Transmogrifying California Healthcare

I’m really looking forward to this coming Friday, February 4th, as I get to moderate a panel on “The Impact of Health Reform on California.”  The panel, which was organized by UC Berkeley’s Institute for Governmental Studies is being held in Sacramento and will take place before a sold-out crowd of nearly 200, in large part because it has a meaty topic and some really top-notch participants, including:

• Diana Dooley
  Secretary, Health and Human Services Agency
• Cindy Ehnes
  Director, California Department of Managed Healthcare
• Paul Markovich
  Chief Operating Officer, Blue Shield of California
• Saumya Sutaria
  Director, McKinsey & Co.

Sacramento Mayor Kevin Johnson (who I went to college with) and Congresswoman Doris Matsui will also make some remarks.

This should be a great event because each of the panelists has a pretty significant role to play in how the State of CA adopts and adapts to health reform, and there is a remarkable amount at stake.

Saul Bellow once said, “California is like an artificial limb the rest of the country doesn’t really need.”  That may be true, but in our healthcare economy we can’t afford to amputate.

If you have been following the budget discussions from newly-elected Governor Jerry Brown’s office, you know that healthcare is one of the hottest potatoes around.  To close a $25.4 billion deficit, Governor Brown and his team filled about 25% of the hole through reductions in various state-sponsored healthcare services, including cuts in Medi-Cal, the Children’s Health Insurance Program, adult day care programs and a myriad of other areas from mental health to AIDS treatment.   It may balance the budget, but there is a large and growing cadre of very unhappy campers.  Man, I don’t envy the Governor, Secretary Dooley and their colleagues.  It is the very definition of a no-win situation and may well result in higher costs to the state down the line as people are forced to put off treatment they can’t afford and get sicker while they wait.

And with the one of the highest unemployment rates in the nation (12.4%), there are an increasingly large number of Californians walking around without insurance and headed straight for Medi-Cal if things don’t improve.  Even healthcare workers, which have long represented 1 out of every 10 California workers, believe it or not, are losing their jobs as a result of the economy and public and private cost reductions.  Talk about a double-whammy.

And that’s only the stuff paid for by the State.  California’s private employers are also looking far and wide for ways to reduce their healthcare liabilities. California employers’ healthcare costs rose 8.4% from 2009-2010, as compared to the national average of 6.9%, while overall inflation rose only 1.6%.  At this rate it won’t take long before healthcare takes up more than 100% of every dollar.   Okay, that’s not possible, but we may need a whole new kind of math at this trajectory.

And furthermore, according to the California Healthcare Foundation, 28% percent of California employers either reduced benefits or increased cost sharing for employees in 2010 as a result of the recent economic downturn, up considerably from the 15% who did so in 2009.  4% of California employers say they expect to cut out health benefits entirely in 2010.  That’s going to go over well.  Not.

Some people believe that health insurance carriers are the culprit in this healthcare marketplace, but the vast majority of them are simply trying to balance their need for rate increases to pay for ever-expanding medical inflation with their desire to be successful in the marketplace.  There may be some firms who have taken advantage like there are in every industry, but there are just as many that are working very hard to find ways of making a positive difference in the system and to introduce methods of improving quality while managing costs.  Think what you want about their motivations, but insurance carriers have to compete in the marketplace like any other business.  If they can’t make it work for their customers and their shareholders, they can’t survive.  I am pretty confident that when it comes to healthcare, no one is too big to fail at this stage of the game.

And while some have suggested that California providers stand to benefit from health reform as more people have insurance coverage, it’s not entirely clear whether those numbers will be overrun by cuts to Medi-Cal, Medicare or other programs.  One example:  Last year, Scripps Health reported revenues of $2.2 billion. At the same time it lost $137 million taking care of Medicaid patients and $55 million providing care for patients covered under Medi-Cal.   According to the CEO of Scripps, which operates 5 hospitals in the San Diego area, “Hospitals aren’t going to see the benefit to the newly insured for nearly four years, but we’re going to start seeing the costs.” They hate it when that happens.

Moreover, providers are being asked to undergo a massive cultural transmogrification and, abracadabra, turn themselves into Accountable Care Organizations that get bundled payments and pay-for-performance incentives and god knows what other jargon for “get paid less”.  Not only do they not know how to run their businesses this way, by and large, but they need to spend a significant amount of money on information technology and training to manage the change.  Oh, and they have to find a whole bunch of new primary care physicians to serve their clientele.  I am sure they can find them right next to the herd of unicorns amassing on the Capitol steps.  Providers everywhere are outside digging holes so they can practice rolling over in their graves.

And so we will have a lot to talk about on Friday and that makes it interesting; who wants to watch a boring panel?  I look forward to reporting the highlights and hopefully the good ideas for addressing these many challenges.