FAQ – Why Did Oregon Health Plan Fail in 2002?

The Oregon Health Plan took effect in 1994, but ended in failure in 2002. This blog explains that the failure was caused by external circumstances and by an internal policy error that can be avoided – provided that we learn a lesson from Oregon’s experience.

Here are the straight answers explaining why OHP failed, and lessons to be learned.

Straight Answers:

1. Partisan opportunism:   Oregon Health Plan (OHP) enjoyed broad cross-partisan support that during its creation 1989 – 1994. But support deteriorated into partisan opposition after Dr. Kitzhaber finished his term as governor.
2. Budget circumstances: Two unforeseen fiscal roadbumps squeezed an already tight state budget:

• Medicaid’s budget was cut in Washington
• An economic downturn in Oregon led to a disproportionate drop in revenue

3.  Tactical error:  To respond to the budget squeeze in 2001, Dr. Kitzhaber ended first-dollar coverage for low-income patients.  The resulting higher out-of-pocket costs served as an unanticipated deal-breaker for families who were living from paycheck to paycheck and couldn’t cover even a modest unexpected medical bill.

Conclusions and Lessons Learned:

1. OHP can be viewed as a “failure” in 2002. On the other hand, we can’t ignore that it was also a remarkable “success” in 1994. The fact that OHP gained political and popular support, was legislated, was implemented, and was sustained for 8 years serves as a “proof of concept” – it can be done!
2. But the caveat is that any reform of the U.S. healthcare system will require a sustained “grand bargain” by politicians and their constituents to support it as a national treasure and to shield it from partisan opportunism. All stakeholders rely on healthcare – doctors and hospitals, big business, small business, insurers (who will become system coordinators), drug companies, researchers, government, and not least patient-citizens. All political stripes – conservatives, liberals, and libertarians – need to find common-ground, put aside political posturing, and then civilly maintain scrutiny on checks-and-balances to “keep healthcare honest,” fair, and responsive. U.S. economy, society, government, and politics will all benefit from a high-quality, costworthy, stable healthcare system, as we proceed through our national historical journey. Thus, Americans need to support our health system through budgetary good times and bad.
3. The health system should strive to keep what is valuable to each stakeholder, for example first-dollar coverage for low-income patients. Oregon could have chosen instead to additional restrictions on coverage of services with lowest cost-benefit. Other examples valued by certain stakeholders are: attention to “social determinants” of health that promotes empowerment and encourages personal responsibility; accountability for “lifestyle choices”; diversity of ethical values (across age, religion, etc).
4. See also Big Fix, Lessons Learned

5. Now, Take Action

Detailed Commentary (Excerpts are from Hrinda, Oregon Health Plan, 2007– scroll down from blank first page to read text)

1. Deterioration of cross-partisan support

The political climate in Oregon had changed significantly since the early days of the OHP. Democratic Governor Ted Kulongoski opposed the passage of new tax initiatives, which left no state general revenue funding for the Medicaid expansion population in OHP Standard. In fact, health care reform was no longer a political priority like it was under the leadership of Governor Kitzhaber. In addition, an increasing conservative sentiment in the Republican Party created escalating partisan conflict and political tensions, and bipartisan support for the OHP, as well as general public support, eroded. In the end, OHP Standard was capped at 24,000 enrollees and closed to new enrollment due to a lack of available funding. OHP Standard now covers fewer services and fewer people in comparison to the Medicaid program prior to the OHP with limited hospital benefits and the elimination of physical, speech, and occupational therapy as well as home health care as OHP Standard funding is sustained by only a provider tax. Meanwhile, OHP Standard costs are increasing as there is a growing number of uninsured and increased emergency room use, which may result in Medicaid eligibility cuts in the future.

