'Shared responsibility' makes sense as an affordable way to address problem.

Gov. Arnold Schwarzenegger's proposal to reform California's health insurance system represents a fundamental change in the way we do business in the state, so it is likely to generate considerable opposition--particularly among health insurers who will be subject to several new restrictions, and among small employers who will be required to pay into a state insurance pool if they do not offer health insurance benefits.

Nevertheless, fundamental changes are needed, and the governor's approach is a good starting point. It is based largely on the "shared responsibility" model adopted by Massachusetts, and calls for increased contributions from individuals, families, employers, health care providers, health plans and insurers, as well as the state.

One area long overdue for reform is the health insurance market for small business groups and for individuals. Almost 21 percent of California's non-elderly residents were uninsured during at least part of 2005, and a major reason for this high level of uninsurance is the lack of affordable coverage in the small-group and individual markets. Almost half of the state's workers are employed in small firms, defined as 50 or fewer employees and including the self-employed. These employees are three times more likely to be uninsured than those working in larger firms.

Employees unable to obtain health insurance through their place of employment are always free to purchase policies individually in the market. But because of medical underwriting, the cost of these policies continues to be prohibitively expensive, even for individuals who are healthy but require regular medication to manage one or more chronic conditions. The governor's proposal addresses this barrier by requiring insurers to sell policies regardless of age or health status, which will eliminate the practice of medical underwriting and make insurance more affordable in these markets.

Affordable coverage?

Although desirable, this requirement to offer insurance is coupled with a required minimum health insurance benefit that is extremely narrow. All Californians will be required to purchase insurance with no more than a $5,000 deductible and with annual out-of-pocket limits no greater than $7,500 per person or $10,000 per family. But these high-deductible health plans are so narrow they may be quite onerous to the financial and medical health of individuals and families.

On average, only about 15 percent of Californians have health expenditures that exceed $5,000 in any particular year, so these high-deductible plans are likely to make many who purchase them feel like they're paying for health insurance that offers no tangible benefit. While such plans may be "affordable," they barely provide "coverage." One solution would be to limit both deductibles and out-of-pocket expenditures to a fixed percentage of family income rather than fixed-dollar amounts.

A better solution would be to open the proposed state purchasing pool to all uninsured Californians, not just those who are eligible for subsidies. In contrast to the Massachusetts plan, the governor's proposal creates a subsidized state insurance pool that is limited to uninsured individuals and families with incomes at 250 percent or less of the federal poverty level, or $51,625 for a family of four in 2007. This means middle-income families will be left primarily to the individual market, and despite guaranteed issue, the v may not find any "affordable" options other than high-deductible plans.

Employers are also being asked to increase their shared responsibility. Employers with 10 or more employees who do not offer health insurance coverage will be required to contribute 4 percent of payroll to the state insurance purchasing pool. A similar requirement, the California Health Insurance Act of 2003 (SB 2), was enacted in 2003 by the state Legislature, but narrowly overturned when voters rejected Proposition 72 in November 2004.

The governor's support for an employer mandate is a welcome recognition of the fact that just as all employers have a responsibility for protecting their workers from employment-based injuries through the Workers' Compensation system, employers also benefit from the increased productivity of employees who have adequate health insurance.

One concern is that the governor's proposed contribution level of 4 percent may be too low; the cost of health insurance benefits ranges from an estimated 6 percent to 12 percent of payroll. However, this lower contribution rate may be the most effective way of encouraging participation among small businesses that have been reluctant to offer health insurance.

The governor's version of "shared responsibility" makes sense and appears to be an affordable way of extending health insurance benefits to virtually all residents. But whether this proposal can survive the expected opposition of insurers and small businesses will depend at least in part on the governor's political acumen. All Californians should hope he is up to the task.

Gerald F. Kominski is professor of health services, UCLA School of Public' Health, and associate director, UCLA Center for Health Policy Research.