Times Staff Writer

Calling for massive changes throughout a healthcare system he called “broken,” Gov. Arnold Schwarzenegger on Monday proposed a $12-billion plan that would require all Californians to obtain medical insurance while helping the poorest to afford it.

The plan, which both critics and supporters called the most audacious in the country, would dramatically reshuffle the financial underpinnings of an already fragile industry. The governor said his plan would control spiraling health costs while ensuring coverage for the quarter of a million children and 5.6 million adults who lack insurance.

“Everyone in California must have health insurance,” Schwarzenegger said via teleconference from Los Angeles, where he is recuperating from a broken leg. “If you can’t afford it, the state will help you buy it, but you must be insured.”


Only Massachusetts has required all residents to carry insurance, but California’s larger population of uninsured and poor makes Schwarzenegger’s goals much more challenging. To pay for the plan, Schwarzenegger proposed placing new fees and obligations on doctors, hospitals, employers and insurers -- all powerful lobbies in Sacramento.

Schwarzenegger was widely praised for tackling such a huge issue so comprehensively. But many leading consumer advocates, academics and business leaders said they feared that the governor’s proposal was inadequately financed and would shift more responsibility for healthcare to families while unintentionally encouraging businesses to drop or downgrade the coverage they now offer.

Employers with 10 or more workers would have to offer plans that cost them at least 4% of their payroll. Those who refuse would be required to pay an equivalent amount into the state’s insurance fund for people with no other option. That mandate, while greeted skeptically by businesses, was criticized as too lax by advocates who said that a majority of companies that now provide insurance already contribute much more money.

“It’s the equivalent of setting the minimum wage at $3 an hour,” said Anthony Wright, executive director of Health Access California, a consumer advocacy group.

Those earning more than 2 1/2 times the federal poverty level -- a total of $41,500 a year for a family of three -- would not receive a subsidy but would still have to buy insurance if their employer did not offer it. The cheapest plan would require families to pay $2,000 a year in premiums, and as much as $10,000 in out-of-pocket medical costs.

“By setting this as a minimum, the tendency will be to undermine and reduce the current level offered by some employers, who will use this to justify reducing their benefits much more,” said E. Richard Brown, director of the UCLA Center for Health Policy Research, who nonetheless called the proposal “very impressive” in its reach.


Steven A. Burd, chairman of the Safeway grocery chain, who was invited by the administration to comment on the proposal, also lauded the effort but said it did not ask enough of employers. Their required contribution, he said, “is frankly too low and should be higher.”

The plan was welcomed by the Democrats who control the Legislature, which must approve any proposal. Assembly Speaker Fabian Nunez (D-Los Angeles) called it “good work” and “a good start.”

But he said that he could not agree to requiring everyone, whether working or not, to obtain health insurance “until and unless we solve the problem of the costs of the premiums.”

Schwarzenegger’s fellow Republicans showed little enthusiasm for the plan, saying that the governor’s strategy of funding it through mandated employer contributions and assessing a portion of earnings of doctors, hospitals and health plans violated the anti-tax cornerstone of his reelection campaign.


Republican opposition

“If we put any form of mandate on a business, we are seeing a jobs tax,” said Assembly Republican leader Michael Villines of Clovis, echoing the argument that Schwarzenegger himself made in 2004 when he successfully campaigned against Proposition 72. That Democratic plan would have required employers to provide health insurance or pay into a state fund.

The administration insisted that its plan did not include taxes, instead labeling the levies “coverage dividends.” The debate is more than semantic: A measure with taxes needs two-thirds support in the Legislature, giving the GOP veto power. Otherwise, it needs only a simple majority that could be obtained solely with Democratic votes.


Another part of the plan provoking Republican resistance would provide healthcare for impoverished children who are in the United States illegally. Senate Republican leader Dick Ackerman of Irvine called such a provision a “nonstarter.”

The governor said emergency rooms are required by federal law to treat anyone who shows up, regardless of status. “So the decision for my team was, do we treat them in emergency rooms at the highest cost available or do we do it right and do it efficiently?” he said.

The plan, which has been anticipated for weeks as the governor’s biggest initiative of the year, gave virtual coronaries to leaders of California’s hospitals, doctors’ groups and insurers -- the most politically influential players in a $169-billion industry that spends $22 million annually on lobbying in Sacramento.

