High-risk insurance for the middle class

E. RICHARD BROWN is the founder and director of the UCLA Center for Health Policy Research and a professor at the UCLA School of Public Health.

THERE’S A LOT to like in Gov. Arnold Schwarzenegger’s healthcare reform proposal. It covers all 1.1 million uninsured children and most of the 5.4 million uninsured adults in California. It requires everyone to help pay for coverage. It makes some important fixes to the insurance industry, forcing insurers to sell coverage to everyone — including those with preexisting health problems — at the same rates.

But, as written, Schwarzenegger’s plan also is likely to put some middle-class families and individuals at substantial risk.

The governor’s proposal requires that all Californians carry health insurance and would create a statewide purchasing pool and subsidies for those least able to afford coverage. It also would force employers with 10 or more workers to provide health insurance that costs at least 4% of the company’s payroll, or to pay an equivalent amount into the state’s insurance fund.

So employers have a cap on contributions — no matter how big their profits. The governor’s proposal also would protect people with low and moderate incomes; employers’ 4% contributions would help subsidize comprehensive health insurance for them. But the middle class has no such protection.

A middle-class family whose employer provides no health benefits would not get a subsidy, nor would family members be able to buy coverage through the state purchasing pool — even if their employer paid into it in lieu of providing health benefits. Such workers, who would be mandated to carry insurance, would pay about $12,000 a year for comprehensive family coverage. Individual policies would cost about $4,500.

That means that a typical family of four earning about $60,000 a year would spend about 20% of its income on premiums — not counting deductibles, co-pays and non-covered medical expenses. A catastrophic plan would cost less — perhaps $3,000 to $4,000 a year — but that family would still face a $5,000 deductible and an out-of-pocket limit of $10,000 a year. One hospitalization could easily hit that limit, again causing the family to spend about a fifth of its income on medical care.

The governor’s proposal also would probably degrade job-based insurance because the 4% minimum employer contribution is too low. The typical employer currently spends twice as much — about 8% of payroll — on health benefits. In essence, the plan encourages firms to replace comprehensive coverage with cheaper, high-deductible plans or opt out altogether and just pay into the state pool.

There is a real risk that comprehensive health insurance plans would be forced into a death spiral as people who could bear the risk would select catastrophic coverage with their lower premiums. That would leave only the sickest to pay the rising premiums for comprehensive coverage — a pattern that undermines the very principle of health insurance: the pooling of risk.

It’s pooling risk that allows employers to get better deals on their group coverage, which is exactly why the state is creating its own purchasing pool. But middle-class workers without job-based insurance — a gap into which 2.9 million Californians fall — are barred from buying coverage through the state pool. They would have to shop for comprehensive coverage in the private health insurance market.

The Legislature can fix these problems. First, individuals and families should get protection for their incomes through a cap on the percentage of income spent on health insurance premiums and out-of-pocket costs.

Second, the share of payroll that employers would be required to pay for their workers’ healthcare should be increased to a percentage close to the average that employers now pay.

Third, everyone without job-based insurance should be able to get coverage through the state-run purchasing pool.

Schwarzenegger has offered a bold proposal to fix a badly broken health insurance system, and it should not be derailed by these problems. The governor, working with the Legislature, can craft real solutions that give all Californians the health security they need.