2. Budget circumstances

The need to implement the cost-sharing measures of OHP2 was borne from fundamental fiscal limitations in Oregon. For the basic benefit package of the OHP that was scheduled to be implemented on January 1, 1994, the state needed $83.6 million in state funds, or else the prioritized list would have to be cut pending federal approval.5 In 1990, a property tax limitation initiative was passed that was expected to produce a $1.2 billion state deficit by 1993. Then, Ballot Measure 5 was approved by voters in 1991, followed by Ballot Measure 47 in 1996, both of which reduced property taxes. Furthermore, because there is no general sales tax in Oregon, 70% of state revenues are derived from personal income taxes. Meanwhile, at the national level, it was possible that the federal budget-balancing act would reduce federal Medicaid funds, which finance 62% of OHP. In order to help finance the OHP, voters approved referenda raising state cigarette taxes, including a $0.30 increase in the tobacco tax that would allow expansion of the OHP to 25,000 children and state subsidies to purchase private health insurance for 21,000 individuals. Because the prioritized list does not apply to these private health insurance plans, these plans may have high deductibles and limited benefits.

Despite these fiscal concerns, in 5 of the 6 fiscal biennia from 1989 to 2001, Oregon state revenues increased by 15% or more per biennia, and this increase exceeded 20% on two occasions. These consistent increases in state general revenue were essential to funding the initial implementation of the OHP. However, the state of Oregon has a budgetary provision, known as the surplus kicker, that mandates the state to refund tax funds whenever revenues exceed predicted costs by 2% or more, which prevents the state from building up reserves from budgetary surpluses in years of significant revenue growth. Furthermore, because there is a 2-year lag between budget forecasts and the kicker trigger, it could be possible for the state to be required to disburse a refund for a previous year in a year in which costs actually exceed revenues. The surplus kicker was triggered in 2001 when the economy took a downturn and the state was simultaneously required to refund $254 million despite a budget deficit for that year.

Following 2001, Oregon’s economy performed poorly, which contributed to the creation of OHP2, in which fundamental changes were made to the OHP to account for a lack of available financing from state general funds. From 2001 to 2003, Oregon had highest unemployment rate in the nation at 7.4%, and from 2002 to 2003, personal income tax revenues fell 19%. After moderate growth in health care costs in the mid-1990s due to the cost control measures imposed by the widespread growth of managed care, medical cost inflation began to increase. Because the prioritized list does not control costs for covered services, it was not possible for the OHP to offset medical inflation. After 2001, the economic recession, high unemployment, and growing uninsured population began to put increasing pressure on Medicaid as more people qualified for public insurance, thereby increasing enrollment in OHP Plus. Furthermore, as OHP Standard unraveled, the financing base for OHP2 fell out.

Meanwhile, at the federal level, the Federal Medical Assistance Program (FMAP), which provided matching funds to the OHP based on 3-year averages, fell out of sync with the current economic conditions in Oregon, and FMAP funding actually declined from 2001 to 2002 despite an increased need for federal funding. Finally, in 2003, the state legislature attempted to address the recent decline in state revenues with a $542 million tax increase known as Measure 30. However, due to anti-tax forces, a state ballot referendum is required to pass tax increases, and Measure 30 was turned down in February 2004 by a 59% vote. As a result of the failure of Measure 30, the state was automatically forced to cut $542 million in state budget expenditures, including $40 million from OHP Standard.

3. Tactical policy error

To achieve the goal of expanding coverage and reducing the uninsured population given fiscal constraints, Kitzhaber and the Democrats created new cost-sharing and premium policies to redirect revenues from existing enrollees to cover more people. This strategy represented the fiscal pragmatism and progressivism dominant in Oregon politics, specifically the application of conservative means to achieve liberal ends. Meanwhile, Republicans were supportive of this plan because they viewed the reduced OHP Standard benefit package combined with increased premiums, copayments, and direct consequences for failure to pay as reflecting private insurance plans emphasizing personal responsibility in contributing to medical care. However, the failure of this plan resulted from a discrepancy between the predicted behavior of low-income populations and the actual behavior of these individuals in reaction to increased cost-sharing measures. In reality, OHP Standard enrollees were significantly more price sensitive than expected, and the negative reaction to cost-sharing, especially as large numbers of individuals dropped out of OHP Standard, caused the plan to fail.

Now, Take Action

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