Why the Cost of Healthcare Continues to Rise in CA

One of the largest drains on every states budget is healthcare cost.  California has historically been in the top of state healthcare expenditures due largely to its past of providing one of the most generous sets of program benefits in the country.  Both Governor Brown and Secretary Dooley deserve a tremendous amount of credit for acknowledging the mounting problem of healthcare costs and taking steps to begin the process of addressing it.

Healthcare costs in the U.S. are estimated to top $3 trillion this year.  That is a significant increase from the estimated $2.4 trillion in 2009.  The Affordable Care Act (ACA), aka Obamacare, is supposed to be lowering the costs and improving efficiencies for healthcare.  While it can be argued, and it has vociferously, that it is early in the process and the projected savings will begin in the next four to five years, there are some significant indicators from the administration in Washington DC that more and more of the promised savings will not happen.  This will spell further disaster for states like California that already shoulder a disproportionate share of the healthcare burden of our population.

Before we can discuss AB154 and AB171, let’s review some broader recent decisions and data that have a direct impact on California’s projected healthcare costs.

Part of the plan to afford the care under the Affordable Care Act was to appropriate revenue from the purchase of healthcare and penalties for non-purchase of policies.  The governing method to assess the fees and assure collection was the IRS.  Within months of its passage the government had to admit that the idea of the IRS administering this program’s revenue would not work and that segment of the legislation was repealed.  This now begs the question how will this revenue be assured?

As we are all painfully aware, there is some disagreement over whether or not the Affordable Care Act’s mandate to purchase insurance is constitutional.  Scholars, pundits, and constitutional lawyers on both sides are already at polar opposites over the issue with each side quoting chapter and verse as to why, or why not, it will be upheld or declared unconstitutional. The reason for the gulf in the interpretation of the underlying law is its base on a prime case called Wickard v. Filburn from 1942 that started the justification for the federal government’s expansion into what had prior been clearly state jurisdiction.  Any non-lawyer’s reading of the case simply defies common sense—this will be a very sticky wicket indeed. If the Supreme Court declares the mandate unconstitutional then much of the insurance reform inherent in the bill falls apart. Another large segment of projected saving will revert to increased expenses ultimately burdening the state both directly and indirectly.

The U.S. Secretary of Health and Human Services, Kathleen Sebelius, has recently ruled that the CLASS Act—a segment of the bill that was designed to expand options for people who become functionally disabled and required long-term services and support—is not affordable by the definition under the act and therefore it has been suspended.  Where will these costs fall if the federal government stimulates the expectation but fails to provide the funding?

A major part of the projected savings was though the requirements of Accountable Care Organizations (ACO’s).  In the bill, they were projected to provide a savings of approximately $333 million per year, or just about $1 billion over three years. The CBO recently announced the results of a 20 year study focused on disease management and value based payment methods that fundamentally negate most, if not all, of the assumption on which these projected savings were based. In fact the study indicates they will potentially increase costs.

Another main point of the Affordable Care Act was to eliminate treatment disparity.  Who wants to argue for disparity? No one!  But even CA Secretary of Health and Human Services, Dianna Dooley, has said publically that “…we all need to get used to the idea that disparities will exist.”  I commend her for this statement because it is unequivocally true.  There is a basic law of diminishing returns that says that you will spend 80% of your money trying to arrest 20% of the problems.

