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IN THIS ISSUE OF PolicyMatters

IMMIGRATION
Noor Dawood

From Persecution to Poverty: The Costs of the U.S. Refugee Resettlement Programs Narrow Emphasis on Early Employment

PolicyMatters
A Journal of the Goldman School of Public Policy UNIVE RSITy O F CALIF ORN I A, B ERkELEy
Volume 8 Number 1 Fall 2010Spring 2011

CONVERSATION
Hope Richardson

Clean Energy Jobs, Higher Education, and Strong Leadership: A Conversation with Former Michigan Governor Jennifer Granholm

WATER

Conserving Regulated Water: Revenue Decoupling, Incentives, and Equity


John Erickson and Greg Leventis

PHYSICIANS
Teal V. Brown

Meeting the Need for Primary Care Physicians under Expanded Health Care

CONVERSATION

Improving Education and Closing the Achievement Gap: A Conversation with Former California Senator Gloria Romero
Enrique Ruacho, Vianey Nuez, and Danny Yost, Jr.

GAS TAX

The Floating Gasoline Tax: Carbon Dioxide Mitigation and Revenue Generation Potential
Dries Berghman

CONVERSATION
Danny Yost, Jr.

Meaningful Civic Participation: A Conversation with Emeryville Vice Mayor Jennifer West

PRESCRIPTIONS
Leah Krieger

Prescription for Prior Authorizations: A Better Way

JOIN US ONLINE:

WWW.PolicyMatters.NET

The PolicyMatters team proudly puts forth the work of our contributing authors, who present well-researched and thought-provoking policy analysis. The Faculty Advisors and Editorial Board wish to highlight the work of the Goldman Schools own John Erickson and Greg Leventis, recipients of the 2011 PolicyMatters Outstanding Policy Article Award. We hope you find all the articles in this issue contribute to the discourse of public policy with originality and innovation. The academic contributions start with Noor Dawoods illuminating discussion of problems caused by the U.S. refugee resettlement programs early employment requirement. Next, John Erickson and Greg Leventis address the pros and cons of a proposed revenue decoupling policy in Californias regulated water market. Teal Brown moves the conversation forward, describing how the United States could reduce the shortage of primary care physicians under health care reform, while Dries Berghman presents original quantitative research on a floating gasoline tax. Finally, Leah Krieger explores alternatives to prior authorization of prescriptions that could reap health cost savings. To our adept editors and creative publishing associates, thank you so much for your dedication. Only with your hard work can we achieve excellence in publishing. I would like to extend special appreciation to our Executive Editor, Laura Morsch-Babu. You have exhibited exceptional executive leadership. Without a journalism background myself, I simply cannot imagine producing this journal without your many talents. Sincerely,

Foreword

Danny Yost, Jr., Editor in Chief

Once again, PolicyMatters delivers thoughtful, policy-relevant reflections on important public policy issues. How should refugees be integrated into American society? How can we provide incentives for water conservation? How can we encourage doctors to be primary care physicians? In addition to featuring these illuminating articles, this issue highlights the accomplishments of women in politics. A March 7 New York Times article summarized the work of Sarah Anzia, our newest faculty member, on how Congressional representatives who are women outperform their male counterparts, perhaps because the bar is higher for them to get elected in the first place. In her research, Professor Anzia shows how women exercise leadership by sponsoring more bills and bringing more resources to their districts than men. Certainly the three women featured in this issue are exceptional leaders. The first female Governor of Michigan Jennifer Granholm discusses how establishing a new foundation for Michigans economy provides lessons for other states. We are proud to welcome Gov. Granholm to the Goldman School and Berkeley Law faculties. The first female Senate Majority Leader of California Gloria Romero, in an address she gave to the Goldman Schools Latino Speaker Series, describes her continuing efforts to improve the effectiveness and equity of Californias education system. And our very own Vice Mayor of Emeryville Jennifer West, a Goldman School graduate student, elaborates on the virtues of constituent engagement in policymaking. My thanks to the Goldman School students who put together this issue, continuing the Goldman School tradition, celebrated at our recent 40th Anniversary, of speaking truth to power. You can continue the conversation on the Journals website, www.PolicyMatters.net, where you can find each of these articles, comment fields, and blog posts. Sincerely,

Henry Brady Dean, Goldman School of Public Policy, and Faculty Advisory Board Member

PolicyMatters
is the student journal of the Goldman School of Public Policy University of California, Berkeley

PolicyMatters Journal is thankful for the contributions and insights of many people and organizations in the development of this issue. We would first like to thank Martha Chavez, Assistant Dean for Academic Affairs, for her continued support and dedication to the Journal. We would also like to thank our Faculty Advisory Board, as well as Lee Friedman, Rucker Johnson, Dan Acland, and the many Goldman School students who assisted in our review process. We are grateful to last years leadership team for their advice and direction: James Baird, Editor-in-Chief; Ethan Jacobs, Managing Editor; John Minot, Copy Editor; Kathleen Wilson, Exhibit and Layout Editor; Karen Zhang, Business Manager; and Danielle Love, Online Editor. Finally, we would like to thank Dean Henry Brady, Women in Public Policy, the Youth Policy Committee, and Vianey Nuez of the Goldman Latino Speaker Series for bringing exceptional speakers to the Goldman School of Public Policy.

thank you

Copyright 2011 by the University of California Regents. All rights reserved. No part of this publication may be reproduced in any form or by any meanselectronic, photocopy, or otherwisewithout written permission from PolicyMatters.

Policy Matters
EdITOrIal BOard
Editor in Chief Danny yost, Jr. Executive Editor Laura Morsch-Babu Senior Editor Hope Richardson Business Manager Enrique Ruacho Associate Publisher, Layout & Design Stanley Ellicott

VOLUME 8 NUMBER 1 FALL 2010SPRiNG 2011


From Persecution to Poverty: The Costs of the U.S. Refugee Resettlement Programs Narrow Emphasis on Early Employment
Noor Dawood

IMMIGRATION

CONVERSATION

Clean Energy Jobs, Higher Education, and Strong Leadership: A Conversation with Former Michigan Governor Jennifer Granholm
Hope Richardson

12

WATER

Conserving Regulated Water: Revenue Decoupling, Incentives, and Equity


John Erickson and Greg Leventis

16

PHYSICIANS advISOry BOard


Henry Brady, Dean Prof. Jack Glaser Prof. David L. kirp Prof. Larry Rosenthal

Meeting the Need for Primary Care Physicians under Expanded Health Care
Teal V. Brown

24

CONVERSATION

EdITOrS
Carolyn Chu John Erickson Emily Gerth kasandra Griffin Rashi kesarwani Stephanie McLeod Pilar Mendoza Mark Reinardy Joshua Smith Frederick Taylor-Hochberg

Improving Education and Closing the Achievement Gap: A Conversation with Former California Senator Gloria Romero
Enrique Ruacho, Vianey Nuez, and Danny Yost, Jr.

29

GAS TAX

The Floating Gasoline Tax: Carbon Dioxide Mitigation and Revenue Generation Potential
Dries Berghman

32

CONVERSATION

Meaningful Civic Participation: A Conversation with Emeryville Vice Mayor Jennifer West
Danny Yost, Jr.

39

PUBlISHINg aSSOcIaTES
Miranda Dietz kathleen Wilson

PRESCRIPTIONS
Leah Krieger

Prescription for Prior Authorizations: A Better Way

42

CAll FOR SubMISSIONS

49

PolicyMatters Journal

IMMIGRATION IMMIGRATION

From Persecution to Poverty: The Costs of the U.S. Refugee Resettlement Programs Narrow Emphasis on Early Employment
Noor DawooD
EDITED BY CAROLYN CHU, STEPHANIE MCLEOD, AND MARK REINARDY

In U.S. policy and practice, early employment is the foremost priority for domestic refugee resettlement. This approach to resettlement has revealed itself as short-sighted, however. By pushing refugees to focus time and energy on attaining immediate employment, the program deprives them of opportunities to enhance their long-term well-being. This paper examines the flaws of the current system, and offers recommendations to improve refugees prospects for economic stability.
Mr. and Mrs. Aboud will also be forced to enter the workforce rapidly to support their family. But without dependents (children under age 18), their situation may be even more pressing: Eight months after arrival to the U.S., they will be cut off from all refugee cash and medical assistance. Despite their extensive professional training and experience, the Abouds will have to accept low-paying, menial jobs, as the resettlement program does not grant refugees the time and resources to seek professional recertification. Though the Aboud children had hopes for higher education, they will not have this opportunity upon arrival in the U.S.; they, too, will need to seek employment in order to qualify for refugee assistance. In U.S. policy and practice, early employment is the foremost priority for domestic refugee resettlement. The federal refugee program states this unequivocally in its contractual agreement with local resettlement agencies: The principal objective of the resettlement plan shall be assisting the refugee to obtain early employment.3 The intent of this construct is to promote early self-sufficiency, and also to signal to the American public that the nations generosity is contingent on refugees reciprocal hard work. This approach to resettlement has revealed itself as short-sighted, however. The experiences of recently resettled refugees demonstrate the dire need for greater support to improve their chances for long-term economic stability. As one recent Iraqi refugee stated: We [have already] lost everything. Give us more than eight months to build our lives.4 This report seeks to shed light on the costs of the U.S. refugee resettlement programs myopic focus on immediate employFall 2010Spring 2011

INTrOdUcTION
Consider the profiles of two families recently resettled under the United States refugee resettlement program. The Kos are a young Burmese couple who arrived in the U.S. with four young children.1 They lived in a refugee camp at the Thai Burmese border for twenty years prior to resettlement. Health conditions in the camp were poor and access to medical care was scarce. Neither of the Ko adults has any formal schooling or English language ability. The Abouds, an Iraqi couple in their early fifties, arrived in the U.S. with two adult children, aged 18 and 21.2 Before the war, Mr. Aboud worked as a veterinarian and Mrs. Aboud as a physician. Like other Iraqis, they were exposed to frequent violence in Iraq and, fearing for their safety, fled to Jordan three years prior to their application for resettlement in the United States. Unable to obtain legal work in Jordan, and helping to support family and friends left behind in Iraq, the family exhausted its savings. Despite their vast differences, the U.S. government will hold the Kos and the Abouds subject to a largely identical resettlement plan, centered around one key criterion: a requirement that both families prioritize immediate employment upon arrival in the United States. The Kos will receive cash assistance via the federal welfare program for families with dependents, but this amount is unlikely to cover their basic needs in New York City. Without assets, they will be compelled to enter the workforce as soon as possible, at the expense of mastering English, building professional skills, and sufficiently addressing chronic medical conditions.

www.policymatters.net

From Persecution to Poverty ment. By requiring that newly arrived refugees pursue immediate employment, the government compromises refugees ability to recover from physical and emotional trauma and to adapt to their new surroundings. Further, this policy deprives refugees of opportunities to acquire knowledge, skills, and credentials necessary to ensure long-term economic prosperity. Refugees are consequently channeled into the same circumstances that plague the nations poor, thus perpetuating experiences of hardship for themselves, their communities, and broader U.S. society. location. As detailed below, the U.S. governments generosity in providing an escape for large numbers of the worlds most vulnerable is commendable. But providing physical refuge is only part of the equation; the extent to which refugees are supported in rebuilding their lives after physical relocation is critical to successful resettlement.

