“Honeymoon” Period is Over For Government Run Health Care

The announcement yesterday by Covered California that the statewide premium increase for Obamacare will be 13.2%, up from approximately four percent in each of the last two years, signals that the “honeymoon” period is over for government run health care in California and elsewhere.

The State of California and its taxpayers needs to brace itself for another major threat to its long-term fiscal sustainability because things could get ugly pretty quickly depending on many variables that determine California’s extraordinary level of government run health care spending.

The precise impact of the fiscal hit posed by the premium increases is difficult to pinpoint at this early stage, but there is no question that the state’s exposure to significant increases in Obamacare-driven health care expenditures will increase dramatically over the next few years.

Total costs for Obamacare in California are staggering, which means that any tweak to the program by the federal government could immediately expose the state to billions, or even tens of billions of dollars in increased costs unless corrective action is taken.

This fact is particularly troubling given the extremely poor track record of the California Democrat Legislature in being proactive on fiscal issues such as the state budget and the pension issue.

For example, Republican Presidential nominee Donald Trump says he plans to completely repeal Obamacare, which would blow a hole in California’s budget of tens of billions of dollars, unless coverage is dropped for millions of Medi-Cal recipients.

A few sets of summary figures paint a good picture the state’s total exposure in the event that federal government shifts more responsibility for the financing of Obamacare to the states, or decides to pull back all together.

According to the state’s approved 2016-17 budget, total state spending for Health and Human Services totaled $54 billion for 2016-17, which even now surpasses K-12 Education as the biggest category of state spending, which received $51.5 billion in 2016-17.

California State spending for Health and Human Services, primarily Medi-Cal, has increased by 46% since 2011-12, jumping from only $37 billion in 2011-12 to the $54 billion for 2016-17 noted above.

But if you add federal spending to the equation, the California Department of Health Care Services received a total $93 billion in 2016-17, nearly double the $47 billion received in 2011-12, according to the California Department of Finance.

The state’s Medi-Cal caseload has exploded in the past few years, increasing from 8 million in 2012-13 to a projected 14 million in 2016-17, covering over a third of the state’s population, according to the Governor’s May Revise.

For 2016-17 the state’s share of the Medi-Cal expansion under Obamacare is $16.2 billion ($819.5 million General Fund).  But this only assumes a 5% share of the cost for the State of California.  By 2020-21, the state share will double to 10%, while the federal government is supposed to continue to pick up 90% of the costs.

I don’t believe it’s reasonable to assume that these formulas will stay so one-sided for long, particularly in light of increased premium pressures as well as fiscal pressures on the federal budget.

Absent changes to current federal and state law, my preliminary analysis suggests that the state’s annual cost increases related to Obamacare could easily reach into the billions of dollars per year in the very near future, and significantly higher if the federal government decides to further shift its costs to the states, which is inevitable.

Future double-digit annual premium increases will only serve to exacerbate state costs and encourage more cost shifting by the federal government.

It is important to note that health care premium inflation is not something that will subside anytime soon, and the trend is only likely to increase for the foreseeable future.

The low-premium increases over the last two years of 4%, was a complete anomaly based on the historical 20-year averages.

Public agencies in California commonly assume an average of 10% annual increases in employer health care premiums.  According to the California Health Care Foundation, individual premium increases rose by 15% in 2014, 9% in 2013, 8.2% in 2012, and 10% in 2011—roughly an average of 8.75% per year.

“The key drivers of health care premium increases are advances in medical technology and subsequent increases in utilization, excel price inflation for medical services, cost-shifting, the high cost of regulatory compliance, and patient lifestyles (e.g. physical inactivity and increases in obesity),” according to a study by the Wellpoint Institute of Health Care Knowledge.

To sum up, the federal government’s future commitment to Obamacare financing is shaky at best, and any major changes could spell financial catastrophe for the State of California unless bold political leadership is exercised in Sacramento—something that has been in extremely short supply on the Democratic side of the aisle in Sacramento for quite some time.

David Kersten is executive director of the Kersten Institute for Governance and Public Policy (www.kersteninsitute.org) . He is an expert on fiscal issues and teaches a masters’ course on public budgeting for the University of San Francisco.