Another key segment area of the ACA savings plan is Insurance Rebates. The act maintains that it has teeth to control the insurance industry profits because of its ability to mandate rebates for fees in excess of the medical loss ratio that the U.S. Secretary of HHS sets.  In the first place, the rebate amount is a mere trifle compared to the $3 trillion national expense.  More importantly, rebates have been mandated by the federal and state governments of Pharma for years.  Rebates do not lower costs at all.  Rebates in this bad play are methods to redirect money from the general consumers of the products, prescription drugs in this case, to other areas that the federal government, or the state, wants to spend them.  They do nothing but increase the cost in an arbitrary and specious way and obscure the real cost of care in America.  If monies flow in payments to the drug companies, and then flow back to the states, and the states, like California, can redirect these monies back to the programs or the general fund to fund more patients, it amounts to nothing more and a consumption tax.  A look at the California budget shows that about ½ of the drug spend for some programs comes through mandated rebates.  Sure this is a good thing for the participants in the programs, if like California the moneys flow back to services—not all states do this, some pay for other infrastructures—but it is not good for understanding the real impact of these programs economically as the myriad of convoluted funds flow become impossible to track or account effectively.  Frankly, the $3 trillion in health costs for the U.S. is not likely even close to $3 trillion because it is an unintelligible mix of both invoice pricing and actual reimbursement payments.  And for those who do not know, a healthcare provider typically is getting reimbursed from eleven cents on the dollar to twenty-two cents on the dollar for services they bill—and they seldom can predict the amount.

Yet another key segment of savings under ACA was the premise that hospital readmissions will reduce.  The plan is to select a series of specific disease states and for the government to begin to select measures that will allow for adjustment, read penalties, to hospitals that have higher than the selected measures for readmission.  Houston, we have a problem.  One of the biggest drivers of healthcare cost is age related illnesses.  Since 1964, when we created Medicare and Medicaid, the lifespan has increased from about 70 years old to almost 83 years old today.  The effect of this increased lifespan has been to significantly increase the cost of care in one’s life and shift the cost curve of lifetime health expenses to our last few years of existence. A recent Kaiser study now indicates that almost 85% of our lifetime expense for healthcare will be made in the last 5 years of life—and the trend is still increasing.  We are aging, our culture of how we manage our elderly relatives has shifted from family responsibility to outsourced solutions (nursing homes), and we now are more focused on quality of life than just life as the basis for our expectation of care.

Let’s stay on the topic of re-admissions for another moment because this is a big one.  One of the assumptions that drive the belief that we can reap savings by setting measures and penalties is that and assumption is that the reason for the readmission is that hospitals get more money for readmissions. As a result, they are not doing much, or enough, to improve the outcomes in the first place.  But this is a false assumption for many reasons.  To illustrate the issue, let’s discuss Hospital Acquired Infections.  The premise is that Hospitals are sloppy or slipping when it comes to hygiene and if they simply do a better job following antiseptic protocols to reduce infection, then these unnecessary costs will go down.  The people drawing this conclusion do so from the basis that healthcare is more of a cause and effect system, a static system, where we have fixed cures for most of what affects us.  This is one of the main cores of why we keep thinking we can make progress if we just keep doing X process more and better… But the problem is that the practice of healthcare, after all, is largely a war with other species (bacteria, viruses, and other complex pathogens), a war with our environment, (accidents, violence, and pollution) and a war with ourselves (diet, exercise, work habits, and sleep). From time to time, we can see gains for ourselves in these battles, but our mortality assures us that we will all eventually lose the war. Basic biology and the laws of nature have stacked the deck against us. Innovations in technology, science, and medication have helped many of us delay the day of our ultimate surrender, but these advances have also fostered the false belief that no price is too high to pay for an extra day or week of life. Related to infections, we are losing this war as our chemical and biological weapons have continued to become less and less effective. The protagonists, other species, have evolved resistance to our weapons and the remaining available chemistries’ at our disposal have become more toxic to us who take them. Hospital readmissions will likely continue to increase.

Lastly, ACA relies heavily on projected savings from the mandate of conversion to Electronic Health Records (EHR’s).  While EHRs are a good thing and will very likely improve patient outcomes, any projected savings, should they even materialize, will be negligible.  How can I predict this so definitively?  If you look at where the healthcare dollar is spent only about 12 cents is spent in administrative costs today as it is.  The percentage that may be gained in efficiency from conversion to electronic records will likely be 10% to 20% of that number which would yield about 1.2 cents, to 2.4 cents, for every healthcare dollar.  The current plan for EHRs does nothing to change the current HIPPA regulations and as such the sharing or coordination of care though the transportability of these records between providers and sponsors is very expensive and practically prohibitive.  The application of technology has always been made with the promise of increased productivity and lower costs but an honest assessment of the past 40 years shows that overall lower cost and significant gains in productivity are the exception not the rule.