OvErvIEW OF THE U.S. rEFUgEE aSSISTaNcE PrOgraM (USraP)


We are committed to helping resettle refugees who face the most difficult circumstances. Americans have done that time and again, welcoming more than 2.5 million refugees into our communities since the Refugee Act became law. It goes to the core of who we are as a people and a country. Secretary of State Hillary Rodham Clinton on World Refugee Day, June 2010 The United States first formalized its commitment to refugee resettlement via passage of the Refugee Act of 1980, which remains the legislative basis for U.S. refugee resettlement today. Since that time, the U.S. has positioned itself as the world leader in providing refuge to individuals fleeing persecution, accepting nearly three million refugees since 1975 from at least 70 countries of origin.9 In 2009, the U.S. admitted 74,654 refugeesmore than 70 percent of refugees accepted for resettlement that year worldwide.10 While the U.S. could arguably still do more to assist the worlds refugee population,11 the nation has unquestionably made a significant contribution to the international resettlement system.12 Mirroring international standards,13 the Refugee Act established the oft-debated criteria for refugee status, as well as a quota system for refugee admissions. Refugee acceptance priorities historically have been openly political in nature; the large majority of admissions in past decades were allocated to individuals seeking to escape communist regimes.14 In recent years, however, U.S. refugee priorities have increasingly shifted away from this political model, instead emphasizing acceptance of the worlds most vulnerable populations.15 The three largest groups accepted in 2010 were Iraqis, Burmese, and Bhutanese, in that order. Of central importance to this report, the Refugee Act also created the United States Refugee Assistance Program (USRAP), an interagency program coordinating all phases of U.S. refugee resettlement. Domestic components of USRAP resettlement are administered by the Administration for Children and Families Office of Refugee Resettlement (ORR), within the Department of Social Services, and the Bureau of Population, Refugees, and Migration (PRM), a division of the Department of State. For simplicity, this report will use USRAP to refer to all federal resettlement functions. The actual provision of social services to refugees is administered by ten nonprofit resettlement agencies contracted by USRAP, with 350 affiliated offices dispersed throughout the Fall 2010Spring 2011

rEFUgEES HavE grEaT NEEd FOr rESETTlEMENT SUPPOrT


A refugee is defined by U.S. law as someone who is unable or unwilling to return to his or her country of origin due to persecution or a well-founded fear of persecution on account of race, religion, nationality, membership in a particular social group, or political opinion.5 As articulated by immigration law experts Stephen Legomsky and Cristina Rodriguez, It is difficult to imagine a class of people who deserve a humanitarian response more so than genuine refugees. Persecuted, generally homeless, and by definition unable to turn to their own governments for protection, refugees are utterly dependent on the good will of the people and the government of foreign lands.6 Among the estimated 15.2 million individuals who meet these criteria worldwide, the U.S. State Department admits only those deemed to be the most vulnerable.7 Given these experiences, most refugees arrive in the U.S. with a broad array of complex needs. The vast majority of refugees arrive with very few, if any, assets, and most also lack family or other networks in the U.S. to provide material or social support.8 On principle (and by law, as detailed further below), the U.S. government has an obligation to actively support refugees following resettlementone that it does not have toward non-refugee immigrants. The international concept of refugee resettlement is premised on humanitarian aid; the more desperate an individuals circumstances, the more likely it is that he or she will qualify for admission by the U.S. or other third-party resettlement countries. As such, the U.S. accepts refugees knowing that they lack resources to rebuild their lives, and that they have significant mental health and other health needs; the subtext for acceptance is an agreement of support. This is the converse of admission requirements for other immigrants to the U.S., for whom the principal criterion is self-sufficiency. Non-refugee immigrants are required to demonstrate long-term financial self-sufficiency as a prerequisite for receiving a visa; those without personal assets must have a U.S. sponsor legally commit to supporting them for at least their first ten years in the country. Given their high level of need, resettled refugees are heavily dependent on the government for support following their rewww.policymatters.net

PolicyMatters Journal country.16 These agencies are typically responsible for assisting refugees with transitional needs during their first few weeks in the U.S. Some agencies continue to provide resettlement assistance beyond the initial adjustment period, depending on the given states resettlement agreement and the agencys administration of any extra federal grant programs.17 Each refugee family is assigned to a resettlement site and a nonprofit resettlement agency prior to departure for the U.S. Upon arrival, a one-time Reception and Placement (R&P) grant allocation is used to meet each familys basic needs such as food, housing, furniture, housewares, and clothing for their first thirty to ninety days,18 and to fund the resettlement agencys coordination of these services and registering the family for food stamps and other public assistance programs for which they may be eligible (such as TANF, Medicare, or Social Security Insurance [SSI]).19 The total R&P allocation per refugee is $1,800 (a doubling of the allocation provided prior to January 2010).20 In addition to the R&P grant, refugees are entitled to monthly cash and medical assistance. Individuals and families without dependents are eligible to receive up to eight months21 of this support via the Refugee Cash Assistance (RCA) and Refugee Medical Assistance (RMA) programs. The RCA provides approximately $345 each month for individuals, $541 for couples, and $694 for a family of three.22 USRAP (via the Office of Refugee Resettlement) also operates some additional discretionary resettlement grant programs administered on an ad hoc basis in select regions. Families with dependents (children under the age of 18) that meet general program requirements (income and assets must total below a maximum amount, and individuals must be actively seeking employment) receive cash assistance via state-administered Temporary Assistance for Needy Families (TANF) programs,23 and medical assistance through Medicaid. TANF grant amounts and requirements can vary significantly from state to state.24 Families that continue to meet TANF requirements may receive cash assistance for up to five years (the federal lifetime maximum), though states may have shorter program limits.25 There is no time limit for Medicaid as long as families continue to meet state-specific requirements.26 reliance on public assistance. As a central component, all refugees between the ages of 18 and 64 are required to be actively seeking employment in order to qualify for cash assistance (via RCA or TANF), and are obligated to accept the first job offered.29 Once a refugee becomes employed, cash assistance ceases, regardless of the employees wage or the stability of employment.30 Refugees who do not find work (as is increasingly the case in the current recession) continue to receive cash assistance (RCA or TANF) during the initial eight months. However, refugee resettlement caseworkers and recent studies on resettlement indicate that this assistance is often far too little to support families subsistence.31 For example, one study notes: A family of five in Detroit will receive $698 per month, but they are forced to pay a $600 rent to comply with local housing laws that require five people to live in a three bedroom home. In San Diego, a family of four receives $862 per month, but the rent for a two-bedroom apartment is $850.32 Similarly, an informational handout supplied to U.S. resettlement applicants in Cairo warns, Cash and other assistance provided to refugees by the government generally is not enough to fully support a family.33 The strain of attempting to support ones family on such limited assistance creates an added push for refugees to expedite their entry to the workplace, frequently at the expense of meeting basic transitional needs or pursuing opportunities that would further their success in the long run. For refugees without dependents and who are not able to find work within the eight-month period, the consequences are dire. Cash and medical assistance end at the eight-month mark; refugees without jobs or other public assistance (e.g., SSI, Medicare) must rely on family or friends for support. This fact, combined with low levels of cash assistance for families receiving TANF, mean many refugee families are left in desperate circumstances.34 Anecdotal evidence suggests that significant numbers of refugee families have not been able to support their basic needs, with many falling victim to homelessness.35 Media outlets and recent reports on refugee experiences depict story after story of individuals and families who have reached such grim economic circumstances.36 In September 2009, a group of Iraqi refugees protested outside of the Arizona capitol in Phoenix, carrying signs that read: Real hell in Iraq better than false paradise of America.37 The protesting refugees reported that they had not been able to find stable work, and some were on the brink of homelessness. In San Diego, the Muslim community has stepped forward to support homeless Iraqi refugees (though most Iraqi refugees in San Diego County are not Muslim), finding that the demand for assistance overwhelmed the communitys capacity.38 USRAPs principal data point for gauging resettlement success is short-term employment.39 By this data, refugee resettlement appears to be relatively successful. As of October 2007 (the Fall 2010Spring 2011

IMMIGRATION IMMIGRATION

USraP EMPHaSIS ON Early EMPlOyMENT


The centerpiece of the U.S. resettlement construct is early employment. In the agencys most recent Annual Report to Congress, the ORR articulates the fundamental program objective as assisting refugees to attain economic self-sufficiency as quickly as possible after their arrival.27 This quick-to-work ethos is closely aligned with U.S. antipoverty programs for the general population that prioritize expedient transition to selfsufficiency.28 Every dimension of the resettlement program is designed to encourage early workforce engagement and deter long-term www.policymatters.net

From Persecution to Poverty most recent national data publicly available), 56.8 percent of sampled refugees over the age of 16 who had been in the U.S. less than five years were employed, compared to 63 percent in the general U.S. population.40 Of sampled refugees, 64.5 percent were considered entirely self-sufficient (i.e., not reliant on public assistance). However, employment alone does not connote economic security, stability, or progress in other areas of integration necessary for long-term success. ORR staff acknowledge that short-term employment outcomes currently tracked by the agency are not predictive of refugees long-term stability and prosperity.41 Similarly, a European Union task force on refugees states: Integration in the labour market is . . . about appropriate and sustainable employment, not just work full stop.42 Virtually no study has attempted to track the long-term outcomes of resettled refugees.43 However, recent studies show that many refugees who are considered successfully employed by USRAP standards are struggling to support their families. Most jobs accepted by refugees are low-wage, low-skilled positions with minimal benefits and job security. Common examples include work in janitorial services, assembly lines, hospitality (e.g., hotel cleaning), daycare, construction, and retail.44 A large proportion of refugees are hired for seasonal or temporary positions. Refugee wages reflect the low-skilled jobs most occupy. A 2007 survey commissioned by the ORR found that the average household income for refugee families who had been in the U.S. for two to seven years was $20,000 to $23,000 per year.45 With an average household size of four in this sample, this is just about equivalent to the poverty threshold of that time, and less than a third of the average household income for a family of four in the U.S. in 2007. The Insight Center for Economic Development estimates that a family of four living in Sacramento County (one of the three areas surveyed in the ORR study) requires an income of at least $49,624 for each of two adults to support the familys minimal basic needs.46 perience or education, having lived in refugee camps or otherwise dire circumstances for many years.47 Others arrive with specialized training or skills for which there is little demand in the U.S. or an oversupply in the labor market. The UNHCR Refugee Resettlement Handbook notes that an important factor in ensuring long-term economic self-sufficiency is the availability of support to enable participation in . . . further education and training in preparation for employment or advancement in the labour market.48 However, as a consequence of USRAPs rapid employment requirements, refugees have little opportunity to develop professional skills prior to entering the workforce. Though local resettlement agencies receive funding via Refugee Social Services to provide a range of pre-employment support services, low funding means that agencies often can only afford to provide the most basic services, such as job search assistance and basic language training.49 Further, the current resettlement construct often does not supply sufficient English-language training to refugees before they enter the workforce. With a large proportion of refugees arriving with little or no English ability (57.7 percent of refugee arrivals in 2007 reported that they spoke no English at all),50 language training is a critical component in the path to long-term self-sufficiency. However, one study cautioned that the early employment requirement leaves adult refugees with little or no time to become even remotely functional in English.51 Some sources have also reported that the quality and supply of English-language training at some resettlement sites is lacking.52 Without first allowing refugees time to learn English before accepting full-time employment, individuals are cornered into accepting jobs not matched to their experience and qualifications. For example, one refugee reports: My English was funny at this time and I took a job as a cleaner in hairdressers. No one believed that back home I was an engineer.53 Once refugees begin employment, they face steep practical barriers (time and resources, such as transportation) to attending language classes. 2) Refugees are not provided adequate opportunity to recover from physical and mental trauma before entering the workforce. Most refugees come to the U.S. after years of living in circumstances of poor sanitation, violence, and/or limited access to medical care. As a consequence, refugees have unusually high rates of chronic conditions that inhibit daily functioning.54 Mental health is also a prevalent concern among refugees; as is no surprise, a high percentage have experienced extreme hardship that puts them at great risk for mental health conditions such as post-traumatic stress disorder and depression.55 Many refugees have spent years in prison prior to resettlement and/or have been victims of torture, violence, or rape. A 2008 UN survey of 754 Iraqi refugees in Syria found that 89 percent of refugees suffered depression.56 Eighty percent Fall 2010Spring 2011

cUrrENT aPPrOacH lIMITS rEFUgEES cHaNcES FOr lONg-TErM PrOSPErITy


USRAPs heavy emphasis on immediate self-sufficiency is short-sighted. By pushing refugees to focus time and energy on attaining immediate employment, the program deprives them of opportunities to enhance their long-term well-being. The existing construct constrains refugee achievement in three principal ways: 1) Refugees are not provided adequate opportunities to develop professional and English-language skills. While refugees are generally motivated to seek stable employment in the U.S., many arrive with little or no prior work exwww.policymatters.net

