DEMOCRATIC HEALTH CARE PROPOSAL ALLOWS GOVERNMENT AGENCY TO RAISE PAYROLL TAXES

Basically, the proposal - strongly opposed by the California Chamber of Commerce - sets up a government-run health care system for employees who don't receive health care from their employers, financed almost exclusively by a payroll tax on all employers who don't spend a certain level of funding on employee health care. The tax increase could exceed $6.5 billion.

"All employers - including those currently providing health care to their employees - should be very concerned about the Democratic leadership's revised health care reform bill, AB 8," said CalChamber President Allan Zaremberg. "While it imposes a new payroll tax of 7.5 percent on employers who don't currently spend that much on health care, early calculations indicate that tax will raise substantially less than the revenues required to provide the benefit package indicated in the bill.

"Since AB 8 gives an unelected volunteer board of bureaucrats the new right to increase the health care payroll tax as needed for costs, it seems virtually certain the payroll tax will have to be increased substantially, well beyond what most employers pay in health care costs today. This increase in what all employers will have to ‘pay or play' is even more likely when you consider that health care costs have risen at twice the rate of low-wage payroll growth in recent years, worsening the future gap between revenues and expenses in this new government program."

Underfunded Mandate
A look at the makeup of the uninsured in California quickly demonstrates why it is likely that the benefit package in the new government health care program would require revenues from a much higher tax rate than the 7.5 percent of Social Security wages initially placed in the proposal.

Other than people with a pre-existing condition, the vast majority of Californians without health insurance are individuals employed in lower-wage jobs. Neither they nor their employers can afford to buy health care coverage.

Nearly two-thirds of uninsured Californians live in households with income less than 200 percent of the federal poverty level, according to a UCLA study. Three-fourths of the uninsured are in households with income below 300 percent of the federal poverty level.

For an individual, 200 percent of the federal poverty level equates to an hourly wage of $10.13 ($21,070 a year). For a family of three, 200 percent of the federal poverty level is the equivalent of a sole wage earner or a combined family wage of $17.03 an hour ($35,422 a year).

Therefore, collecting a tax of 7.5 percent of the low wages earned by most of the uninsured is likely to raise far less than the cost of health coverage. For revenues to match costs, if benefits are not cut or the employee cost sharing increased, the 7.5 percent payroll tax rate would have to be increased significantly for all employers in the new "pay or play" system.

For example, 7.5 percent of the wages of the $10.13 an hour employee (200 percent of the federal poverty level) brings in less than half the cost of the average health insurance premium for individual coverage - $382 per month. To collect the equivalent of that premium amount would require a tax rate of more than 20 percent of the individual employee's wages, and even more for family coverage.

Although the Democratic proposal requires employees who are mandated to be in the new government program to contribute toward health care coverage on a sliding scale capped at no greater than 5 percent of wages, this will have a relatively small impact on the great disparity between the cost of the program and revenues received from employers of employees not covered through work.

The disparity would worsen over time, given that health care inflation in recent years has grown twice as fast as low-wage payrolls.

Abdication of Tax Authority
What is most frightening about the Democratic proposal is that it grants to an unelected government bureaucracy - the Managed Risk Medical Insurance Board (MRMIB), unpaid appointees of the Governor and Legislature - the authority to increase the employer tax to whatever level it deems appropriate to pay for the comprehensive benefit package in the proposal.

Illegal Tax
If the employer tax is enacted by just a simple majority vote - which Democrats claim they can do, having labeled the tax as a "fee" - it will violate the state Constitution. When voters approved Proposition 13 in 1978, they placed in the state Constitution not only a cap on property tax increases, but also the requirement that all tax increases be approved by a two-thirds vote of the Legislature.

The Democratic proposal also appears to violate federal law. The federal appellate court has recently ruled that a "pay or play" scheme in Maryland violates the federal Employee Retirement Income Security Act (ERISA), which prohibits states from adopting legislation that requires multistate employers to have different obligations from state to state in how they deliver health care to their employees.

Affects All Employers
Any employers who already pay at least 7.5 percent of payroll for health care and think the legislation wouldn't apply to them need to be greatly concerned that the tax ultimately will exceed their cost of delivering health benefits, given that just the revenue from employers of low-wage employees will be insufficient to fund the program.

Small businesses are not exempted from the requirement to provide health care or pay the new tax.

Other Provisions
Senate President Pro Tem Don Perata (D-Oakland) and Assembly Speaker Fabian Núñez (D-Los Angeles) announced on June 21 that they plan to merge their proposals into the Speaker's bill, AB 8, compromising on provisions where their legislation had previously differed. SB 48, which formerly carried Perata's proposal, has since been amended to deal with a different health subject by another author.

The Democratic proposal was not in print as Alert went to press, but based on the outline released when Democratic leaders announced the merger of their bills, other provisions include the following.

• In a major split from the Governor's approach, individuals will not be required to purchase health care coverage.
• Insurers, however, will be required to issue coverage for anyone in the individual market without serious medical conditions.
• A high risk pool for individuals with serious medical conditions is to be "funded by a broad assessment on health plans."
• The employer mandate and purchasing pool would go into effect in 2010.
• Existing insurance rules for small employers are extended to mid-sized employers with 51-250 employees, while rate bands in the mid-size group market are phased out.
  
  July 11 Hearing
  AB 8 is scheduled to be considered on July 11 in the Senate Health Committee.  The CalChamber opposes AB 8 and encourages employers to voice their concerns to their senators.

http://www.calchamber.com/CC/Headlines/07022007TS.htm

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