The largest cost drivers, where EHRs could have a major influence, are in the areas of duplicated services, defensive medicine, fraud, and abuse.  By many estimates, on both sides of the political spectrum, only about 33 cents of the governmental healthcare dollar is realized in services—about 60 cents is lost in these areas.  There is little debate on this total number across the aisles.  There is large debate as to whether the costs are larger in the fraud and abuse area or in the duplicated services/defensive medicine areas.  This debate is moot as EHRs could have the potential to drastically reduce these aggregate costs if, and only if, they are coupled with mandated coordination of care and benefits across all available sources.  By the way, I don’t mean single payer.   Single payer is a great sound bite but the term likely does not really describe what people are seeking.  Do we really want all care to come from a governmental source—eliminating choice, volunteer treatment, faith based programs, non-profits, philanthropic sources, corporate sources, etc.?  When I have had this discussion with various legislators, both state and federal, the answer invariably has become; well no, of course not!  What most really seem to want, and what is necessary to make this all work, is a central point of administration with the ability to connect the providers around the patient as the center point in a kind of virtual care team.  This is relatively inexpensive, does not initially even require full HER implementation to achieve significant savings, and provides a great role for state government to play.

With this as a backdrop, we come to the last big issue facing why healthcare is continuously increasing in cost and the issues with AB154 and AB171 drastically put at risk California’s healthcare future.  AB154 is legislation recently approved by the Assembly that will require private insurers to cover diagnosis and treatment of mental illnesses (it appears all mental illnesses on the books).  AB171 requires coverage of developmental diseases such as autism.  The Assembly also approved legislation to cover oral chemotherapy and mammography regardless of age.  While I applaud the sentiment, these kinds of actions that constantly increase the overall coverage of anything, and everything, which can ever affect anyone as they perpetuate their long risky walk through life to older and older age, in conjunction with the items previously discussed, are setting California up for a perfect storm.  As the ACA projections continue to fall apart and as the federal cost for healthcare programs like Medicare and Medicaid continue to increase, states like California will be left in the crosshairs of larger expectations for treatment and less, perhaps no, federal money to pay for it. Already the President refers to Medicaid as a state program.  I guess he forgets that both Medicare and Medicaid are just parts of the federal Social Security Act of 1964.  Of course, the states consider this a federal program and due to the increasing drain on state budgets some are trying to figure out how they can again opt out of this federal program.

Our largest issues come down to the following things.  We no longer truly insure health care to preserve basic life.  More and more we are requiring insurance to cover “quality of life.”  We have extended though technological gains the amount of time we can spend on the planet to the point that we are now on average way beyond the period where our bodily systems effectively fight the healthcare war.  As we have gained the additional ten more years of life from the past forty years of technical and medical accomplishments, we have moved into a new reality that to preserve our quality of life during this extended period we are consuming consuming more and more of our resources.  Unfortunately, much of what programs like Medicare and Medicaid are now paying for are not the actual costs of care.  They are paying for the things we purchased during the former years to improve our quality of life way beyond the realm of healthcare.  These programs are really funding the earlier purchases of larger screen flat panel televisions, vacations, 2nd homes, new cars.  They fund the things that, prior to 1964, we typically did not purchase because we knew we needed the money for our elderly rainy day funds.  We were worried that we would need to pay for the catastrophic accidents and illnesses that fate dictated we would face as we aged. Today, we are all free to make these lifestyle purchases because the threat of elder catastrophe is now covered by entitlement.

