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JUNE 25, 2007

BW SMALLBIZ -- FRONT LINE

Altered States

California, Illinois, and Pennsylvania take up the push for universal coverage

To learn about health-care reform, you have to look beyond Washington, D.C. That's what President George W. Bush said in his State of the Union address, urging Secretary of Health & Human Services Mike Leavitt to visit the states and "see what you can learn."

States are far ahead of the federal government in trying to help small employers priced out of the market for health insurance, and three states are even taking stabs at universal coverage. First came Maine's Dirigo Health, in 2005. Massachusetts will begin Commonwealth Choice in July, and Vermont's Catamount Health will follow in October. All three use government clout to try to negotiate better prices for health insurance, and Massachusetts and Vermont mandate that companies either buy insurance or pay into a fund that subsidizes those who do.

Now the governors of California, Illinois, and Pennsylvania have put forth proposals for universal coverage. All three mimic key features of the New England plans. Two dozen other states are debating less ambitious reforms.

Few dispute the need. Last year, companies with fewer than 200 workers faced average premium hikes of 8.8%, almost two points higher than those with more than 200 workers, according to the Kaiser Family Foundation. With just 60% of small firms providing coverage—compared with 98% of big ones—a huge swath of the uninsured works at small companies.

The New England plans are providing blueprints for other states' proposals. "We studied carefully the three New England states," says Christa Donahue, director of policy at the Illinois Department of Healthcare & Family Services. California, Illinois, and Pennsylvania will redirect some funds now used for emergency care to cover the uninsured, as in Maine and Massachusetts; state governments would negotiate prices; and those who don't buy insurance would pay to help cover those who do.

Illinois Covered Choice, which aims to reduce premiums on small business health plans by about 20%, would charge 3% of payroll to businesses that don't participate. Pennsylvania Governor Edward Rendell is also proposing a 3% tax on employers for his program, designed specifically to provide premium assistance to low-wage workers in small companies. In California, where 20% of the population is uninsured, Governor Arnold Schwarzenegger is recommending a 4% assessment on employers.

Although most small business advocates remain allergic to any so-called employer mandate—fearing that a 3% or 4% assessment could spiral higher if the programs turn out to be more expensive than expected—some California entrepreneurs are warming up to the idea. "It's not unreasonable to ask small businesses to pay 4% because everyone is contributing something," says Scott Hauge, president of the nonpartisan Small Business California. He's somewhat comforted by the fact that Schwarzenegger included an individual mandate, which, like Massachusetts', would penalize residents who fail to purchase insurance.

Rosalie Bulach, chief executive officer of Name-Finders Lists, a 15-employee San Francisco direct marketing consultant, has seen her health-care premiums rise 62% since 2003, to 11% of payroll. Says Bulach: "Small employers who haven't been doing right by their workers should really pay more than 4%."

Some policymakers consider these new state programs nothing but a short-term fix. David Merritt, a policy analyst at the Center for Health Transformation, a Washington consulting firm, believes runaway costs are the main villain, and doubts the effectiveness of cost-containment strategies such as wellness programs and chronic disease programs. Says Merritt: "These plans aren't financially sustainable. Although they may increase coverage for small business employees in the short run, in the long run they would just mean more taxes and fees." But in the absence of a complete cure, noninvasive surgery may just have to do.

By Joshua Kendall