State of emergency: California's health-care crisis

The words "health care" and "crisis" follow each other in sentences so often that we have grown numb to the association. Policymakers and editorial writers have been talking about a crisis in access to affordable health care for more than half a century. Another truism that finds its way into newsprint all the time is that trends that sweep America often begin in California. Well, the crisis in health care is about to get almost unimaginably worse everywhere in America, but nowhere as ugly as in California.

There are several reasons for California's impending meltdown:

1. The state is broke and facing a budget deficit of about $35 billion and counting, more than all other states combined, except New York. High on the list of cuts proposed by Governor Gray Davis are reductions in eligibility for the state's Medicaid program (known as MediCal) and its program for other low-income families with children. More than two hundred thousand people will be dropped from the MediCal program alone. MediCal is funded by a mix of state and federal matching funds. When state funding is reduced, federal funding--about 60 percent of the total expenditure--is lost proportionately. To many, the cuts in state funding are a false economy, since 100 percent of the cost of care for these newly uninsured people will be absorbed in higher costs to everyone else as the costs are shifted.

2. In the face of budget shortfalls, county governments have been forced to close many of the public hospitals and community health clinics that were a "safety net" for the uninsured, especially migrants with nowhere else to go for services. Many private and even nonprofit providers have pulled out of poor neighborhoods because reimbursement was inadequate, and those remaining are already swamped to the point of breakdown. The poor have very little access to even the most basic health care.

3. For those whose insurance is tied to employment, a double whammy of medical-cost inflation and a persistent recession has further threatened their coverage. Insurance premiums went up an average of more than 25 percent last year, and next year looks to be as bad. No one believes these price increases are manageable for companies that have little pricing power for their own products. Many employers are planning to cap their contribution, shifting the burden to their workers; others may drop their coverage altogether.

How did California get to this place so quickly? After all, just four years ago, the state had a large surplus and was looking to expand its program of health care for the working poor. The answer, of course, is tied to the bust in many sectors of California's economy, like information technology, aerospace, travel, and communications. As with many states, California has a very progressive tax structure that is heavily dependent on personal and corporate income taxes. That was swell in the boom years, but the leverage worked against the state treasury when the economy tanked.

Just as important, across the United States all of the factors in medical cost inflation went into overdrive. An aging population needs more resources. Pharmaceutical costs are way up, last year outpacing every other element in health-care cost inflation. Hospital charges are up, in part as the result of increased costs for wages and, in part, because competition has been eliminated in most communities. Physicians have also shown great ability to maintain their incomes by increasing the volume of their services to make up for caps on reimbursement.

In California, these national trends are exacerbated by the large number of individuals and their families who fall outside any organized system of care. When they need health care, it is usually delivered later than is optimal for efficacy and efficiency, because lack of insurance means they wait until there is an emergency to be treated for illnesses that could have been dealt with much earlier. The care is usually handled in a very expensive setting, such as an emergency room, and the cost is shifted to others with private insurance in the form of a hidden tax built into the pricing structure.

Attempts at reforming health-care delivery in California have usually been thwarted by a split among progressives. The purists hold out for the creation of a "single payer" system, such as Canada has, that would make government the insurer for all, just as Medicare covers the elderly. The pragmatists begin with the system as it is, and seek to expand coverage by incremental improvements. Recently, however, the CEO of Blue Shield went much further, proposing that health insurance be mandatory for every individual in California, and requiring all insurance companies to issue policies regardless of risk. Under the proposal, which has gotten widespread and favorable attention, a funding pool would be set up to subsidize those who could not afford the insurance premiums, and it would be financed by single-purpose taxes as well as the general fund. Although some die-hard critics groused that the plan would mean more policyholders for Blue Shield, the press and political community are taking it seriously, because the current situation is not sustainable.