Column: Gov. Newsom’s healthcare initiatives will test what a single state can achieve on its own

Gov. Gavin Newsom set down a marker for his administration’s approach to healthcare policy on its very first day, when he unveiled a strikingly comprehensive package of reform proposals aimed at improving access to care and lowering its costs.

The governor’s proposals include expanding Medicaid coverage (known in California as Medi-Cal) to undocumented youths to age 26, up from the current limit of 19; extending premium subsidies to households earning up to 600% of the federal poverty line ($154,500 for a family of four), up from the Affordable Care Act’s 400% ($103,000 for four); and creating a bulk purchasing system aimed at reducing the cost of prescription drugs by leveraging the state’s huge aggregate market.

Newsom’s proposals thrilled healthcare advocates inside and outside the state, as they should. That’s because they placed California in the forefront of the movement for universal healthcare and the drive toward a national single-payer system.

“He’s outlined big, bold, first-in-the-nation steps,” Anthony Wright, executive director of Health Access California, told me.

“These are not just symbolic gestures,” Newsom told me. “We’re hoping to ignite a new conversation. It’s a moral imperative, not just economic.”

Yet Newsom’s proposals also underscore how difficult it will be for even a huge state like California to make real progress on access and affordability without the cooperation of the federal government — which plainly won’t be forthcoming under the Trump administration.

Federal law governs some of the initiatives Newsom has proposed, and federal funding is crucial for those and others. It’s not coincidental that as part of his Day One package, Newsom asked Congress by letter to enact a new type of waiver from federal rules so states could use federal funds under the Affordable Care Act and Medicaid to move toward universal coverage.

“Big systemic reform clearly requires the federal government,” says Larry Levitt, a health reform expert at the Kaiser Family Foundation. “Gov. Newsom made that crystal clear in his letter to federal officials — that was the governor’s way of signaling support for single-payer, but also lowering expectations about what could be done without the federal government’s help.”

Newsom’s proposals for near-term reforms would be funded entirely with state funds, assuming the Legislature assents. The expansion of Medi-Cal coverage for undocumented young adults would be financed with $260 million from the state general fund, according to his budget message. The expanded subsidies would be paid for from penalties assessed from residents violating a state individual mandate requiring all Californians to carry health coverage, replacing the federal individual mandate penalty that the Republican Congress and Trump administration reduced to zero as of Jan. 1. (State individual mandates are in place in Massachusetts, Vermont, New Jersey and the District of Columbia.)

State funding of these proposals can be a mixed bag. Budget constraints during a recession could prompt the Legislature to reconsider spending priorities. Paying for premium subsidies from penalties assessed on health coverage refuseniks makes theoretical sense, since the refusal of younger and healthier individuals to join the insurance pool drives up premiums in the pool. But it places the state in a policy bind, because if the mandate is successful, there will be less penalty money for subsidies.

Newsom says he’s confident that the expenditures he’s calling for will be sustainable even in an economic downturn. The funds for more early childhood services and developmental screening under Medi-Cal, as he proposed, would come from the tobacco tax increase enacted as Proposition 56 in 2016.

More than $60 million of the cost of expanding Medi-Cal to undocumented young adults would be covered by savings to county health centers that now have to absorb their treatment costs without reimbursement, Newsom says. And although it’s hoped that the individual mandate penalty will be a declining revenue source, he estimates that at least at first it will bring in $500 million a year.

It’s proper that California carry the flag for healthcare reform, because the state has been a national leader in implementing the Affordable Care Act. The state took advantage of ACA provisions to expand Medi-Cal, adding 3.47 million Californians to the rolls, and brought all low-income children into the system regardless of their immigration status.

Covered California, the state’s ACA exchange for individual coverage, is a national model, setting benefit and premium standards allowing customers to compare plans entirely on price and customer service. More than 2.3 million residents are now insured by the program.

Those gains have been placed at risk by the hostility to the ACA practiced by the Trump administration and congressional Republicans, who last year eliminated the individual mandate that aimed to bring all Americans into the insurance pool.