PolicyMatters Journal and 72 percent reported witnessing a shooting or car bombing, respectively, and 75 percent knew someone who had been killed. The UNHCR estimates that one in five Iraqi refugees were themselves victims of torture or violence. Refugee families without dependents are entitled to Refugee Medical Assistance (RMA) for only the first eight months following their arrival. Individuals with debilitating mental health or medical conditions may qualify for Social Security Insurance (SSI) on an ongoing basis. For all others, the only possible sources of medical insurance are Medicaid (with stringent eligibility requirements) or employer-supplied medical benefits. An ORR study of refugees who had arrived within the last five years showed that only 18.5 percent of surveyed refugees received medical coverage through their jobs.57 It can be inferred that a large proportion of refugees without dependents are left without medical insurance coverage following their initial eight months in the U.S.58 For many refugees, arrival in the United States represents their first opportunity to access mental health treatment.59 USRAPs early employment construct, however, does not allocate time or resources for new refugees with serious mental health needs to receive necessary treatment before entering the workforce.60 Further, the supply of mental health treatment options is insufficient in some regions; torture treatment centers and mental health clinics often have long waitlists, particularly in areas with high concentrations of recent refugees. The language barrier and insufficient access to transportation also complicate refugees access to necessary care. A failure to devote adequate attention to serious mental health and medical needs can inhibit refugees ability to find and maintain employment. Clinicians who work with Iraqi refugees in Dearborn, Michigan, report that many refugees are unable to hold jobs once they get them.61 They lament that resources going toward helping refugees obtain employment go to waste when refugees critical treatment needs are not met. One resettlement caseworker in Dearborn stated: I wish for the new refugees [that] we could give them enough time so they could get treatmenthelpand then put them to work.62 3) Refugees are discouraged from pursuing professional recertification and secondary education. The immediate-employment policy unfavorably impacts not only refugees who arrive with high needs and little education or employment skills, but also those who experienced relative success in their home countries. A significant subset of refugees arrive in the U.S. with professional degrees or several years of professional training. However, the current U.S. resettlement program does not accommodate support for individuals to become recertified or to complete their training in the U.S.63 Recertification for many professional degrees can www.policymatters.net be a lengthy and sometimes expensive process;64 most refugees do not have the requisite funds to support themselves through the process and often require assistance to navigate U.S. certification systems.65 These challenges are compounded by the fact that all refugeesincluding those with professional backgroundsare required to seek employment immediately following resettlement and must accept the first job offered.66 The U.S. Government Accountability Office, in a report to Congress on Iraqi refugee resettlement, writes: According to an ORR official and resettlement agency officials, the U.S. resettlement program does not take into account refugees prior work experience and education in job placements. Rather, the focus of the program is on securing early employment for refugees.67 Without support to pursue accreditation and recertification, highly educated and experienced refugees are forced to accept jobs that are ill-matched to their abilities and qualifications. As noted in a 2010 Columbia University study on U.S. resettlement, a failure to support refugees in recertification disempowers highly skilled refugees and deprives their new communities of valuable human capital.68 This challenge has been particularly relevant to the experience of recent Iraqi refugee arrivals. Refugee resettlement workers report that the Iraqi population is among the most highly educated refugee populations they have served.69 As one study of Iraqi refugee resettlement indicated, Many Iraqis pointed out that their potential is being wasted and that they could make greater contributions to American society if they were given sufficient time and resources to recertify in their professions.70 USRAPs discouragement of higher education also extends to the young adult children of resettled refugees. Here, too, U.S. resettlement policy requires the attainment of immediate employment, forcing young adults to forgo aspirations of attending college or completing studies initiated prior to resettlement. The Cooperative Agreement between USRAP and all contracted resettlement agencies indicates: For each employable refugee, the principal objective of the resettlement plan shall be assisting the refugee to obtain early employment, with employable refugee defined as any refugee who is between the ages of 18 and 64.71 Nowhere in the agreement are resettlement agencies instructed to encourage or support young refugees in pursuing higher education. A study by the Womens Refugee Commission on resettled refugee youth reported: The delegation met with a number of young people who wanted to go to school, but instead had to get a job immediately to help support their family. This was especially true for those who came with only a mother and siblings. [] The primary goal of resettlement is selfsufficiency, not education.72 Forcing refugees to forgo professional recertification, higher education, or professional training for entry-level employFall 2010Spring 2011

IMMIGRATION IMMIGRATION

From Persecution to Poverty ment has had particularly detrimental effects in the current economic recession.73 As unemployment in the U.S. remains high, individuals applying for entry-level jobs must compete with overqualified workers; this presents a particular challenge for newly arrived refugees, most of whom are automatically disadvantaged in labor competition with Americans, due to their relatively poor English language ability and a lack of U.S. work experience.74

HOPE FOr rEFOrM


We simply cannot sacrifice the long-term investments that we so desperately need to generate long-term prosperity. Just as a cashstrapped family may cut back on luxuries but will insist on spending money to get their children through college, so we as a country have to make current choices with an eye on the future. President Barack Obama, Georgetown University, April 2009 For the first time since 1980, comprehensive refugee resettlement reform may finally be receiving its due attention. The National Security Council under the Obama Administration has created a working group of various government and non-government stakeholders aimed at examining critical challenges in domestic resettlement.76 This effort has already generated some positive outcomes: In December 2009, Congress passed legislation enacting some small but critical improvements to the resettlement system, such as a doubling of the one-time R&P grant allocated to refugees in their initial transition period (from $900 to $1,800). As the National Security Council seeks to build on these reforms, this report contributes the following recommendations for consideration.77 The uSRAP Should: Reorient its mission away from immediate selfsufficiency, toward improving refugees prospects for long-term economic stability. Extend the duration of refugees benefits well beyond eight months to allow greater opportunity for orientation, treatment, language training, and professional development. Increase its allocation of cash assistance to refugees, as necessary, to adequately provide for basic needs during their initial adjustment period in the U.S. Amend its policy to encourage the pursuit of higher education, particularly among young refugees. Expand its Career Development Program to include all refugees who would benefit from professional recertification support. Offer professional development and training to refugees during their initial resettlement period. Commission a longitudinal study to track longterm refugee outcomes.

rEFUgEE POvErTy IS a MOral aNd PracTIcal cONcErN


As evidenced above, USRAPs existing construct and philosophical approach to resettlement do not promote the longterm self-sufficiency and prosperity of refugees. Instead, refugees are systematically channeled into the same conditions that have perpetuated cycles of poverty in American communities throughout the countrys history. Low educational attainment, unstable and low-wage employment, untreated medical and mental health conditionsthese are the circumstances that describe the struggle of many recently resettled refugees in the U.S. Adjoined with these factors are the collateral consequences of poverty: poor housing conditions, social isolation, health disparities, poor-quality schools, substance abuse, and exposure to crime, to name a few. The grim reality of refugee resettlement raises both moral and practical concerns for the nation. Morally, the U.S.s commitment to take in the worlds most vulnerable families cannot be disassociated from an obligation to support those individuals successful recovery upon relocation. Unlike the countrys relation to other immigrants, the U.S. accepts refugees with full knowledge that they lack assets and skills necessary to rebuild their lives and, further, have suffered extreme adversities that set them back in this process. In failing to sufficiently support their transition, the U.S. government actively generates conditions that degrade human dignity and promote the continuation of hardship for future generations. Practically, adding refugees to the ranks of Americas poor has lasting detrimental effects for greater U.S. society. Greater numbers of individuals and families struggling to meet their basic needs mean a greater strain on public services. For example, individuals without medical care turn to expensive emergency rooms for care, and families without sufficient cash flow remain reliant on public benefits. Perhaps even more significant, failing to adequately support refugees in their pursuit of economic security represents a missed opportunity for the nation. Prosperous residents contribute to the countrys tax base and, through their purchasing power, to the broader economic good.75 Educated, healthy, and successful individuals enrich a society with their productivity and innovation. Failing to meet refugees pressing needs upon arrivalbefore pushing them into the workforcegreatly reduces the U.S.s chances of reaping these invaluable benefits for its citizenry. www.policymatters.net

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Noor Dawood is a masters student at the Goldman School of Public Policy, soon to graduate in May 2011. Her primary work and research experience has been in criminal and juvenile justice reform, and she hopes to continue improving opportunities for Californias low-income and disenfranchised communities after she graduates.

