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Oct 05, 2003

CONTACT: Jerry Flanagan, (415) 497-1710 - cell or Jamie Court, (310) 874-9989 - cell

Gov. Davis Signs SB 2; CA Law Could Be National Health Care Model If Cost Controls Are Adopted

Consumer Advocate Prescribes Cost Control Plan

LOS ANGELES. Governor Gray Davis signed legislation today that will provide health care benefits for an estimated 1 million working Californians who do not have access to care. The consumer advocacy group the Foundation for the Taxpayer and Consumer Rights (FTCR) applauded Davis' decision but said the state must now regulate health insurance premiums and hospital and physician rates in order to make the plan work.

FTCR provided a three-point cost control plan for the future and says the nation can learn California's leadership on health care reform.

"Now that there is a mandate for employers to provide health care by 2006, we have a deadline to make the system affordable," said Jerry Flanagan of FTCR. "Governor Gray Davis has taken the first step toward stabilizing our health care system by assuring that working families have access to care. The second step must be to rein in excessive and unfair health care costs. This one-two punch to the health care crisis would put California back on the map as a national leader in health care reform."

Under the proposed "pay or play" plan, employers with 20 or more employees must either provide health care benefits directly to workers or pay a fee for the worker to receive care from a state run health insurance purchasing pool. The bill's implementation date has been delayed until 2006 for large employers and 2007 for medium sized employers. Employers with 20-49 employees will not be required to participate unless a 20% tax credit is adopted first. The bill does not contain cost control provisions or provide protections for consumers on the amount of out-of-pocket charges they will be required to pay in order to access medical services.

Hawaii's 30-year experience with a similarly constructed "pay or play" system has shown that "without cost controls, the solvency and stability of the health care system is threatened," according to Flanagan:

* After 3 consecutive years of 10-28% premium increases, the Chamber of Commerce of Hawaii asked the state legislature and the governor to provide independent oversight of rates in 2002.
* During that same year, health care premiums had increased 250 times faster than medical inflation.
* The Hawaii legislature approved, and the Governor signed, legislation allowing a regulator to deny unfair premium increases.

For the nation, there are lessons to learn from the California's leadership on health care reform, according to FTCR: 1) Coalitions of organized labor, insurers, hospitals and physicians will attempt SB 2-styled reform in other states and must be required to include real cost controls; 2) Insurance premium rate regulation and caps on how much doctors and hospitals may charge are time-tested cost control strategies; 3) Bulk purchasing and universal access to care help bring down system-wide costs.

Inefficient HMOs and health insurers spend 12-33 cents out of every premium dollar they collect on administration, salaries, and advertising, and are recording record profits. In 2002, the cost of health insurance for a family of four increased 250% more than the rate of medical inflation. Including administrative costs and bloated profit margins of hospitals and physician groups, experts estimate that one-half of every health care dollar is spent on overhead. As a result, since 2000 a consumer's share of premiums for family coverage has increased from $1,619 to $2,412 -- a nearly 50% increase. A new report released this week by the U.S. Census Bureau shows that uninsured rates are increasing fastest among the nation's middle class as a result of cost increases.

In a letter sent on Friday to Governor Davis, Lt. Governor Cruz Bustamante, candidate Arnold Schwarzenegger , Senator Tom McClintock and legislative leadership, FTCR called upon candidates and policy makers to pledge support for a 3-point cost control plan for the future:

1. HMO and health insurer premium regulation.

HMOs and health insurers should be required to have premium increases approved, as auto insurers have since 1988 under the California voter approved Proposition 103. That landmark auto insurance reform initiative established a 'prior approval' system for many lines of insurance. During the decade after Proposition 103 was adopted, auto insurance rates in California went down by 4.0% while insurance products remain broadly available and competitive, and the uninsured motorist population declined by 38%. Nationally, rates rose 25% during this period. California consumers saved over $23 billion since 1988 under the prior approval system.

2. Price controls on doctors and hospitals.

Hospital and physician rates should be regulated like hospital rates have been in Maryland since 1971. The Maryland law created the Health Services Cost review Commission (HSCRC) as an independent agency with seven members appointed by the governor. Since 1977, Maryland hospitals' average cost per admission has declined from 25 percent above the national average to 8 percent below the national average. Such a model could serve as a basis for all-payer rate setting for California's health care system.

3. Bulk purchasing and universal access.

A new state health care plan overseen by the 2-million member California Public Employees Retirement System would be more efficient than the current system if it is designed to bypass insurers and organizes hospital and physician networks directly as well as buy prescription drugs at bulk discounts. Universal access to care will save California taxpayers millions of dollars, because health care will be provided preventatively rather than later in an Emergency Room when the patient's condition is critical and care is much more expensive. By insuring everyone, the cost of care will come down for all consumers because risk is spread more widely. The new state purchasing pool should provide care for all who do not have access to benefit plans provided by employers. Competition between the State and private plans will help to stabilize premium costs.


The Foundation for Taxpayer and Consumer Rights is a national non-profit and non-partisan consumer advocacy organization. For more information visit us on the web at and