California’s Physicians: Do They Know Who the Enemy Is?

California’s Physicians: Do They Know Who the Enemy Is?

The California Medical Association is supporting a bill that will reduce competition amongst the state’s health plans, which will have the secondary effect of reducing doctors’ negotiating position with respect to health plans and, therefore, likely lower physicians’ remuneration.

How’s that for short-sighted?

The CMA has been duped by state senator Sheila Kuehl, infamous for her big health reform bill, SB-840, which would impose Canadian-style, government-monopoly health care in the Golden State. As my critical analysis of her bill demonstrates, her government-monopoly health “system” would squeeze doctors’ incomes and freedom to practice medicine far more than America’s current hybrid government-corporate “system” does.

Well, SB-840 is not going anywhere in the senate, so senator Kuehl periodically attempts to lob a wrench into the machinery of the state’s health care status quo with more limited legislation. Her most recent effort is SB-1440, which would impose a Medical Loss Ratio (MLR) of 85% on the state’s health plans. Basically, an MLR reflects the share of a plan’s premium revenue that is paid out to providers. Naturally, supporters of such regulation employ intuitively appealing slogans, such as: “it goes straight to patient care, not profits”.

The 85% MLR is scavenged from the wreckage of the Schwarzenegger-Nuñez Health Care Deforminator, which failed in January. In my analysis of that devastating “reform”, I cite Professor James C. Robinson of the University of California, Berkeley (hardly an arch-conservative) as stating that “the MLR is an accounting monstrosity that enthralls the unsophisticated and distorts the health policy discourse.”

One problem is that HMOs (namely Kaiser Permanente) can report “better” MLRs than health plans running PPOs (such as Blue Cross) because an HMO can “cram down” administrative costs to its own hospitals. If you don’t own your own hospitals, but contract with Sutter Health or Catholic Healthcare West, for example, you cannot move administrative expenses to their books to make your own numbers look better to a regulator.

Another problem is that regulated MLRs are deadly to consumer-driven health care. Let’s assume a (pessimistic) scenario where a Health Savings Account eligible policy incurs exactly the same costs as a traditional policy. (I write “pessimistic” as the HSA-eligible policy is likely to have lower costs, because the patient controls more of the spending, as demonstrated again and again and again since they were introduced in 2004.) The traditional policy costs $4,000 and spends $3,400 on patient care, for an MLR of 85%. In the consumer-driven plan, the patient controls $1,100 more of the medical spending (through a higher deductible). In this simple scenario, his premium goes down by $1,100, but the MLR also “deteriorates” to 79.31% ($2,300/$2,900).

The patient’s welfare in the consumer-driven plan is better, but the accounting is worse. Because many California health plans would struggle to achieve these accounting shenanigans, an 85% MLR regulation would risk resulting in five of the top ten health plans in California closing up shop.

The remaining plans would be even less responsive to physicians’ and patients’ needs than the CMA claims they are now – an oligopoly created by an arbitrary accounting measure.

I understand why Sheila Kuehl wants the bean-counters to decide what health plan you’re in, but for California’s physicians to support it is slow suicide for their profession.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.