This is not an argument to go back to the way it was, neither an argument to eliminate these programs, nor an argument that we should die earlier.  I know of no one that wants to see people die younger, suffer more, or live in destitution.  The point of this article is to bring to the front the dilemma.  It is here we need to develop a better dialogue and, as Ben Franklin said, “find compromise, through tolerance.”  It is here we also need to start to focus our hard decisions on where personal responsibility ends and our safety net begin.  Until we do this, California faces the coming perfect storm and like all other state will likely face it alone without federal help.  The decisions we make on items like AB154 & AB171 while laudable are significantly increasing expectations and hence our risk of future economic collapse.  Remember it was Albert Einstein who said, “Insanity is doing the same thing over and over again and expecting different results.”  Wait, is this why AB154 is being passed?

I commend the Governor and the Secretary for their effort to begin to address this issue.  While there are many who want to lay blame for everything at their feet, I find in both inappropriate and counterproductive.  Both have had long records of public service.  Both began, perhaps, more on the side of idealism but they have each arrived at pragmatism based on hard one experience and dedication to effective solutions.  I can’t think of any I would rather have trying to help California move these issues forward.  That said it is time we all begin to recognize the depth and diversity of the problems, reset our expectations and all become responsible for the solutions!

(Tom Loker served as the Chief Operating Officer of Ramsell Holding Corporation. Prior to joining Ramsell, Mr. Loker was the founder and senior partner of Wild Tiger Holding Company and Thomas Loker Consulting. Visit his website at www.loker.com and his blog at tloker.wordpress.com.)


  1. Pamela McDonald says

    Working in the healthcare field for 42 years in the administrative level, and now as a medical business consultant, much of what is in this article is inaccurate. At this moment, there has been such a sharp decline in the numbers of available physicians practicing medicine as a direct result of the implementation of the Affordable Care Act. It’s name alone is a farce. The rise in the cost of healthcare in the nation and specifically in California has to do with several areas which need to be addressed. For most of my career, the CMS has dictated to physicians what their fee schedule will be and their reimbursement. CMS is the Centers for Medicare and Medicaid. In California, the welfare state, we have a huge population of people who are covered under Medi-Cal. The reimbursement level for treatment for this population is lower than anywhere in the nation, while the demand remains high. The risk with treating this population is also elevated because they tend, overall, to not be compliant, and litigation (malpractice suits) is much higher than the other population groups. Since the reimbursement for treatment is far below the costs of the providers, many physicians simply cannot afford to treat these patients. Likewise, fraud and abuse is rampant in some clinics who treat this demographic. So, these patients go directly to the hospital emergency rooms for their routine healthcare, clogging access to an already overwhelmed system. To add to this problem, Medi-Cal has been a bureaucratic nightmare to comply with. They have a manual, previously printed on paper, which changes weekly and is two binders thick – some 600 plus pages of guidelines and rules. It is now online to save money. It still is nearly impossible to understand and comply with.

    Recently with the updated Meaningful Use program instituted by the HHS and CMS, including the establishment of an EHR requirement, California has found itself unprepared to handle even the application process for providers to enroll. California does not even have the computer system developed to handle the applications or the implementation of this system, and they don’t have the millions at hand to do so. Does anyone remember the DMV computer debacle that cost California millions, and ultimately failed to reach it’s goal, and the following attempt to connect the court system with some sort of data base sharing throughout California – millions again down the rat hole for that failure.

    The end result is forcing thousands of doctors, who are actually small business owners in the “business” of providing healthcare, out of business or into other states with less regulations and lower costs. We now have a dramatic doctor shortage, which is growing rapidly and no doctors to replace them. The socialized medicine model has never worked, and Canada now is reversing it’s trend. Massachusetts is also near bankruptcy over the implementation of Romneycare, with Mass General Hospital (one of the best teaching hospitals in the nation) filing for bankruptcy and Harvard Medical School closing many of it’s programs. UC Davis Medical School is struggling, and the numbers of physicians and mid-levels (physician assistant/nurse practitioners) has declined rapidly.