IMMIGRATION IMMIGRATION

ENdNOTES
1. D. Gupta, L.T. Vo, and K. Zraick, From Burma to New York (multimedia), retrieved December 2010, http://www.fromburmatonewyork.com/ 2. Georgetown University Human Rights Institute and Georgetown Human Rights Action, Refugee Crisis in America: Iraqis and Their Resettlement Experience, Georgetown University Law Center (October 2009). Some aspects of the Aboud family profile were not detailed in the original source (e.g., information on the Abouds children), and are filled in here with fictional information reflecting typical experiences of Iraqi refugee families. 3. U.S. Bureau of Population, Refugees, and Migration (PRM), FY 2009 Reception and Placement, Basic Terms of the Cooperative Agreement Between the Government of the United States of America and the (Name of Organization). Washington, D.C. (February 2009). 4. Georgetown, 2009. 5. INA 101(a)(42). 6. S.H. Legomsky and C.M. Rodriguez, Immigration and Refugee Law and Policy, Foundation Press: New York, NY (2009). 7. United States Department of State (State Dept.), United States Department of Homeland Security, and United States Department of Health and Human Services, Proposed Refugee Admissions for Fiscal Year 2011: Report to Congress (2010). 8. State Dept. et al., 2010. 9. U.S. Bureau of Population, Refugees, and Migration (PRM), Refugee Resettlement in the United States, Department of State: September 2010; J. Gaber, S. Gaber, J. Vincent, and D. Boellstorff, An Analysis of Refugee Resettlement Patterns in the Great Plains, Great Plains Research 14:10 (Fall 2004): 16583. 10. U.S. Government Accountability Office (GAO), Report to Congressional Committees, Iraq Refugees and Special Immigrant Visa Holders Face Challenges Resettling in the United States and Obtaining U.S. Government Employment. Washington, D.C. (March 2010). 11. On a per capita basis, the U.S. accepts fewer refugees than Australia, Canada, and Sweden (World Refugee Survey 2009). Also, despite

growing worldwide need, the U.S. now accepts only a fraction of the absolute number it accepted in the early 1990s (75,000, as compared to 250,000) (Office of Refugee Resettlement [ORR], FY 2007 Annual Report to Congress. Administration for Children and Families, U.S. Department of Health and Human Services: Washington, D.C. [2010]). 12. State Dept. et al., 2010. 13. The Refugee Act of 1980 parallels the framework established by the 1951 Convention Relating to the Status of Refugees and its 1967 protocol. U.S. Government Accountability Office [GAO], Report to Congressional Committees, Iraqi Refugee Assistance: Improvements needed in measuring progress, assessing needs, tracking funds, and developing an international strategic plan, Washington, D.C. (April 2009); Georgetown, 2009. 14. Legomsky and Rodriguez, 2009. 15. State Dept. et al., 2010. 16. GAO, 2010; State Dept. et al., 2010. 17. Columbia University School of International Affairs (SIPA), Refugee Resettlement in the United States: An examination of challenges and proposed solutions, International Rescue Committee (May 2010). 18. Administering agencies may choose to concentrate use of funds in the first 30 days, or make gradual use over 90 days. 19. Lutheran Immigration and Refugee Service (LIRS), The Real Cost of Welcome: A financial analysis of local refugee resettlement, Baltimore, MD (2009). Around one-third of the current R&P allotment is used to finance overhead costs for the administering nonprofit agency. 20. GAO, 2010; Prior to this change, the R&P allocation amount had declined in real terms by more than 50 percent since 1975 (State Dept. et al., 2010). 21. The duration of refugee assistance is determined by the Director of the Office of Refugee Resettlement. See 45 C.F.R. 400.211. 22. Interview: Program Manager, Refugee Resettlement Services, Anonymous Refugee Resettlement Agency, California, November 2010. 23. In some states, TANF funding for refugees

is administered by the state, while in others it is administered directly by one of the ten contracted refugee resettlement agencies. N.G. Schiller, J.A. Boggis, M. Messenger, E.M. Douglas, Refugee Resettlement in New Hampshire: Pathways and Barriers to Building Community. University of New Hampshire: Center for the Humanities, 2009. 24. M. Farrel, B. Barden, and M. Mueller, The Evaluation of the Refugee Social Service (RSS) and Targeted Assistance Formula Grant (TAG) Programs: Synthesis of Finding from Three Sites. Falls Church, VA: The Lewin Group (2008). Columbia, 2010. 25. Georgetown, 2009. 26. Families that do not become citizens after seven years will no longer be eligible for Medicaid (Schiller et al., 2008). See Schiller et al. for various obstacles that refugees face in attaining citizenship. 27. ORR, 2008. 28. Georgetown, 2009; Researchers from the Migration Policy Institute (2003) theorize that an emphasis on employment is likely politically motivated by the notion that an emphasis on employment eases Americans negative perception of refugees feeding off of taxpayerssimilar to sentiments regarding welfare for the general population (G. Noll and J. van Selm, Rediscovering Resettlement, Insight [3]. Migration Policy Institute [December 2003]). A National Geographic publication on U.S. refugee resettlement similarly conjectures that resettlement officials are not necessarily worried about how refugees will adapt, but how the local communities will react (S. Lovgren, Refugees in the U.S.: One Familys Story, National Geographic News. National Geographic, June 20, 2003). 29. PRM 2009; Schiller 2009; Interview: Employment Specialist, Refugee Resettlement Services, Anonymous Refugee Resettlement Agency, California; December 2010. 30. For families with dependents, the continuation of TANF during employment is based on household income and state-specific thresholds. 31. Interview, Resettlement Agency Employment Specialist, 2010; Columbia, 2010; T. Dwyer, Refugee Integration in the United States: Challenges and Opportunities, Church World Service, March 2010; IRC, 2009; Georgetown, 2009; Schiller, 2009. 32. Georgetown, 2009.

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From Persecution to Poverty


33. International Organization on Migration (IOM), Information Sheet: Refugee Resettlement in the United States, May 2010. 34. On top of the challenges in covering basic expenses, refugees are responsible for paying back the cost of their flight to the United States; refugees are required to repay their travel loan in monthly installments, beginning six months after their arrival (State Dept., 2010). 35. Columbia, 2010; Georgetown, 2009; Schiller, 2008. 36. L. Turnbull, Refugees Face Homeless All Over Again In U.S., Seattle Times (August 2010); R. Marosi, Iraqi Refugees Find Hard Times, Los Angeles Times, March 29, 2010; M. Brand, Iraqi Refugees Settle In California, National Public Radio (NPR), August 13, 2009; H.I. Win, Between Iraq and a Hard Place: Seeking Asylum and a Better Life, Californias Iraqi Refugees Find Themselves in Limbo, Los Angeles Times, May 20, 2009; Schiller, 2008; Georgetown, 2009. 37. Womens Refugee Commission, Life in the Promised Land: Resettled Refugee Youth Struggle in the U.S.; Case study: Phoenix, Arizona (October 2009). 38. Interview: Dr. Wael Delaimy, San Diego Muslim community representative, December 2010. 39. Farrel, 2008; Columbia, 2010. The three priority measure elements tracked are: (1) length of time between arrival and employment; (2) wage rate; and (3) 90-day job retention (D.S. Nightingale, A Framework for Continuous Evaluation of Office of Refugee Resettlement Formula Programs Supporting Employability Services, Johns Hopkins University, (March 2008). ORR also tracks partial or full independence from public assistance and employment linked with health benefits. 40. ORR, 2008. While federal data are not publicly available, refugee resettlement agency representatives and recent reports on resettlement indicate that short-term employment rates have plummeted since 2008 (Interview, Resettlement Agency Program Director 2010; Church World Service, Impact of the Recession on Refugee Resettlement, May 2009). 41. Columbia, 2010. 42. United Nations High Commissioner for Refugees (UNHCR), Refugee Resettlement: An International Handbook to Guide Reception and Integration (October 2002). 43. Farrel et al., 2008; UNHCR, 2002. 44. Interview, Resettlement Agency Employment Specialist 2010; Schiller et al., 2008. 45. Farrel et al., 2008. 46. Insight Center for Community and Economic Development, California Family Economic SelfSufficiency Standard by County, retrieved December 2010; estimate varies depending on the age of children in the family. This figure applies to a family with two school-aged children. 47. UNHCR, 2002. 48. UNHCR, 2002. 49. Columbia, 2010; Georgetown, 2009. 50. ORR, 2008. 51. Womens Refugee Commission, 2009. 52. Georgetown, 2009; H. Abdulkhaleq, Z. AlBaaj, A. Boumediene, Iraqi Torture Survivors: Panel Discussion with Experienced Service Providers, National Capacity Building Webinar Series, The Center for Victims of Torture (May 2008). 53. UHCR, 2002. 54. Georgetown, 2010. 55. Abdulkhaleq et al., 2008. 56. United Nations High Commissioner for Refugees (UNHCR), Trauma Survey in Syria Highlights Suffering of Iraqi Refugee (January 2008). 57. ORR, 2009. 58. A study of refugee resettlement in New Hampshire found that 91 percent of refugees relied upon Medicaid shortly after their arrival in the U.S.; eight months later, only 26 percent were still receiving the service (Schiller 2009). Those not receiving Medicaid failed to qualify because either no one in the family was working or the household income disqualified the family. 59. Abdulkhaleq et al., 2008. 60. Ibid; Georgetown, 2009. Refugees also encounter challenges in obtaining prompt access to necessary care as a result of flaws in USRAP planning and coordination (such as insufficient screening prior to resettlement, and inadequate transfer of information to resettlement agencies in the U.S.). See Columbia, 2009; Womens Refugee Council, 2009. 61. Abdulkhaleq et al., 2008. 62. Abdulkhaleq et al., 2008. 63. Columbia, 2010; IRC, 2009; Georgetown, 2009. 64. For example, recertification as a doctor requires one to pay an initial registration fee of $700 and to complete three stages of verification within five years (Georgetown, 2009). The first stage is an exam that costs $825; the second, an exam that costs $1,200; and the third stage includes a residency period and another exam. 65. UNHCR, 2002; IRC, 2010. 66. USRAP does provide a special grant for a Career Development Program in a small number of select resettlement sites. However, agency representatives from one of those sites report that the grant is nearing its expiration (Interview, Resettlement Agency Program Director, 2010). 67. GAO, 2010. 68. Columbia, 2010. 69. Interview, Resettlement Agency Employment Specialist. 70. IRC, 2009. 71. PRM, 2009. Exceptions granted for one refugee per household who must care for an infant (under one year old) or another fully dependent person, and for refugees who are unable to work due to physical or mental disability. 72. Womens Refugee Commission, 2009. 73. Columbia, 2010; Georgetown, 2009; IRC, 2009; Schiller, 2009. 74. Interview, Resettlement Agency Employment Specialist, 2010. 75. UNHCR, 2002. 76. State Department et al., 2010; Columbia, 2010. 77. This report examines only one slice of the multi-phase resettlement process. Thus not all areas requiring critical reforms are touched upon in these recommendations. See the 2010 report by Columbia University for a comprehensive account of necessary U.S. refugee resettlement reforms.

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PolicyMatters Journal

Clean Energy Jobs, Higher Education, and Strong Leadership: A Conversation with Former Michigan Governor Jennifer Granholm
INTERVIEW bY HOPE RICHARdSON

CONVERSATION

This spring, former Michigan Governor Jennifer Granholm began a two-year joint academic appointment at the University of California, Berkeley, as Distinguished Practitioner of Law and Public Policy. Granholm, the first woman governor of Michigan, led the state from 20032011, during a severe economic downturn. As the automotive and other manufacturing industries faltered, Michigan lost an estimated 850,000 jobs. Granholm worked to broaden the states economy, targeting new sectors for growth such as clean energy, homeland security, biotechnology, and film production. PolicyMatters sat down with Gov. Granholm on March 2, 2011, to discuss the green economy, higher education priorities, and state leadership in a time of fiscal crisis.

