Financing Health Insurance Coverage: California's Revenue Structure and Options

Financing Health Insurance Coverage: California's Revenue Structure and OptionsTracy Gordon, Kim Rueben

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California’s health care reform effort may have been one of the first casualties of the national economic downturn. Yet the conditions that gave rise to the initiative did not disappear when the plan failed, and other states are pushing ahead with proposals to expand health coverage. So it remains useful to reflect on the California experience. In particular, it will be helpful to understand the proposed funding sources, how they would have interacted with California’s revenue system, and what alternative funding streams might have withstood the politics of reform. In this policy brief, we analyze the options for financing expanded health insurance coverage in California and offer our own preferred solution in light of the state’s fiscal and political constraints.

California’s health care reform effort, ultimately the ABX1 1 plan put forward by Gov. Arnold Schwarzenegger and Assembly Speaker Fabian Nuñez, failed to survive a critical Senate Health Committee vote in January. A key intervening event was the release of the governor’s budget, which projected a $14.5 billion shortfall in revenues through FY 2009. More recently, the state’s Legislative Analyst projected the shortfall to be $16 billion.

Several lawmakers cited concerns about the state budget as the main reason they rejected the health measure. The Legislative Analyst’s Office also raised questions about funding sources for the plan. Tax increases would have required voter approval, a long shot in the best of times and a near impossibility in a slowing economy.

Yet the underlying conditions that made health care reform important to Californians persist. California is home to a disproportionate share of the nation’s uninsured. In 2006, 6.7 million Californians, or 18.5 percent of the state’s population, lacked health insurance at any given time, well above the national average of 15.3 percent. In a study by the Commonwealth Fund, California ranked 39th among the 50 states in health system performance. The state had especially low rankings regarding access, quality, and equity, in large part because of the number of uninsured. With worsening economic conditions, the number of uninsured is likely to rise.

Moreover, Californians continue to support health care reform despite the darkening fiscal environment. A statewide survey conducted in January 2008 found that a majority of state residents (60 percent) as well as a majority of likely voters (53 percent) would support a plan requiring all Californians to have health insurance, with costs shared by employers, hospitals, individuals, and government through a variety of fees and a cigarette tax.

In light of this ongoing support and other states’ coverage initiatives, it is useful to reflect on the California experience. In particular, it will be helpful to understand how California’s specific fiscal and political circumstances affected the prospects for reform, how proposed funding sources would have interacted with California’s current revenue system, and what alternative funding mechanisms would look like.

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