A joint study by UC Berkeley and UCLA healthcare experts forecast that the end of the individual mandate could reverse the state’s success in bringing its uninsured rate down to 10.4% in 2016 from 17.6% in 2012. The researchers projected that the rate could rise back to 12.9% by 2023 — representing 4.4 million more uninsureds — if the state took no action.

Californians should be proud that their new governor is charting a divergent path from that of many red-state political leaders. States such as Texas, Arkansas and Kentucky are seeking permission from the federal government to roll back consumer protections under the Affordable Care Act and other federal laws.

The Trump administration has smiled on efforts to narrow access to decent coverage. Existing waivers allowing states to tinker with the ACA and Medicaid “are used to take something away, to not provide more care,” Newsom says. “We felt there needed to be a new category.”

One reason California faces limitations on going it alone is the sheer weight of federal spending on healthcare in California. “Healthcare is substantially a federal responsibility and funded with federal dollars,” says Peter V. Lee, executive director of Covered California. “The only way any state, even a big state like California, can do a major overhaul is to work with what has been up to now federal dollars.”

He’s correct. According to a 2016 study by UCLA’s Center for Health Policy Research, the federal government provided more than half of the $367.5 billion spent on healthcare in the state. Medicare led the parade, accounting for 20%, followed by the federal share of Medicaid (17.1%), federal tax breaks for employer-sponsored coverage (9%) and ACA subsidies (2.4%). A federal contribution that was $185 billion in 2016 presumably is higher now.

The most far-reaching element of Newsom’s package is an executive order calling for statewide bulk purchasing of prescription drugs, with the possibility that individual patients or health plans could join. It’s also the most nebulous, though Newsom ordered state agencies to report on its feasibility within a few months. (“They know I want aggressive implementation of that executive order,” he told me.)

The idea here is to enhance the state’s ability to negotiate with drug companies for lower prices. But the potential gains from such a program aren’t clear.

The gold standard in hardcore government negotiating is set by the Department of Veterans Affairs. The VA pays an estimated 40% less for drugs than Medicare. But there’s a catch — the VA can exact big discounts from drug companies because it doesn’t have to cover all drugs. Indeed, economist Austin Frakt calculated in 2011 that the agency covers only about 59% of the 200 most popular drugs, while Medicare insurers covered an average of 85% and some private insurers as much as 93%.

“Any attempt to get a better price means the paying party needs to have a quasi-credible threat to say no and walk away,” health insurance expert David Anderson of Duke University’s Margolis Center for Health Policy told me in 2017. That’s difficult for Medicare, which is required by law to cover “all or substantially all” drugs in six protected classes: immunosuppressant, anti-cancer, anti-retroviral, antidepressant, antipsychotic and anticonvulsant drugs and at least two drugs in several other categories.

Gov. Newsom’s buying consortium probably could obtain significant discounts if it exercised the same threat to walk away as the VA, given the size of the statewide market for prescription drugs. But taking a drug off the state formulary is complicated and politically fraught, in part because the change would mean that patients who have genuine need for the excluded drugs might have to pay for them out of pocket. In 2014, when Medicare proposed to take antidepressants, antipsychotics and immunosuppressants (which are used in organ transplants) off the protected list, a public uproar forced it to back down.

Notwithstanding those cavils, Newsom’s initiatives are smart from the standpoint of public health and politics. It’s no coincidence that some proposals address shortcomings of the Affordable Care Act that would probably have been fixed by a Democratic administration in Washington. These include the stinginess of the ACA’s financial assistance, the exclusion of undocumented residents and the weakness of the individual mandate, which never carried penalties stringent enough to force more people into the insurance pool.

What may be most encouraging about Newsom’s approach is a long-overdue focus on the cost of coverage, not merely access.

“In the midterms, the public showed just how much healthcare costs matter to people as a percentage of their budgets,” says Sandra Hernandez, a veteran public health official who is CEO of the California Health Care Foundation. “The governor is making a good bet on prevention and early intervention and controlling costs. These are investments that if you don’t make, you pay the price down the line.”

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