The guiding philosophy of Schwarzenegger’s plan was that fixing California’s healthcare system was a responsibility to be shared, and the complex plan gave each sector some benefits that are offset by new burdens.

He proposed a $4-billion annual increase in Medi-Cal reimbursements, which are among the lowest in the nation. That would help hospitals and doctors who treat many poor people, and encourage more providers to participate in the program.

But doctors also would have to pay 2% of their gross earnings back to the state to help expand coverage. The physicians’ lobby said many doctors would simply pass that cost on to patients and insurers through higher bills.


If all Californians were indeed covered under his plan, hospitals would be able to bill insurance for the costs of the uninsured they must absorb now. But hospitals also would have to pay 4% of their earnings back to the state, and would lose $2 billion they now get from the government for uncompensated care.

“I did get a little bit of pain in the side when I heard that part,” said Jim Lott, executive director of the Hospital Assn. of Southern California.

And hospitals may still have to deal with uninsured patients. The homeless, unemployed and illegal immigrants might not obtain insurance even if fully subsidized, and the administration plans to enforce the mandate through the state’s income tax boards.

Insurers would receive a huge business boon, since the mandate for coverage would provide them with a captive audience, but without having their rates regulated as those of auto and home insurers are. The governor would require insurers to offer coverage to all people regardless of their health, and would limit to 15% the amount of premiums insurers could spend on administration and keep as profits.

Much of Schwarzenegger’s plan was designed to allow the state to qualify for $5.5 billion in additional federal money. But many questioned whether, even with that boost, the contributions from employers would be enough to allow workers to buy anything more than bare-bones catastrophic coverage.


Premiums rising

Healthcare premiums have been rising at the rate of 8.2% annually, nearly twice the rate of wage growth. Yet employers would pay only 4% of their payroll amounts, something that disturbs both labor and business leaders.


“How will the inevitable shortfall in funding be addressed?” asked Allan Zaremburg, president of the California Chamber of Commerce. “Will the tax have to be doubled in 10 years?”

The proposal was devised by a team of policy experts who were hired last year specifically for that task. They spent months interviewing representatives of all segments of the healthcare industry across the nation. But the final decisions were delayed until Sunday night because of Schwarzenegger’s injury, which occurred in a skiing accident Dec. 23.

All of the plan’s details can be altered and its questions can be resolved in negotiations with lawmakers, and Schwarzenegger said he looked forward to forging a bipartisan agreement as he had last year with a massive public works building project.

But because so many parts of Schwarzenegger’s plan hinge on one another, deleting the areas of greatest disagreement could unravel the entire plan.

“Health insurance reform is as delicate as an egg,” said Jamie Court, president of the Foundation of Taxpayer and Consumer Rights, a Santa-Monica based watchdog group. “One little crack and the egg is lost.”



Times staff writers Mary Engel, Evan Halper and Nancy Vogel contributed to this report.



Plan highlights

Among other provisions, the governor’s proposed health overhaul would:

* Require every Californian to have health insurance.

* Require employers with 10 or more workers to offer health benefits or pay 4% of the payroll to a coverage program.

* Extend government insurance for poor children to more families.

* Ban insurers from denying coverage because of medical conditions, occupation or age.

Source: Governor’s office


Breaking down costs

U.S. healthcare spending reached almost $2 trillion in 2005, an average of $6,697 per person--and far more than any other industrialized country’s spending. Where the money comes from, and what it goes toward:

Where it comes from*

Private insurance: 35%

Medicare: 17%

Medicaid: 16%

Other public programs: 13%

Private out-of-pocket: 13%

Other private programs: 17%


Where it goes

Hospital: 30%

Doctors/Clinical: 21%

Prescription drugs: 10%

Administrative costs: 7%

Nursing homes: 6%

Other spending** : 25%

*Medicaid includes State Children’s Health Insurance Program; other public programs include worker’s comp and military healthcare; other private programs include charity.

**Includes dental care, home health, over-the-counter medicines, research and more.

Note: Totals may not add to 100% because of rounding.


Source: Centers for Medicare and Medicaid Services, Office of the Actuary