    If you want to reduce the cost of healthcare, real reform begins with keeping the government out of the business of providing healthcare, returning to a free-market system which is based solely on the premise of it being between the physician and patient – patient needs.
    1. Tort reform of the out of control legal system. This would allow physicians to reduce the number of costly tests they order simply because they do not want to be sued by the patient. HMO organizations and managed care have divested themselves of any liability, leaving it on the shoulders of the individual physicians. Patients can sue for anything at all, just or otherwise, and many make a living doing just that. There also needs to be a cap on rewards from litigation.
    2. The HHS serves no purpose other than to create conditions which are not sustainable for physicians and healthcare providers.
    3. Entitlement programs in California must be regulated, prevention of people qualifying for taxpayer funded care who are not citizens of this country or state. The system and regulations associated with Medi-Cal need simplification. Fraud and abuse regulations and monitoring should be a priority. Non-profit community clinics should be established for the care and treatment of patients covered under Medi-Cal to improve access and control costs. Return of the County Hospital system and development of more County Hospitals should be undertaken to provide more access to acute care, while providing medical students the opportunity to serve their residency requirements and perhaps even payback their student loans after completing those requirements, serving a contracted period of time.
    4. Open up the health insurance market to compete across state lines. This worked very well with other aspects of the insurance industry to bring the costs of insurance premiums down. Free market system has worked very well until the government has chosen to take control, allowing the huge lobby of insurance companies to favor the larger companies while weeding out the smaller. Competition has always served business well, and this is not exception with the healthcare or insurance industries.
    5. Reduce the over-regulation of small business, because healthcare providers (physicians) are a small business of providing healthcare. The numbers of primary care physicians has declined drastically by over 60% in the last 5 years. Access to healthcare has been compromised.

    California has been completely unable to manage the Medi-Cal system, and has been a complete failure. We are drowning in debt, and to even think of another billion dollar boondoggle such as state universal healthcare will rush this State over a cliff to it’s demise. The State of California cannot absorb the billion dollar debt created by a universal healthcare program.

    I am a third generation Californian of the baby boomer generation, and I am deeply concerned over what I see as the disease of socialism and dysfunction spread across this once prosperous state. The taxpayers no longer have a voice in our legislature, and our legislature and the governor have no agenda favorable to the taxpayers and business in California. We also have empty pockets, cannot survive the business climate here, and are moving out by the thousands. Sadly, with the direction this state has taken, I will be forced to join them.

    • Dear Ms. McDonald,
      despite your opening statement that much of the information in the article is wrong, to which I would of course disagree, I agree with each and every one of your points. In fact, I have a book releaseing very soon called “the History and Evolution of Healthcare in America:The untold backstory of where we’ve been, where we are and why healthcare needs more reform.” In the book I discuss each of your points both from the historical–how we got here perspective–and the impact of the Affordable Care Act, Obamacare.

      I am by no means a proponent of the current system The Article was narroly focused related to the rising costs of care and other issues. One of the biggest issues in the “cost of care” is that the healthcare economy is a completely false one.

      I invite you to e-mail me. I would like to discuss your points more with you and open a dialog on some other issues that will be covered in the book.

      Feel free to e-mail me if your want to chat more.

  2. bttt

  3. Healthcare for me and my family only went up 28% this year! Obamacare is making it worse and will probably have to become a citizen of Mexico and stay here in America so I can have free healthcare and all the other benefits that non US citizens get here in our state and our country.

  4. Decline of the system started when the Feds implemented medicare and then encouraged the formation of HMO’s in the mistaken belief that preventive care would be less expensive than remedial care. Minimal or non-existant co-pays make the cost of a doctor’s visit inconsequential, so the patient goes to the doctor for every little ache or pain. When I found out the cost of my simple annual physical – in excess of $6,000, I was flabergasted. I was healthy, no blood pressure problems, no changes in visual or auditory acuity, no indications of any problems. However, it was ‘necessary’ to run the battery of tests to be sure there really was nothing wrong with me. The only thing wrong with the health care system is that the deductibles and co-pays have not been adjusted for inflation. Doctors can charge anything they want to because the insurance picks up the tab and the patient never sees the cost.

