Medical Device Daily National Editor

A proposal by California Gov. Arnold Schwarzenegger to arrange medical insurance for nearly all Californians was rejected by a State Senate committee this week amid widespread concerns about its potential costs.

The Senate Health Committee voted down the $14.9-billion proposal, which would have required people to hold private insurance and subsidized the premiums for those who could not afford them.

The swift defeat of the proposal came from both Republicans and Democrats on the committee, with only one of 11 senators backing the plan that Schwarzenegger and Assembly Speaker Fabian Nuñez (D-Los Angeles) had spent much of 2007 putting together.

According to a report in the Los Angeles Times, lawmakers called the plan — which had passed the State Assembly last month — “fundamentally flawed” and “a fairy tale.” The Times report said a “visibly frustrated Nuñez, sitting in the committee room, muttered disagreement under his breath.”

Senators said the proposal, while laudable in its ambitions, might fall apart financially in a few years, leaving the state to cancel its new healthcare services or put taxpayers on the hook for billions of dollars more.

Senators said that was too risky a financial commitment when California faces a $14.5-billion budget gap that could force them to cut existing healthcare programs. Schwarzenegger has proposed $2.9 billion in healthcare cuts over the next 18 months.

The governor issued a statement after the vote, calling it a setback and vowing that he would not walk away from “comprehensive healthcare reform. The problems will not disappear. In fact, they are likely to get worse.”

Massachusetts, the first state to require that its citizens have health insurance, has run into $400 million in cost overruns after more uninsured people than expected signed up for state-supported coverage.

“It doesn’t matter if there are these good things in the bill if there isn’t the money to pay for them,” said Sen. Sheila Kuehl (D-Santa Monica), who chairs the health panel and has proposed that the state take over the role of providing medical insurance. “We can’t simply say to the people of California, ‘Go buy insurance.’”

In its report on how the plan — described as Schwarzenegger’s top legislative priority — had stumbled, the Sacramento Bee said the committee Democrats who voted against the bill cited a report released last week by the Legislative Analyst’s Office concluding that the plan could be underfunded by billions of dollars.

“You can say you’re going to cover 800,000 more children, but if there’s no money, you’re not going to do that and it’s cruel to raise such expectations,” The Bee quoted Kuehl as saying.

According to the state capital newspaper, Schwarzenegger and Nuñez maintained that the plan would raise enough money to pay for itself. Their plan called for mandatory employer and employee contributions, a fee on hospitals, an additional $1.75 tax on a pack of cigarettes and leveraging the money to increase matching federal funds.

However, The Bee noted that the proposed tobacco tax drew high-powered opposition. “The fact that raising taxes takes a two-thirds vote in the Legislature made finding financing a complicated exercise,” the newspaper said. “Republicans never supported the measure [and] Democrats weren’t on the same page.”

The Times story noted that some labor unions and consumer advocates who usually support healthcare reform efforts were put off by the bill, saying it put too much responsibility on individuals and was a giveaway to private insurers. “They faulted the plan’s requirement that everyone have insurance, saying people would be forced to buy policies with deductibles as high as $2,500 and out-of-pocket costs that could ruin them,” the story added.

The California Labor Federation (Oakland) and the California Medical Association (Sacramento), two groups that the L.A. paper said were principal backers of the last legislative effort to overhaul healthcare – repealed by California voters in 2004 — remained neutral this time and so essentially on the sidelines of the debate.

“The Senate saw several shortfalls for consumers that we agreed needed improvement,” said Art Pulaski, secretary-treasurer of the labor federation.

The California Nurses Association (Oakland), which advocates abolishing private insurers in favor of a government-run health program, also fought the measure.

The Times story said the defeat “may be a poor omen for national efforts to overhaul the country’s healthcare system. The three leading Democratic presidential candidates — Hillary Clinton, Barack Obama and John Edwards [the latter withdrawing from the race this week] — all have proposed similar programs aimed at expanding private insurance while allowing people who have coverage they like to keep it.”

As the story noted: “Healthcare advocates, including the powerful Service Employees International Union [Washington] had hoped a success in California would help build national momentum for change. Public opinion polls show increasing anxiety about the current health system, as more employers shed coverage benefits and premium costs outpace inflation each year.”

“This shows how hard it is for states to do this on their own,” said Peter Harbage, a healthcare expert at the New America Foundation (Washington), who has advised the Schwarzenegger administration and Edwards. “What you really need is a national focus and a national leadership to make it happen.”