit. page 7.
19. Barents, op cit. page 21.
20. Barents, op cit. page 22.
21. California Legislative Analyst Office, "Proposition 216 - Health Care, Regulation, Consumer Protection, Initiative Statute, Sacramento, 1996. 22. Proposition 216 Chapter 13, 1796.13 (1) (A).
23. Ibid.
24. Barents, op cit. page 14.
25. Proposition 216 Chapter 13, 1796.13 (1) (B) (i).
26. Proposition 216 Chapter 17, 1796.17 (a). Similar language in 214 Article 14, 1399.955 (b).
27. California Business and Professions Code sections 510 and 2056, CA Health and Safety Code section 1368.
28. California Health and Safety Code, sec. 1367.
29. Medicaid Source Book: Background Data and Analysis, 1993 Update, 103rd Congress, 1st Session, Committee Print 103-A, Subcommittee on Health and the Environment of the Committee on Energy and Commerce, U.S. House of Representatives, January 1993, p.112.
30. California Legislative Analyst Office, "Proposition 216 - Health Care, Regulation, Consumer Protection, Initiative Statute," Sacramento, 1996.
31. Medical Benefits, Volume 13, Number 5, March 15, 1996.
32. "The Impact of Managed Care on U.S. Markets," Educational Series, KPMG Peat Marwick LLP, Executive Summary 1996.
33. Ibid, p.3.

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