Gov. Jennifer Granholm received her bachelors degree from the University of California, Berkeley in 1984 and graduated from Harvard Law School in 1987. She served as a federal prosecutor in Detroit and was later elected Michigans first female attorney general. More recently she was a member of President Barack Obamas transition team. She also serves as Senior Advisor to Pew Charitable Trusts Clean Energy Program. PolicyMatters Journal (PMJ): Several states in the Midwest (such as Wisconsin, Ohio, and Indiana) are considering bills that would limit collective bargaining among public employees. These actions are being framed by their proponents as a response to budget deficits. What is your perspective on this debate? Gov. Granholm: These actions are being proposed because they want to break the union. Its not because of the budget. The unions have already given what has been asked. And I say that with full knowledge, having been through the toughest time of any state in the country with Michigans economic woes. I had to cut more out of state government, as a percentage, than any governor in the nation, and we did that in partnership with the unions. When unions are at the bargaining table they bargain hard, but www.policymatters.net

they are the ones who can identify where the savings can come from. Its going to happen here in California, too, with these big budget cutsbut you dont need to go after the workers. I would say, too, that as a management principle, why would you attack the people who are carrying out the mission of the organization? It just is such a self-defeating way of going about this to say my way or the highway. I know that in Michigan we got at least $700 million in concessions from [unionized] state employees at the bargaining table, and then, in a bipartisan way, we made changes to the law that allow us to treat new employees differently from the vested employees who had been there before. Young people who are just graduating from college might not expect to go into a pension plan and have the same deal as their parents did. So you can look at things in a sort of tiered way. This is what the private sector did with United Auto Workers. They have tiered benefits. Thats what we did inside Michigans state government, and it will save billions of dollars over the next decade. You do not need to dismantle collective bargaining in order to achieve those results.

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A Conversation with Former Michigan Governor Jennifer Granholm

PMJ: Can you talk about your strategy for building the foundation of a new economy in Michigan? In your opinion, what strategies work best to create jobs? Gov. Granholm: This was my obsession for seven of the eight years that I was governor. I say seven of the eight because the first year I didnt really understand fully that there was such a massive structural change happening beneath the foundations of Michigans economy, with the loss of these manufacturing jobs to low-wage countries.

Gov. Granholm: It was very hard. I think that there needs to bethe universities dont like thisbut there needs to be a greater focus on tuition restraint in order to ensure that people have access. Now, the public universities in Michigan are actually fairly reasonable. We also added what was known as a Promise Scholarship to the mix, which means that we securitized our Tobacco Settlement Fund and created a $2 billion pool of money. Part of that we used to help kids go to college, and part of it we used to diversify the economy into those sectors that I described.

Michigan is a state of 10 million people; weve lost about The legislature refused to fund the Promise Scholarships 850,000 jobs. Those are largely related to manufacturing, in my last year in office. It was my biggest disappointlargely auto industry, but not entirely. My whole strategy ment. I had Republicans in the house and the senate, and was to do what is known as a S.W.O.T. analysis of the state: we battled constantly. But I think governors have to do identify what our strengths, weaknesses, opportunities, and whatever they can, in partnership with universities, to keep threats are. We brought in experts, we identified sectors that tuition down and keep college accessible. Now does that would be natural for us to create clusters around as a stratmean that there may have to be some selections, like many egy, and then universities are making, we developed a about the relevance of I had to cut more out of state government, as course offerings, parseries of incentives around a percentage, than any governor in the nation, ticularly those that may each of those and we did that in partnership with the unions. be extremely narrow clusters. or obscure? I do think there has to be some We were aided bargain hard, but they are the ones who can shrewd decision-making significantly in on their part. identify where the savings can come from. our efforts in 2009 with the But I also think its Recovery Act, really important to when the president offered states the opportunity to comfocusand Californias got to do this, tooon the lead-up pete for clean energy jobs. We really went after that with to college. That means kids have to graduate from high gusto, and the results have been great. Im proud to say school college-ready, so theyre not doing remedial work that [on February 28, 2011] the Gallup organization did an while theyre in college. Thats not so applicable to Cal, but analysis of which states in the nation have had the fastestit certainly is to many universities. So I think both the short growing economies over the last year, and Michigan was term and the long term have to be addressed. number one in the country because of the improvements we set in motion. PMJ: Based on your experience bringing clean energy investment to But its a very long-term strategy. There are two strategies, I Michigan, what steps would you recommend on a national level to would say: One is to diversify the economy, and the second grow Americas clean energy economy? is to educate our kids. You know, in Michigan we came from a manufacturing-sector background, with a very low Gov. Granholm: One: we need a renewable energy percentage of adults who had gone to college, so we had standard nationally. You guys in California just upped your to change a paradigm. We really focused on that education energy standard to 33 percent. We cannot expect that this strategy as well. economy is going to grow in the United States if we dont send the right market signals for the industry to have some confidence that their investment will, in fact, bear fruit. So PMJ: In Michigan, as in California, budget challenges have led to that really is the demand side of the equation, to send the decisions to cut state funding for higher education. As governor, one of right market signals. your long-term goals was to double the number of college graduates in the state of Michigan. Can you describe your efforts to advance that goal while facing the reality of a restricted budget? What are your thoughts on ways that states can work with university leaders to lessen the impacts of declining state support for higher education? Two: you also have to work on the supply side by providing low-interest loans and upfront asset financing for those who make significant investments in capital. The technology associated with advanced solar panels, for example, is extremely expensive, and the banks are not lending. The Fall 2010Spring 2011

When unions are at the bargaining table they

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PolicyMatters Journal

federal government can be a partner in providing a layer of financing. They have done this in little bits, but not a whole lot. Three: we have got to be serious about the infrastructure for electrification of the vehiclethe advances in battery technology that will store renewable energy so we can deploy this and get full use of it. This is all job creation. And then weve got to really be significantly investing in research and development, as well, on the federal side. Ill give you one quick example of that. The Department of Energy put out competitive grants for batteries as part of the Recovery Act. Now there are seventeen companies in Michigan that are doing advanced battery work as a result of the cluster that we created. But the federal government provided all this upfront funding. Prior to that, 2 percent of the electric vehicle batteries were built in the U.S., and now its going to be about 40 percent. You cannot separate research and development from the actual manufacturing of new technologies. The engineers, the researchers have to be where the buildout occurs. If we dont do that, all of this stuff is going to be gone. This is a $6 trillion global opportunity, and we are missing out. And theres a sense of urgency, because once these other countries have itand China is being very aggressive about getting itits just going to be gone. If we could only have a bit of that sense of urgency here in this country to create those jobs here, things would be entirely different. PMJ: Can you share any key lessons from your experiences as a governor that might inform California policymakers as the state considers a proposal to eliminate local redevelopment agencies? Gov. Granholm: Well, let me just say that I think youve got to have effective economic development on the ground where it occurs. If you centralize it too much, then you lack the full array of options. It just gets bottled up. You need to really decentralize economic development in many aspects. You need to distribute leadership across the state. But you also want to hold people accountable. If youre just giving money to entities and theyre not showing results, thats obviously not what you do. But I think enlisting others to do the very serious work of restructuring an economy and bringing in jobs requires that it not come from one central point, but that you have local allies on the ground. Hold them to accountable standards; dont fork over money without some specific conditions. But I think youve got to enlist others. PMJ: The recent census showed Michigan as the only state to lose population. With its struggling economy, what can Michigan do to keep people from leaving the state in search of better prospects? In www.policymatters.net

particular, how can Michigan retain graduates of its colleges and universities? Gov. Granholm: Its all about diversifying the economy. I mean, thats why our focus has been to add these new sectors, sectors that are hiring. Again, you have to address the supply and demand issues. Those who are seeking great talent are going to want to know: Is that talent going to be available when the time is right? Thats why we chose the sectors we didadvanced energy, clean energy; advanced manufacturing, which would include things like robotics and nanotechnology; life sciences; pharmaceuticals; the bioeconomy; homeland security and defense; as well as film and video gaming, a creative economy. So those are all of the diverse things that we have focused on. I pray that the next governor doesnt undo a lot of the groundwork that we laid. People arent going to stay if the unemployment rate is high, because theyre going to search where the opportunity is. But Michigan has got fantastic bones, and the question is how to enhance that in order to keep the young talent there. PMJ: The recent recession caused a disproportionate loss of jobs among men, affecting traditionally male-dominated industries like manufacturing, transportation, and construction. About a year ago, the number of women on U.S. payrolls surpassed the number of men for the first time in history. Did you think about gender dynamics when you were designing the response to the recession in Michigan? Gov. Granholm: Ah, the mancession. Not necessarily. Although I must say, my husband is totally focused on this issue. I didnt think about gender dynamics when, for example, we did our S.W.O.T. analysis of the sectors we wanted to select, although pharmaceuticals, life sciences, and health care [fields that traditionally employ a high proportion of women] actually became our largest sectors over the course of the past four years. But this is a really interesting phenomenon thats happening in the country. And Michigan, because of our concentration in manufacturing, was hit particularly hard by it. The response that we devised was a policy response to not just men, but those who are unemployed, who happen largely to be men. We launched a program called No Worker Left Behind. We went to the federal government and we said, while these people are collecting unemployment, allow them to go to community collegebecause for the vast majority, they may not have been to college, ever. No Worker Left Behind was a way to say to those who are unemployed, Go to community college and we will pay, using the workforce training dollars from the federal government of $5,000 per year, $10,000 per student, to train workers in an Fall 2010Spring 2011

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A Conversation with Former Michigan Governor Jennifer Granholm

area of need in an emerging sectorthose six sectors that I talked about, plus some others like technology. We would pay for them to get their degree or their certification in those areas. They couldnt go and get a degree in political science or French (those were my degrees), but they could get one in clean energy technology, for example. As a result of that policy, we saw a 35 percent increase in community college enrollment, and 82 percent of those who went through got a job in the area they were trained in, which is four times the national rate. So we focused on getting men and women, once they have had the rug pulled out from under them by the loss of a job that is not coming back, to realize that they, too, have got to retool themselves, that theyre facing a structural problem too, but that they have an opportunity to go back and get retrained in a new area. PMJ: Our motto here at the Goldman School of Public Policy is Speaking Truth to Power. Can you comment on how your experienceparticularly as governor of Michigan during a time when it was necessary to confront hard truths and make difficult tradeoffsoffers lessons for students at GSPP?

Gov. Granholm: For students who are now studying public policy and deciding where they are going to land, I think its really important to choose to go to areas that are the most difficult. Its easy, perhaps, to jump into a nice place and work for a big entity where you dont have to worry about ruffling a lot of feathers, but the most valuable way your great talents can be used is to dive into a place that is the most difficultI think, for example, of urban education and working in inner cities where there are systemic, very difficult problems. You may get burned out, you may be frustrated, but if we dont recruit the best and the brightest to the most difficult circumstances thats exactly where we need these great minds, and hearts, and souls to be. And so, speaking truth to power, its one thing to say that in a more comfortable position, but where its really needed is in the most difficult places. States can securitize funds from the 1998 Tobacco Master Settlement Agreement with the four largest cigarette manufacturers to create tobacco bonds. Revenues raised from the sales of these bonds can then fund state government activities.

