| Text of Proposed Law | This - 216 | Argument in Favor |

Analysis of Proposition 216

by the Legislative Analyst


Health Care Spending

Annual spending on health care in California totals more than $100 billion. About two-thirds of this cost is covered by various forms of health insurance, with the remainder paid by other sources.

Roughly 80 percent of all Californians are covered by health insurance. Specifically:

Until recently, spending on health care had been growing much faster than inflation and population changes. During the 1980s, for example, average health care spending in the United States grew by almost 11 percent annually after adjusting for inflation and population. Since 1990, however, this rate of growth has slowed to about 4 percent annually.

Health Maintenance Organizations

In part, this slower growth has been due to efforts by employers and government to control their health insurance costs. One way they have attempted to hold down costs is to contract with health maintenance organizations (HMOs), which provide health services through their own doctors and hospitals or through contracts with physicians and hospitals. About one-third of Californians belong to HMOs. Most of these HMO members are covered under employee health plans, but many persons covered by Medicare or Medi-Cal also receive their health care through HMOs.

Generally, health coverage provided by an HMO is less expensive than comparable health insurance coverage provided on a ''fee-for-service" basis. Health maintenance organizations use several methods to control costs, such as ''capitation" payments, other financial incentives, and utilization review.

Capitation and Other Financial Incentives. Under the traditional fee-for-service approach, doctors and hospitals charge fees based on the specific service provided to a patient. By contrast, HMOs generally use capitation to pay doctors.Under this approach, doctors receive a fixed payment for each HMO member regardless of the amount of service provided to the member. Capitation gives doctors a financial incentive to use cost-effective types of care.

In addition to capitation, HMOs use other financial incentives to control health care costs. The federal government, however, limits the types of financial incentives that may be used by HMOs when serving Medicare or Medi-Cal recipients. Specifically, federal law prohibits any financial incentives to doctors that could act to reduce medically necessary care to individual patients, such as a bonus payment for each patient that is not hospitalized during the year. However, federal law does allow ''risk pools" and other types of profit-sharing arrangements that enable doctors to benefit from controlling costs for groups of patients.

Utilization Review. Health maintenance organizations--as well as the state's Medi-Cal program and insurers using the fee-for-service approach--also attempt to contain costs by using ''utilization review" procedures. Under these procedures, health plans will not pay for certain types of expensive or unusual treatments unless they have approved the treatment in advance.

Controlling Hospital Costs

Health maintenance organizations also control their costs by reducing their use of hospitals and encouraging more treatment in doctors' offices and clinics. This trend has contributed to an excess of hospital beds.

On average, about half of the hospital beds in California were unused in 1994. As a result, some hospitals have downsized, merged, or closed; and many hospitals are seeking ways to reduce costs in order to compete for business more effectively. Since staffing is a major cost, hospital cost control efforts often focus on reducing staff and using less expensive personnel in place of more expensive personnel where possible (using nurses' aides rather than nurses, for example).

Regulation of Health Care Facilities

Licensing of Facilities. The Department of Health Services (DHS) licenses many types of health facilities in California, such as hospitals and nursing homes, and has general authority to set staffing standards for those facilities. Clinics that are owned and operated directly by doctors, however, are not licensed.

Staffing Standards. State regulations generally require hospitals to keep staffing records and to base their staffing levels for nurses on an assessment of patient needs. Hospitals are not required to have a specified number of nurses per patient, except in intensive care units. State law requires nursing homes to have at least one registered nurse per shift and sets minimum staffing standards for nurses and nursing assistants per patient.

The DHS is revising its current hospital staffing regulations to cover all departments within each facility. Additionally, the pending regulations require hospitals to establish their staffing needs using a system that more specifically takes into account the condition of each patient. The DHS also enforces federal requirements that health facilities serving Medicare or Medi-Cal patients must have enough staff to provide adequate care.

Regulation of Health Plans and Health Insurance

The state Department of Corporations regulates the financial and business operations of health plans, including HMOs, in California. The Department of Insurance regulates companies that sell health insurance but do not provide health care themselves, including workers' compensation insurers.


This measure imposes new taxes on some health care businesses and individuals, with the revenue dedicated to financing a variety of health care services. It also establishes additional requirements for the operation of health care businesses.

The measure:

The measure's provisions would affect both public and private health facilities. However, it is not clear whether the state's Medi-Cal Program would be considered a ''health care business" subject to the requirements of this measure.


The fiscal effect of this measure is subject to a great deal of uncertainty. The health care industry is large, complex, and undergoing rapid change, making it difficult to estimate the effect of new requirements on the overall health care marketplace. Furthermore, several of the measure's provisions could have widely varying fiscal effects, depending on how they are implemented or interpreted by the courts.


The measure imposes three new taxes on private health care businesses in California (excluding insurers) with at least 150 employees and a new tax on certain individuals. The State Board of Equalization would collect these taxes.

