Lawmakers, Newsom Squabble Over Promise to Lower Costs of Covered California

The adage “get it in writing” applies to politics as much as anything else, and it would seem the California Legislature could learn a lesson or two.

Legislators and advocates have been pushing Gov. Gavin Newsom since last year to make good on a longtime promise to funnel money from a controversial tax penalty into the Covered California marketplace, making health insurance cheaper for nearly 1 million enrollees. The problem — or at least the argument Newsom has always made — is that state statute doesn’t require the penalty money to be used on health care. It goes directly into the general fund — where it has stayed for most of the past four years.

But legislators say that’s not what they intended when they voted on the measure in 2019. Senate leadership signaled its intent last week to ensure in writing that the money will “further lower the costs of health coverage for lower- and middle-income Californians” moving forward. The Senate budget proposal rejects Newsom’s plan (PDF) to temporarily move $333.4 million in penalty money from an affordability reserve to the general fund, calling it a “rip-off” of Covered California funds.

“Our plan protects important advancements that California has made that has moved us towards a more equitable and sustainable economy,” Senate Budget Chair Nancy Skinner said during a press briefing last week.

In 2019, Newsom proposed and the Legislature passed a polarizing tax penalty on Californians without health insurance, known as the individual mandate, with verbal assurances that it would be used to lower health care costs for those who have insurance through Covered California, the state version of the Affordable Care Act marketplace. Though more than $1 billion has been collected in the past four years, the money has only been used once to lower costs for enrollees, about $355 million in 2020.

The Senate Democrats’ budget proposal (PDF), which relies on corporate tax hikes that Newsom swiftly rejected to avoid a variety of cuts, sets the stage for an intense period of negotiation between the Legislature and governor as they hash out a state spending plan in the face of diminishing tax revenue. The Senate’s counter proposal would mandate using the money to eliminate deductibles and copays for roughly 900,000 Covered California enrollees next year. It’s one of several health care funding battles heating up amid a bleak budget year, including a fight to infuse emergency cash into hospitals on the brink of closure.

Newsom is expected to disclose later this month an even more dismal financial picture for the state than the $22.5 billion deficit he projected in his January budget proposal.

In a statement, Brandon Richards, spokesperson for Newsom, said the governor will “continue to work with the California Legislature to develop the final budget package” in the coming months.

This is just one step in a long budget negotiation that will stretch to June. If the Senate’s counterproposal makes it into the state’s final budget come summer, leadership intends to end the diversion of penalty money permanently. Notably, Democratic leaders from the Assembly have not endorsed the Senate’s spending plan nor put forth their own proposal, but John Casey, communications director for Assembly Speaker Anthony Rendon, said both houses are interested in the issue.

“We’ll see what the May revision includes and the two houses will advance their priorities as best they can in negotiations afterward,” Casey said.

‘A bitter pill’

In recent committee hearings, Assembly and Senate legislators have lambasted this particular proposal in Newsom’s budget.

“I’m trying to make sure that those dollars stay in this area to address affordability, and I’m not hearing from the administration that same commitment,” said Assemblymember Joaquin Arambula, a Fresno Democrat and chairperson of the Assembly budget subcommittee on health.

Sen. Caroline Menjivar, a newly elected Democrat from Van Nuys and chairperson of the Senate budget subcommittee on health, criticized the governor’s plan for saving money “on the backs of our low-income communities.”

On his first day in office, Newsom proposed reinstating a tax on people without health insurance to fund increased subsidies for people who have Covered California insurance. A previous federal version of the tax had been repealed by the Trump administration the year prior, which contributed to a 24% drop in enrollment in Covered California plans (PDF).

New taxes always trigger a legislative skirmish, but this one gave even Democratic lawmakers and powerful advocacy groups pause: Theoretically, the tax would encourage more people to get health insurance, lowering the overall cost for everyone in the marketplace, but the penalty would come out of the pockets of the state’s poorest residents — those who forego insurance because it’s too expensive.

The Legislature ultimately approved the tax in 2019 with the understanding that the projected $1.4 billion in revenue over three years would be used to lower insurance costs.

The majority of that money, however, has stayed in the state’s general fund. Newsom has previously argued that the federal government’s more generous COVID-19 subsidies, which extend through 2025, render additional state spending unnecessary, especially at a time when California faces a growing deficit.

But legislators in both the Senate and the Assembly say that’s not what they voted for.

“The individual mandate was not intended to create funds for other government programs outside of health care from my perspective,” Assemblymember Jim Wood said during a recent budget subcommittee meeting. “I don’t think I would have supported it if that was the way I thought it would end up.”

Wood, a Democrat from Santa Rosa who leads the Assembly Health Committee, called the diversion to the general fund “a bitter pill to swallow.”

During the hearing, Department of Finance analyst Matt Aguilera argued using the money to alleviate the deficit would not impact current services under Covered California.

“Everybody is concerned about affordability. There’s agreement on that. Just due to the economic situation this may not be a good time to start up new programs,” Aguilera said.

But advocates argue using the revenue from the individual mandate penalty wouldn’t be new spending. It would be fulfilling an existing commitment.

Costs keep rising

Last year, in tandem with a measure to ensure the penalty money no longer got diverted, the Covered California board approved a plan to eliminate deductibles for the state’s mid-tier coverage option, which is widely considered the most cost-effective insurance option. When Newsom vetoed the policy bill (PDF), citing a “downturn in revenues,” the plan was abandoned.

“Last year this was a priority for everybody: the health plans, business groups, both the Assembly and Senate prioritized it in their budgets, health advocates, Covered California itself. Everybody lined up to support this,” said Rachel Linn Gish, communications director for Health Access California, a consumer advocacy lobbying group. “The only person we didn’t have was the governor.”

Instead, deductibles jumped from $3,700 for an individual and $7,400 for a family with a mid-tier plan (PDF) to $4,750 and $9,500, respectively (PDF). Health Access is sponsoring another measure this year to ensure money appropriated for Covered California affordability measures is used for that purpose.

“One of the most direct and impactful ways we can make sure consumers get health care access right now is by lowering the cost of care,” Linn Gish said. “The 2025 (federal subsidy) sunset was the governor’s main sticking point … but to us, it’s 2023. Why can’t we help people now?”

Senate Democrats also rejected delays and cuts to investments in the state’s health care workforce, including a $49.8 million cut to training programs for public health workers. Michelle Gibbons, executive director of the County Health Executives Association of California, said the money was sorely needed after decades of public health budget cuts left the state scrambling to respond to the COVID-19 pandemic.

“We can’t even begin to grow the pipeline of microbiologists, lab directors, epidemiologists — very skilled positions — without these programs and investments,” Gibbons said.

It’s unclear, however, how feasible the Senate Democrats’ proposal is with the state facing an economic downturn. Most of the cuts avoided are funded through a $6 billion proposed corporate tax hike and $5 billion suspension of a major tax credit, which Newsom rejected within hours of the proposal’s release.