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Winner of the 2011 PolicyMatters Journal Outstanding Policy Article Award

Conserving Regulated Water: Revenue Decoupling, Incentives, and Equity


JoHN ErICKSoN aND GrEG LEVENTIS
EDITED BY RASHI KESARWANI, FREDERICK TAYLOR-HOCHBERG, AND KASANDRA GRIFFIN Under traditional regulation, water utilities profit by increasing their sales and thus have a disincentive to promote conservation. Severing the connection between water utilities revenues and the quantity of water they sell, a system known as revenue decoupling, offers opportunities to solve this problem. However, revenue decoupling has limitations and raises some concerns. First, decoupling by itself is not a conservation program, and must be supplemented with additional conservation efforts such as appropriate increasing block rate (IBR) pricing structures. Second, decoupling alters the risks that both utilities and ratepayers face. Third, water users may perceive a conservation penalty if their rates increase when their consumption decreases. Despite these and other challenges, revenue decoupling is a powerful tool to promote conservation and should be expanded. Regulators should also study the long-term conservation incentives that the policy creates. INTrOdUcTION
The finite nature of Californias water resources has made water conservation an important policy goal. Utilities are often in the best position to implement conservation programs, but traditional regulation of investor-owned utilities (IOUs) rewards utilities for selling more water and punishes them for selling less. Thus, the current regulatory regime provides a disincentive to adopt conservation measures. Water revenue decoupling can remove this disincentive. Decoupling allows IOUs to track any revenue losses due to customers using less water than they were forecasted to use and adjust future rates to recoup those losses. Since mid-2008, the California Public Utilities Commission (CPUC) has been conducting decoupling pilot programs with several water IOUs.1 In concert with this program, the participating IOUs have implemented conservation pricing rate structures. Decoupling can remove the deterrent to conservation that utilities face under the traditional regulatory regime. However, before it is widely implemented, regulators must address several concerns: Decoupling itself is not a conservation program; it only removes a disincentive to conservation. Robust conservation efforts must also be in place for the conservation policy goal to be achieved. The mechanics of decoupling can lead to a perceived conservation penalty: when customers as a whole conserve water, their rates increase. Because regulators are unable to distinguish www.policymatters.net sales losses due to conservation efforts from sales losses from other causes, IOUs with decoupling are compensated for non-conservation revenue losses as well. If IOUs allowed cost of capital is not adjusted for the decrease in their revenue risk caused by decoupling, ratepayers will be compensating the IOUs for revenue risks that they no longer bear. We are not sure of the net impact of decoupling on ratepayer risk. Finally, it is unclear whether decoupling removes IOUs long-term conservation disincentives. In this paper, we will explain how traditional rate-of-return regulation in the water sector leads to the throughput incentive, how the throughput incentive discourages conservation, and how decoupling addresses the throughput incentive. We will also examine some of the concerns we have with decoupling.

WATER

WaTEr cONSErvaTION IS aN IMPOrTaNT POlIcy gOal IN calIFOrNIa


From 2007 to 2009, California suffered a significant drought.2 Some water utilities, such as the East Bay Municipal Utility District, imposed mandatory rationing.3 Estimated impacts of the drought include up to $477 million in farm revenue losses and up to 23,700 lost jobs.4 Among the effects of ongoing water shortages are reduced hydropower generation, increased risk of wildfires, and reduced vegetation, leading to an inabilFall 2010Spring 2011

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Conserving Regulated Water: Revenue Decoupling, Incentives, and Equity ity to graze cattle.5 Multiple circumstances including, but not limited to, climate change and population growth will only add to the imperative of sustainable water use. Conservation is an important aspect of sustainable water use. The California State Legislature recently passed the Water Conservation Act of 2009 (SBx7-7). Chapter Three of the Act mandates conservation goals for urban retail water suppliers, including an ultimate goal of 20 percent reduction in per capita urban consumption by 2020.6 Because of their close contact with customers and familiarity with water use patterns, utilities are well-positioned to implement water conservation efforts.

cONSErvaTION aNd TradITIONal rEgUlaTION


The throughput incentive aligns a utilitys incentives contrary to the public policy goal of water conservation. This misalignment is particularly troubling because utilities are often the actors best-positioned to promote conservation. Conservation strategies can be divided into price strategies and non-price strategies. Non-price strategies include the promotion of efficient equipment such as low-flow toilets and faucets, the promotion of low-impact landscaping, and water use restrictions such as voluntary reduction of lawn watering.13 Non-price strategies are often implemented by water utilities, but can also be implemented by other entities. In several states, organizations separate from utilities have been established to promote energy conservation. These entities are funded through charges on customers utility bills, but are independent of utilities, meaning they are not influenced by the throughput incentive.14 However, in California at this time, water utilities are charged with implementing ratepayerfunded conservation programs. This has advantages because the utilities already administer the rate structure and because they have an ongoing relationship with customers. Price strategies for conservation involve increasing the marginal cost of water consumption to customers. This can be done by increasing the portion of revenues the utility collects through the quantity charge as opposed to the monthly service charge. The California Urban Water Conservation Council recommends that for conservation pricing, the utility should collect at least 70 percent of its total revenues from the quantity charge.15 Increasing block rates (IBRs), a form of conservation pricing, charge customers a rising quantity charge for use beyond certain thresholds. For instance, an IBR structure might charge $5 for each of the first five units used, $7 for each of the next five units, and $10 for each unit past ten. One concern with imposing higher marginal rates is that it tends to make utility revenues more volatile.16 With high marginal rates, failing to reach the sales forecast results in even greater revenue losses for the utility than under a uniform rate design. Conversely, sales above the forecast would likely result in an even greater revenue increase. For these reasons, when California water IOUs implemented IBRs without full decoupling, the CPUC approved a price adjustment mechanism that ensures that the utilities collect the same amount of revenue under IBRs that they would have collected with the same sales under a traditional uniform rate structure. For instance, if sales go down and the utility loses more revenues under the IBR rate design than it would have under a uniform rate structure, it is allowed to recover the additional loss by adding a surcharge to future rates. While the price adjustment mechanism decreases the revenue volatility associated with conservation pricing, it does not adjust for changes in sales Fall 2010Spring 2011

TradITIONal rEgUlaTION aNd THE THrOUgHPUT INcENTIvE


Most IOUs are regulated monopolies, meaning that the government regulates the rates they charge their customers. In California, the CPUC regulates IOUs, which provide water to approximately 20 percent of California residents.7 The CPUC approves rates for each Class A water IOU (defined as those serving more than 10,000 customers)8 every three years in a general rate case. The CPUC also regulates rates for the smaller Class B, C, and D water IOUs.9 Roughly speaking, rates are set by dividing a utilitys projected costs by its projected sales volume. The utility is allowed to cover all of its costs through rates, including the cost of providing a fair return on its capital investments. Normally, water rates consist of a fixed monthly service charge as well as a quantity charge paid for each unit of water a customer uses. Until recently, the CPUCs standard practice was to allow a water utility to recover all of its variable costs and 50 percent of its fixed costs through the quantity charge, and to recover 50 percent of its fixed costs through the service charge.10 Variable costs are costs that change in the short term due to increases or decreases in water sales. They include purchased power, purchased water, and any pump taxes paid to pump groundwater. Fixed costs are all other costs, including the utilitys adopted return on its capital investment. Traditional regulation gives the utility an incentive to sell more water.11 In the energy industry, this is known as the throughput incentive.12 In this article we use the same term in reference to water utilities as well. Because the quantity charge the utility collects from its customers for each unit of water sold includes 50 percent of its fixed costs in addition to its variable costs, and only the variable costs increase when water sales increase, the utility may increase its profits between rate cases by selling more water than it was forecasted to sell in the last rate case. Conversely, in most cases the utility will lose money if it sells less than its sales forecast. For a numerical example of this, see Box 1 on page 18.

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Winner of the 2011 PolicyMatters Journal Outstanding Policy Article Award volume and thus does not remove the throughput incentive. It may be possible to implement both price and non-price conservation strategies despite the utilitys throughput incentive, but it would not be easy. In addition to the throughput incentive, utilities are frequently in the best position to promote water conservation.17 Separate entities created to promote conservation may not be as effective as utilities could be with the right incentives. For a numerical example of how the WRAM/MCBA mechanism addresses the throughput incentive, see Box 1.

BOx 1. THE MEcHaNIcS OF dEcOUPlINg: NUMErIcal ExaMPlES


Assume that in its last rate case a utilitys total adopted annual revenues were $4 million$3 million to cover fixed costs and $1 million to cover variable costsbut that it actually sells 10 percent less water than it was forecasted to sell in the rate case. Consider the effect of lower-than-anticipated sales on utility revenues under three different scenarios: (1) traditional regulation, (2) traditional regulation with conservation rate design, and (3) conservation rate design with revenue decoupling. 1) Traditional Regulation Under the CPUCs traditional ratemaking procedures, the utility would be authorized to collect $2.5 million from the quantity charge (all variable costs plus 50 percent of fixed costs) and the remaining $1.5 million from the service charge. If the quantity charge is the same for all units of water sold, the 10 percent decrease in sales will reduce its actual quantity-charge revenues by 10 percent to $2.25 million. Service-charge revenues will be as forecasted, assuming the utility does not lose or gain customers. Assuming variable costs are proportional to water sales, they will drop to $900,000. Fixed costs will remain constant at $3 million. Thus the utility loses $150,000: $250,000 in lost revenues minus $100,000 in avoided variable costs. 2) Traditional Regulation with Conservation Rate design To comply with the California Urban Water Conservation Councils guidelines for conservation rate design, the utility is authorized to collect $2.8 million (70 percent of its total revenues) from the quantity charge and the remaining $1.2 million from the service charge. Also assume that the utility implemented an IBR, and that all of the sales it lost were from water sold at twice the average rate. This causes a 10 percent reduction in sales volume and a 20 percent reduction in quantity-charge revenues. Thus, actual quantity-charge revenues will be: $2.8 million (1 0.20) = $2.24 million, or $560,000 less than anticipated. As before, the utilitys variable costs will be $900,000, or $100,000 less than anticipated. Under this scenario, the utility loses $460,000: $560,000 in lost revenues minus $100,000 in avoided variable costs. In other words, without a price adjustment mechanism, the conservation rate design would cause the utility to lose more when it fails to meet its sales forecast. It should be noted that even without revenue decoupling, this is not a realistic scenario for California water utilities, since IBRs Fall 2010Spring 2011

rEvENUE dEcOUPlINg TO rEMOvE THE THrOUgHPUT INcENTIvE


Revenue decoupling severs the connection between the utilitys revenues and the quantity of water or energy it sells. The utility is made whole (reimbursed) for net revenue losses due to not reaching its sales forecast and must repay excess net revenues it receives from selling more than the forecast. As of 2007, ten states had approved decoupling for at least one energy utility.18 In 2008 and 2009, in order to pursue the conservation goals laid out in its 2005 Water Action Plan,19 the CPUC approved conservation rate designs and revenue decoupling pilot programs for several Class A water utilities.20 The CPUCs water revenue decoupling mechanism is made up of a Water Revenue Adjustment Mechanism (WRAM) and a Modified Cost Balancing Account (MCBA). The WRAM tracks differences between the amount of revenues the CPUC expects the utility to collect through the quantity charge (adopted quantity charge revenues) and the amount the utility actually collects. The MCBA tracks differences between the variable costs the CPUC expects the utility to incur (adopted variable costs) and the variable costs the utility actually incurs.21 When the WRAM and MCBA are added together, the net balance reflects how much the utility under- or over-collected due to selling less or more water than expected.22 Normally, in the event that the utility undersells, the net WRAM/MCBA balance will represent an under-collection of revenues equal to the revenues the utility missed out on, minus the variable costs it avoided because it sold less water.23 If the utility oversells, the WRAM/MCBA balance will normally represent an over-collection equal to the additional quantity revenues the utility collected minus the additional variable costs it incurred in order to sell more water. The WRAM/MCBA balance accumulates each month until the next rate case or until it reaches a certain threshold (for example, 2 percent of the utilitys total adopted revenues), at which point it is amortized into future rates. If the balance is an over-collection, it is refunded to customers through a credit that reduces the quantity charge on their future water bills. If the balance is an under-collection, it is charged to customers through a surcharge that increases the quantity charge on their future water bills.