Bed Reduction Tax. This is a tax on any private health care business that reduces licensed patient beds in hospitals or nursing facilities. For each bed eliminated, the tax would be 1 percent of the business' average per-bed gross revenues. The tax would have to be paid each year for five years.

Tax on Mergers and Combinations. The measure generally imposes a one-time 1 percent tax on the value of any California assets involved in mergers or acquisitions of health care businesses. The measure also imposes a 3 percent tax on the gross revenue of newly formed ''multiprovider networks" (that is, health care businesses that jointly market or provide health care services). The network tax would be paid during the first five years of operation.

Tax on Sale or Transfer of Nonprofit or Publicly Owned Assets. The measure imposes a 10 percent tax on the sale, lease, transfer, or conversion of any nonprofit health care business (or provider of health supplies or services) to a for-profit business. The tax would be on the value of the nonprofit assets that are involved in the transaction. In the case of the sale or conversion of a publicly owned health facility (such as a county hospital or clinic) to a private entity, the tax would be 1 percent of the value of the converted assets.

Tax on Stock Distributions. The measure imposes a 2.5 percent tax on the value of any new stock or other securities provided as payment to officers of, employees of, or consultants to private health care businesses or suppliers. The tax would apply only to persons who own (individually or together with family members) at least $2 million of stock or securities in the business or related businesses. This new tax would be in addition to California's existing income tax.

Use of New Tax Revenues. Revenues from the taxes imposed by this measure would be deposited in a new Public Health and Preventive Services Fund. After covering the costs of administering and enforcing this measure, the DHS would spend the remaining revenues for the following purposes:

Effect of the Measure on Health Care Costs Generally

Changes in health care costs have an impact on the state and local governments because of their role in directly operating health programs as well as purchasing health care services. The following provisions of this measure would increase health care costs generally.

Physical Examination. Currently, HMOs, health insurers, and other health care businesses may refuse to authorize recommended care that they believe to be unnecessary, unproven, or more expensive than an effective alternative treatment, without physically examining the patient. Patients usually have a right to appeal such a denial. This measure requires health insurers, health plans, or other health care businesses to physically examine a patient before refusing to approve care that is a covered benefit and that has been recommended by the patient's doctor or nurse (or other licensed health care professional). The person conducting the examination would have to be a licensed health care professional with the expertise to evaluate the patient's need for the recommended care.

Requiring a physical examination prior to denying care would increase general health care costs in two ways. First, health care businesses would have to add staff to provide additional examinations.

Second, requiring an examination probably would result in some approvals of care that otherwise would be denied.

Staffing Requirements. The measure requires that all health care facilities provide ''safe and adequate" staffing of doctors, nurses, and other licensed or certified caregivers. Within six months after the approval of this measure, the DHS would set staffing standards for all health care facilities, such as hospitals, nursing facilities, clinics, and doctor's offices.

The staffing standards required by this measure would have to cover all types of facilities and all licensed and certified caregivers. In addition, these standards would have to be based on the specific needs of individual patients. Depending on the specific standards adopted, some health care facilities might have to add more staff, hire more highly skilled staff, or both. The effect on overall health care costs could range from minor to significant.

Financial Incentives. The measure prohibits insurers, health plans, and other health care businesses from offering financial incentives to doctors, nurses, or other licensed or certified caregivers if those incentives would deny, withhold, or delay safe, adequate, and appropriate care to which patients are entitled.

Restricting financial incentives could increase general health care costs by limiting the use of risk pools and profit-sharing arrangements that encourage providers to restrain costs. However, the measure specifically allows the use of capitation payments. Furthermore, it is not clear whether the measure prohibits any financial incentives that are not already prohibited under federal restrictions that apply to providers who serve Medicare or Medi-Cal patients. Consequently, the provision's effect on health care costs is unknown, but could range from minor to significant.

Protection for Certain Health Care Professionals. The measure prohibits health care businesses from attempting to prevent doctors, nurses, and other health care professionals from giving patients any information relevant to their medical care. The measure also broadens existing protections for health care professionals who advocate for patient care.

In addition, the measure protects doctors, nurses, and other licensed or certified caregivers from any adverse actions by health care businesses--such as firing, contract termination, or demotion--for providing ''safe, adequate, and appropriate care." Depending on how this provision is interpreted, it could increase general health care costs by an unknown amount. Costs could increase to the extent that this protection restricts the ability of health care businesses to manage the level of care provided by their employees and contractors.

Liability of Health Care Professionals. The measure specifies that licensed health care professionals who set guidelines for care, or determine what care patients receive, shall be subject to the same professional standards that apply to health care professionals who provide direct care to patients. This provision would increase the risk of malpractice liability for some health care professionals who make decisions affecting patient care, but who do not provide direct care. This could increase health care costs by an unknown amount.