    In 1950, the deductible was $50 and you could buy a donut for $.05. The cost of donuts went up to $.65 to $.75 over the last 62 years. The deductible should be a minimum of $650 today, and probably closer to $1,000. That would encourage the patient to try an aspirin before calling the Dr. about a headache. Co-pay used to be 20% of the first $2,000. Today’s co-pay should be 20% of the first $30,000. Again, if the cost of treatment hurts a little, then you are more likely to monitor those costs and decline unnecessary treatment, tests, and Dr. visits.

    That also places a burden on the drug companies, doctors, and hospitals to keep their services affordable. After all, their customer is not the insurance company, it’s the patient.

    I know this flies in the face of many of my friends and neighbors that think medical care should be free for everyone. Unfortunately, as I’ve pointed out many many times, neither the insurance company or the Federal government have any money of their own to pay for our extravagance. They simply use our money and we think we’re getting a bargain.

  5. You think this is bad? Welcome to the world of Senate Bill 810 which is going to put the state into that magical world of a single payer system of Socialized Medicine. Then we will be like the many nations of the world that have this scheme where you are lucky if you can get an appointment with a doctor in less than 3 weeks. Great going if you only have to wait 3 years for a hip or knee replacement! As far as Doctors go I wonder how many will put up with all of the Bureaucratic crap that goes hand in hand with any government program including Socialized medicine! Then what happens when California enacts this, and heaven forbid Obama gets another term and imposes Obamacare, then you will have the mother of all messes! We may be coming to the time when medical tourism will really become popular, ie you vacation in some country where medical care is good and also not too expensive and get medical work done that might not be available here in the states at any price due to inevitable rationing which will be the result of countless people including illegal aliens piling into the system which will be short on Doctors. Perhaps it is time to become an expat as quite a few people have already done!

  6. The real reason other than inflated Drug Costs and Hospitals Forced to give care to Foreign Indigents and illegals working here,is the Problems caused buy Medicines them selves,Fluoridated Water that causes Brain Tumors and other
    Aluminum Lake food coloring, used to heavily coat liquid medicines for children, contains dangerous amounts of aluminum and harmful synthetic petrochemicals. These “petrochemicals” are carcinogens containing petroleum, antifreeze and ammonia, which cause a long list of adverse reactions. Aluminum poisoning can lead to short and long term central nervous system (CNS) damage, such asmemory impairments, autism, epilepsy, mental retardation, and dementia.
    Research shows that just 4ppm of aluminum can cause the blood to coagulate. This is what causes Alzheimer’s Disease and has been documented to inhibit learning. Aluminum consumption can also be associated with the development of bone disorders, including stress fractures.
    Some of the products containing aluminum
    Many body lotions and creams
    Most cosmetics
    Shampoos and conditioners
    Suntan lotions
    Lip Balm
    Processed cheese
    Baking powder
    Cake mix
    Frozen dough
    Pancake mix
    Self-raising flour
    Pickled vegetables.

    Also, the following food additives contain aluminium compounds. They are E173, E520, E521, E523 E541, E545, E554, E555 E556 and E559.

    Aluminium salts are also found in many common medicines.

    Anti-diarrhea products
    Anti-hemorrhoid preparations.

    Please note, if your doctor has prescribed the above three medicines, please do not discontinue using them. Speak to your doctor at your next appointment and ask if there are any suitable alternatives.

    Do your own searches, on
    Bovine Growth hormone your kids milk
    D U or Depleted Uranium in water and use by the military
    GMO’s Or Genetically Modified Foods

    Vaccines Must read for Ca. since the Governor has Mandated the Guardasil Vaccines
    just the tip of the iceberg .

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