WATER

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Conserving Regulated Water: Revenue Decoupling, Incentives, and Equity

have always been implemented in conjunction with a price adjustment or revenue decoupling mechanism to protect the utility from increased revenue volatility. We have included this scenario despite its lack of realism to show why conservation rate designs implemented without a price adjustment or decoupling mechanism would increase revenue volatility. 3) Conservation Rate design with Revenue decoupling As in Scenario 2 above, the utilitys actual quantitycharge revenues are $560,000 less than was adopted. Thus an under-collection of $560,000 is recorded in the WRAM. An over-collection of $100,000 is recorded in the MCBA to account for the variable costs the utility avoided by selling less water. The net WRAM/MCBA balance is: ($560,000 under-collection) ($100,000 over-collection) = $460,000 under-collection To compensate for the $460,000 under-collection, the utility will eventually be allowed to collect a surcharge from its customers. Under revenue decoupling, the utility loses no money as a result of the sales shortfall.

cONcErNS aBOUT dEcOUPlINg


We have several concerns about decoupling. First, decoupling allows utilities to recover lost revenues whether or not conservation is the reason for the loss. Second, decoupling itself is not a conservation program. Thus, conservation programs and rate designs must be adequate to meet policy goals even if decoupling is in place. Third, decoupling may not remove utilities long-term incentives to increase sales in order to build the size of their business. decoupling and Risk By reducing utilities revenue volatility and adjusting water rates, decoupling affects both utility and ratepayer risk. Decoupling clearly reduces utility risk, which should be reflected by an adjustment to utilities allowed cost of capital. Although some of the risk avoided by utilities may be transferred to consumers, decoupling may also reduce some forms of consumer risk. Decoupling Reduces Utility Risk Decoupling decreases risk for utilities. In addition to removing the short-term throughput incentive and protecting the utility from increased revenue volatility due to conservation rate designs, it also diminishes risk that is present regardless of conservation practices, referred to here as traditional risk. Two examples of traditional risks that utilities no longer face under decoupling are risks due to economic recessions and above-average rainfall, both of which tend to reduce water consumption and, consequently, utility revenues. Decoupling surcharges are designed to make the utility whole for quantitycharge revenues lost for these reasons. Decoupling as implemented by the CPUC effectively removes most of the revenue volatility due to all sales fluctuations, regardless of the cause of those fluctuations, and therefore decreases the utilitys overall risk: the utility will receive its adopted quantity-charge revenues regardless of sales. The Effect of Decoupling on Ratepayer Risk Is Unclear Since surcharges and credits from decoupling affect ratepayers bills, decoupling will affect ratepayer risk as well as utility risk. However, not all of the risks that utilities avoid will necessarily be transferred to ratepayers. We see some ways in which decoupling could increase ratepayer risk and others in which it could decrease it. Decoupling could increase ratepayers risk of being adversely affected by utility customer loss. With no decoupling, when a utility misses its sales forecast because it loses customers, lost revenues come out of profits. Under decoupling, however, the utility is allowed to collect a surcharge in the future to compensate for the lost quantity-charge revenues. This surFall 2010Spring 2011

INITIal ExPErIENcES WITH cPUc WaTEr dEcOUPlINg


Since no California water utility has had revenue decoupling for even four full years thus far, and only a few years of data are currently available for analysis, it is too early to determine the effects of the mechanism. However, preliminary observations can be made. In 2009, water utilities with decoupling experienced undercollections in the net balance of the WRAM/MCBA, which resulted in surcharges to customers. Overall under-collections for each utility ranged from 4 to 11 percent of 2009 company-wide revenues depending on the utility.24 Averaging across twenty-one of its districts, California Water Service Company (Cal Water), the states largest water IOU, recorded a net WRAM/MCBA under-collection of $12.1 million in 2009, or 4.4 percent of adopted quantity-charge revenues. Quantitycharge revenues were $21.4 million (7.8 percent) below the adopted amount in 2009, but that was partially offset by actual variable costs being $9.26 million (6.1 percent) below adopted variable costs.25 Because of the national economic downturn and a drought in California, it is unknown how much of the reduction in water sales was due to conservation efforts. Reduction in water sales could also have been caused by economic factors like reduced consumer income, loss of customers due to home foreclosures, or slower-than-anticipated customer growth due to slowed construction of new homes.

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Winner of the 2011 PolicyMatters Journal Outstanding Policy Article Award charge results in increased rates for customers and, assuming customers do not change their water consumption, in higher water bills. On the other hand, if the utility sells more than its forecast because it unexpectedly gains customers, under decoupling it will pay back the excess quantity-charge revenues to customers through a credit, reducing customers bills. Assuming that an unexpected gain in customers is just as likely as an unexpected loss of customers, the average effect on utility bills will be zero. However, bills will become more volatile, leading to increased ratepayer risk. Decoupling could also increase ratepayers risk of being adversely affected by an economic recession. If the average ratepayers income decreases during an economic recession, she may reduce water consumption in order to save money. However, if all ratepayers respond similarly, the utility will not meet its sales forecast and will then compensate for the lost quantity-charge revenues with a surcharge, increasing water rates. Thus, when ratepayers are viewed in the aggregate, decoupling limits their ability to reduce their water bills during an economic recession even though they use less water, and it increases their risk of being adversely affected by a recession. On the other hand, decoupling could decrease ratepayer risk by reducing water bill variation caused by weather fluctuations. Dry, hot weather generally causes water consumption to go up, as customers use more water irrigating their lawns. Without decoupling, the utility sells more water, collects more quantity-charge revenue, and makes more money. The average ratepayer is faced with higher water bills. Under decoupling, however, the utility refunds the excess quantity-charge revenues to the ratepayer through a credit. When abnormally wet weather causes ratepayers to use less water, the reverse occurs. Without decoupling, the utility sells less water and makes less money, while customers enjoy lower bills. With decoupling, the utility collects lost quantity-charge revenues through a surcharge added to customers bills in the future. Again, assuming that wet weather and dry weather are equally likely to occur, in the long run the ratepayer pays the same amount and the utility collects the same amount with or without decoupling. However, decoupling reduces revenue volatility for the utility and reduces bill volatility for the ratepayer, thus reducing risk for both. One might ask how decoupling can reduce ratepayer risk when changes in water use are due to weather but increase ratepayer risk when changes in water use are due to an economic recession. In the case of an economic recession, the ratepayer changes her water use with the intent of reducing her water bill, but decoupling limits her ability to do so. In this case, decoupling prevents the ratepayer from varying her water bill to her advantage. With changes in use due to weather fluctuations, however, the ratepayer is forced to change water use due to weather patterns outside of her control. In this case, decoupling protects the ratepayer from variability in her water bill that she would prefer to avoid. www.policymatters.net Since there is a significant time lag between when revenue under- and over-collections occur and when decoupling surcharges and credits are imposed, the above descriptions of the effects of decoupling on water bills and bill stability are a considerable simplification of reality. For instance, even with decoupling, weather fluctuations will still cause water bills to go up and down over time. A customer will spend more on water in a dry year, but might not receive a decoupling credit until a year or two later. Nevertheless, while the customers bill will still rise and fall in the face of weather variability, decoupling will reduce variation in the total amount the customer pays for water over a period of several years. The above examples are not intended to be an exhaustive list of ways in which decoupling can affect ratepayer risk. They only serve to demonstrate that decoupling could increase certain aspects of ratepayer risk while decreasing other aspects. A quantitative analysis would be required to estimate the relative magnitudes of these effects on risk. Based on our limited qualitative analysis, we cannot conclude whether the net effect of decoupling is an increase or a decrease in ratepayer risk. Cost of Capital Reflects Risk Borne by Utility The cost of capital is the rate of return a utility must pay investors to borrow money. For one of their shareholders or bondholders, it is the opportunity cost of investing in a particular utility at a particular level of riski.e., the return they could expect to receive from another investment at the same level of risk.26 With the introduction of the WRAM/MCBA, revenue volatility and corresponding risk for the utility are significantly reduced. As a utilitys risk decreases, the amount it must pay to attract investors should also decrease. However, in practice this will not happen immediately and could take years. In the interim, the investors will receive the same rate of return even though some of the risk they previously faced has been transferred to ratepayers. The CPUC, which determines a utilitys allowed cost of capital (how much the utility is allowed to collect through rates to cover its capital costs), currently does not adjust the utilitys rate of return to account for decoupling. In a 2009 cost-of-capital decision, the CPUC acknowledged that decoupling reduces utility risk, but it did not adjust the allowed cost of capital because it could not determine a precise adjustment to risk.27 In the future, the CPUC could adopt a lower cost of capital for utilities that have decoupling. The lower cost of capital could decrease the rate that customers pay, in effect returning to them some of the benefits of the reduction in the utilitys risk. With Decoupling, CPUC Should Reduce Utilities Allowed Cost of Capital If decoupling removes a significant share of the utilitys traditional revenue risk, it is only logical to ask who, if anyone, asFall 2010Spring 2011

WATER

20

Conserving Regulated Water: Revenue Decoupling, Incentives, and Equity Figure 1. The Effect of lower-than-Anticipated Sales on utility Revenues: Three Scenarios
Utility Sells 10% Less Water than Was Forecasted

Traditional Regulation $250,000 revenue loss $100,000 reduction of variable costs

Traditional Regulation with Conservation Rate Design $560,000 revenue loss $100,000 reduction of variable costs

Conservation Rate Design with Revenue Decoupling $560,000 revenue loss $100,000 reduction of variable costs

WRAM: $560,000 under-collection MCBA: $100,000 over-collection Net WRAM/MCBA: $460,000 under-collection

Utility loses $150,000

Utility loses $460,000

Utility collects $460,000 surcharge and loses nothing

sumes that risk. Is it transferred to ratepayers, or does it simply disappear? We conclude that a portion of the risk avoided by the utility is transferred to ratepayers, while another portion may simply be avoided, in a mutually beneficial advantage of decoupling. Furthermore, decoupling may reduce some forms of ratepayer risk. Regardless of what impact decoupling has on ratepayer risk, it clearly decreases utility risk and should therefore be associated with a reduction in the utilitys allowed cost of capital. Perceived Conservation Penalty Another troubling consequence of decoupling is the perception of a conservation penalty. Surcharges implemented to recover revenues from sales lost due to conservation can be perceived as unfair to customers. An individual ratepayer who has made an effort to use less water will likely see these surcharges as a rate increase. Ratepayers could interpret the decoupling surcharge as a conservation penalty and lose motivation to conserve water. decoupling Is Not a Conservation Program Regulators should keep in mind that decoupling only removes a disincentive to utility promotion of conservation; it does not by itself promote conservation. In order for California water users to successfully adopt sustainable water behaviors, www.policymatters.net

robust conservation measures must be in place. Tiered water rates (IBRs) can be a helpful tool, but they must provide a sufficient price signal for customers to limit their water use. Utilities could be allowed to use rate structures with such shallow increases between tiers that customers are minimally or not at all motivated to reduce use because they do not even notice the difference in their bill. The CPUC could use price elasticities of demand for water to estimate the impact that various IBRs would have on water use. However, in order to know whether the estimated impact is sufficient, the CPUC will need a conservation target to compare it to. long-Term Incentives Finally, although decoupling addresses short-term disincentives to conservation, it does not address longer-term disincentives that utilities may face. A utility might be able to grow its business in the long term by selling more water. Conservation measures, particularly those written into law in SBx7-7, might require IOUs to do the opposite, reducing their percapita water sales. While decoupling protects utilities from short-term revenue losses within the rate-case cycle, it does not take away any incentive utilities might have to grow their business in the long term. Of course, there are other ways a utility can grow, such as serving more customers and investing Fall 2010Spring 2011