Access to Information. The measure requires all health care businesses to make certain types of information available to the public regarding staffing, guidelines for payment of care, and quality of care. In addition, the measure requires health care businesses with more than 150 employees to make available certain financial data and information on the status of complaints against the businesses.

Businesses Must Certify Higher Charges. Private health care businesses would have to certify to the DHS that any increase in their premiums or other charges for health services is necessary before the increase can take effect. Also, the measure requires public disclosure of the estimated revenue from the increase and the planned use of the additional funds.

Effect of New Taxes on Health Care Costs. The taxes imposed by this measure would be an additional direct cost to certain health care businesses. Furthermore, the taxes could result in higher costs by discouraging some actions (such as eliminating excess beds or creating larger networks) that would generate savings by improving efficiency. Some portion of these increased costs probably would be passed on in higher prices to purchasers of health care services. However, these additional costs could be partially offset to the extent that some of the tax revenues are allocated to finance ''uncompensated care" costs for services currently provided to indigents and covered by higher charges to other parties. The overall net increase in health care costs is unknown.

Effect of the Measure on the State and Local Governments

Summary. The most significant fiscal effects of this measure on the state and local governments are summarized below and then discussed in more detail:

Revenue Effects of Measure

Public Health and Preventive Services Fund. The four taxes established by this measure would generate unknown revenues, potentially hundreds of millions of dollars annually. The actual amount of revenues will depend primarily on decisions made by health care businesses regarding the activities subject to these taxes, such as bed reductions, mergers, and acquisitions.

General Fund. The taxes imposed by this measure on health care businesses would reduce their taxable income. For this reason, the measure would reduce General Fund revenue from income taxes. The amount of this revenue loss would be up to tens of millions of dollars annually.

Potential Loss of Revenues From the Sale or Lease of Health Facilities. By imposing a tax on the sale, transfer, or lease of publicly owned health facilities to private organizations, the measure could reduce the market value of those facilities. As a result, the tax potentially would reduce revenues from those types of transactions. The amount of this earnings loss could be up to millions of dollars annually to the state and local governments, but would depend on many factors.

Health Care Consumer Protection Fund. The measure also would result in an unknown amount of revenues from voluntary contributions to the Health Care Consumer Association to support its activities.

Spending of New Tax Revenues. The measure requires the DHS to spend the revenues from the new taxes on a variety of health care services (after covering state administrative costs). These expenditures could total up to hundreds of millions of dollars annually, depending on the amount of revenue produced by the new taxes.

Increased Costs to Government to Operate Health Programs

Requirement for Physical Examinations. If the Medi-Cal Program is subject to this measure, the requirement for a physical examination prior to denial of care would increase state costs by an unknown amount, potentially exceeding $100 million annually.

Counties operate health care programs for people in need who do not qualify for other health care programs such as Medicare or Medi-Cal. These programs also would experience some increase in costs to provide additional examinations and for additional costs of care. These costs are unknown, but probably less than the potential costs to the Medi-Cal Program.

Staffing Requirements. The staffing requirements in this measure could increase the costs of health facilities operated by the state and local governments, including University of California hospitals, state developmental centers and mental hospitals, prison and Youth Authority health facilities, state veterans' homes, county hospitals and clinics, and hospitals operated by hospital districts. The amount of this potential increase is unknown and could range from minor to significant, depending on the actual staffing standards that are adopted.

Increased Costs to Government to Purchase Health Care Services

State Medi-Cal Program. The state contracts with HMOs and health care networks to serve a portion of the clients in the Medi-Cal Program. Cost increases to these organizations would tend to increase Medi-Cal costs by an unknown amount. The state spends about $6 billion annually (plus a larger amount of federal funds) for the Medi-Cal Program, primarily to purchase health care services. The potential cost increase to the state could range from a few million dollars to more than $100 million annually, due to the measure's effects on health care costs generally (as described above).

County Health Care Costs. Counties spend over $2 billion annually to provide health care to indigents. In addition to services that they provide directly, counties contract to purchase a significant amount of services. The potential county cost increases could be up to tens of millions of dollars annually, due to the measure's effects on health care costs generally.

State and Local Employee Health Insurance Costs. The state currently spends about $900 million annually for health benefits of employees and retirees, and the amount spent by local governments is greater. By increasing health care costs generally, the measure could increase benefit costs to the state and local governments by an unknown amount, potentially in the tens of millions of dollars annually. However, the provisions that require disclosure of financial data and certification of rate increases (which might discourage such increases) could offset some portion of these costs.

State Administration and Enforcement Costs

The measure would result in additional costs to the Department of Health Services, the State Board of Equalization, and other state agencies to administer and enforce its provisions (primarily the staffing standards and the collection of new taxes). The ongoing costs could be roughly $15 million annually, plus several million dollars of start-up costs in the first year. These costs would be paid from the new tax revenues in the Public Health and Preventive Services Fund created by this measure.

| Text of Proposed Law | This - 216 | Argument in Favor |