21

Winner of the 2011 PolicyMatters Journal Outstanding Policy Article Award in more sophisticated infrastructure. But if a utilitys strategy is to grow its business over the long term by selling more and more water to its customers, decoupling will not discourage it from doing so. To the extent that long-term incentives exist for utilities to sell more water, other regulatory mechanisms may be needed to enforce conservation goals such as those laid out in SBx7-7. Regulators could use the experience of the electricity industry to examine these long-term incentives, since the energy sector has used decoupling for thirty years. However, differences between the energy and water sectors must be heeded. Whereas long-term conservation pressures have led the energy sector to seek efficiencies and alternative fuels to meet conservation goals, in the water sector long-term pressures may be addressed through increasing capital intensity, e.g., by building wastewater recycling plants and desalination plants. These measures are not undesirable per se, but the CPUCs policy decisions should explicitly consider such long-term consequences. lose money if they sell less than their adopted sales forecast. This throughput incentive puts the objectives of the IOU in conflict with conservation efforts. Revenue decoupling can help California achieve its water conservation goals by relieving this conflict. To meet these goals, the CPUC should expand its decoupling pilot program to include all IOUs under its regulation. Due to several concerns with decoupling, before doing so, regulators should take the following actions: Because decoupling itself is not a conservation program, the CPUC should evaluate the impact of IOU conservation programs to ensure that utilities are engaging in effective price and non-price conservation efforts. Since decoupling relieves IOUs of most revenue risk associated with sales fluctuations, IOU shareholders should no longer be compensated for these risks that they no longer bear. The CPUC should lower the allowed cost of capital for utilities with decoupling programs to account for the reduction in revenue risk. Finally, regulators should study the long-term conservation incentives for IOUs with decoupling.

WATER

cONclUSION
Because investor-owned water utilities regularly interact with their customers, the water users, they are well-positioned to promote conservation efforts. However, under traditional regulation, IOUs profit from increasing their water sales and

Greg Leventis is a Master of Public Policy student at the University of California, Berkeleys Goldman School of Public Policy. His policy focus is water and energy as they relate to conflict. He recently finished an internship at the California Public Utilities Commission working on water revenue decoupling, among other issues. John Erickson is a Master of Public Policy student at the Goldman School of Public Policy and a Master of Science student in environmental engineering at the University of California, Berkeley. He is interested in drinking-water infrastructure, particularly in the developing world. He recently finished an internship at the California Public Utilities Commissions Division of Ratepayer Advocates.
Research for this article was done by the authors while working as summer interns in the California Public Utility Commissions (CPUC) Division of Ratepayer Advocates. However, the opinions expressed in the article are solely those of the authors and are not opinions or policies of the Division of Ratepayer Advocates.

ENdNOTES
1. Lisa Bilir, CPUC Division of Ratepayer Advocates, California Water Revenue Decoupling Pilot Programs, presentation at NASUCA 2010 Mid-Year Meeting, slide 2, http://www.nasuca. org/archive/Bilir.ppt.

2. Office of Governor Arnold Schwarzenegger, Gov. Schwarzenegger Takes Action to Address Californias Water Shortage, press release, February 27, 2009, http://gov.ca.gov/press -release/11556/. 3. East Bay Municipal Utility District Board of Directors, Regular Meeting Minutes of May 13, 2008, 46.

4. California Department of Water Resources, California Department of Food and Agriculture, Californias Drought: Water Conditions and Strategies to Reduce Impacts, news release, March 30, 2009, 1719, http://www.water.ca.gov/news/ newsreleases/2009/040209droughtrpt-gov.pdf. 5. Ibid.

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Conserving Regulated Water: Revenue Decoupling, Incentives, and Equity


6. California Senate Bill SBx7-7, text. Legislative Counsels Digest Part 1, Chapter 2, Section b.1, http://info.sen.ca.gov/pub/09-10/bill/sen/ sb_0001-0050/sbx7_7_bill_20091110_chaptered. html. The baseline for this goal is average per capita consumption over a ten-year period ending between 2004 and 2010. Since the goal is on a percapita basis, if the states population grows, it is possible for the state to meet SBx7-7s goals while simultaneously increasing its overall water use. 7. California Public Utilities Commission, CPUC Addresses Water Supply in California, h t t p : / / w w w. c p u c . c a . g o v / P U C / Wa t e r / WaterSupplyCalifornia.htm. 8. California Public Utilities Commission, Water Action Plan, December 15, 2005, p. 3, ftp:// ftp.cpuc.ca.gov/PUC/hottopics/3water/water_ action_plan_final_12_27_05.pdf. 9. CPUC Division of Water and Audits, Standard Practice for Processing Informal General Rate Cases of Water and Sewer Utilities, October 2007, http://docs.cpuc.ca.gov/published/ Graphics/97754.pdf. 10. CPUC Water Division, Rate Design for Water and Sewer System Utilities Including Master Metered Facilities, Standard Practice U-7-W, July 2006, http://docs.cpuc.ca.gov/published/ REPORT/113896.htm. 11. W. Shirley, J. Lazar, and F. Weston, Revenue Decoupling Standards and Criteria: A Report to the Minnesota Public Utilities Commission, June 30, 2008, p. 5, http://www.raponline.org/docs/RAP_ Shirley_DecouplingRevenueRpt_2008_06_30. pdf. J. Eto, S. Stoft, and T. Belden, The Theory and Practice of Decoupling, Berkeley, CA: Energy and Environment Division, Lawrence Berkeley National Laboratory, University of California, Berkeley, 1994, 511, http://eetd. lbl.gov/ea/emp/reports/34555.pdf. Most, but not all, utilities face the throughput incentive. If a utilitys marginal cost of producing additional water is much greater than its average cost of production (perhaps because it must purchase additional water from an expensive source) the marginal cost may be greater than the marginal revenue it earns from selling additional water. This was the case with Suburban Water Systems, a California Class A water IOU. For that reason, Suburban did not institute full revenue decoupling when other California Class A water IOUs did. CPUC Decision 08-02-036, 25, http://docs.cpuc. ca.gov/word_pdf/FINAL_DECISION/79434. pdf. 12. Shirley, Lazar, and Weston 2008, 5. 13. S. Olmstead and R. Stavins, Comparing Price and Non-Price Approaches to Urban Water Conservation, Fondazione Eni Enrico Mattei, September 2008, http://ageconsearch.umn.edu/ bitstream/42919/2/66-08.pdf. 14. Shirley, Lazar, and Weston 2008, 23. 15. California Urban Water Conservation Council, Best Management Plan 11: Retail Conservation Pricing, amended June 13, 2007, http://www. cuwcc.org/BMP-11-Rates.aspx. 16. Stephen St. Marie, Effects of High Tiered Rates on the Financial Stability of Regulated Utilities and Necessary Regulatory Response, with Application to Water Utilities, CRRI Western Conference, June 2324, 2010. 17. In some cases, nonprofits, counties, or cities are well situated to promote conservation. For example, in Santa Clara Valley Water Districts territory, San Jose and other water utilities rely on the district for water conservation programs. Santa Clara Valley Water District, Water Use Efficiency Strategic Plan, Phase 1, September 2008, http://www.valleywater.org/Programs/ Water_Conservation/Water_Use_Efficiency_ Strategic_Plan_-_Phase_I.aspx. 18. National Association of Regulatory Utility Commissioners, Decoupling for Electric and Gas Utilities: Frequently Asked Questions (FAQ), Grants and Research Department, Washington, D.C., September 2007, 6. 19. CPUC Decision 08-08-030, August 21, 2008, 2, http://docs.cpuc.ca.gov/WORD_PDF/FINAL_ DECISION/87061.pdf. 20. CPUC Decision 08-02-036, February 28, 2008, http://docs.cpuc.ca.gov/word_pdf/ FINAL_DECISION/79434.pdf. CPUC Decision 08-08-030, August 21, 2008, p. 2, http:// docs.cpuc.ca.g ov/WORD_PDF/FINAL_ DECISION/87061.pdf. 21. It is important to note that the MCBA tracks all changes in variable costs, not just those due to changes in the amount of water sold. For instance, if a utilitys electricity costs increase because it uses electricity less efficiently, the WRAM/MCBA will allow it to recover the cost increase from ratepayers. This is troubling, since it may remove the utilitys incentive to minimize its variable costs. 22. This description of the WRAM/MCBA mechanism is somewhat simplified. For a more detailed explanation, see CPUC Decision 08-02036. 23. Underselling will not always result in an MCBA over-collection. If a utilitys per-unit variable costs increase substantially (because electricity prices rise, for example), the utility can still register an MCBA under-collection even though it produces less water than it planned to. 24. Bilir, slide 12. 25. Under-collection statistics are from Cal Water Advice Letter #1983 filed with the CPUC April 30, 2010. These statistics include only 21 of Cal Waters 24 districts. We have excluded Antelope Valley, Kern River Valley, and Redwood Valley, three of the companys smaller districts, because analyzing the under-collection data for them in the advice letter would have presented complexities that required more time than was available, and revenues were small relative to revenues in the larger districts that were included. 26. Investorwords.com, Cost of Capital: Definition, http://www.investorwords.com/ -1153/cost_of_capital.html. 27. CPUC Decision 09-05-019, May 7, 2007, 46, http://docs.cpuc.ca.gov/WORD_PDF/FINAL_ DECISION/100837.pdf.

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PolicyMatters Journal

Meeting the Need for Primary Care Physicians under Expanded Health Care
TEaL V. BrowN
EDITED BY EMILY GERTH AND PILAR MENDOZA

There is a shortage of primary care physicians (PCPs) in the United States relative to the overall population, and that shortage will be exacerbated as health care reform increases the number of Americans who have health insurance. Medical students have strong disincentives to become PCPs, including comparatively low pay, high levels of medical school debt, and the danger of medical malpractice suits. This paper outlines a number of potential interventions to address the PCP shortage, and these interventions can be broken down into two broad categories: those aimed at reducing the demand for PCPs and those aimed at increasing the overall supply of PCPs.

PHYSICIANS

The current supply of primary care physicians (PCPs) is insufficient to meet the demands of expanded health care coverage in the United States. While the supply of PCPs is expected to grow by 2025, demand is expected to outpace this growth, resulting in a primary care provider shortage.1 This shortage is most acute in rural areas and poor urban centers. Attaining expanded health care in the United States, without overwhelming the current physician supply or further exacerbating the problems faced by underserved populations, will require a systematic change in health care provider services and graduate medical education financing. Failing to address this problem could harm expanded coverage efforts. At the federal level, the government should consider pursuing two simultaneous strategies: first, to decrease the overall demand for PCPs; and second, to increase the supply of PCPs. Promising initiatives to decrease demand for PCPs include: expanding nurse practitioner and medical assistant responsibilities; investing in research, design, and deployment of medical technology and information-sharing systems; expanding and supporting community health programs in targeted geographic areas; funding military-to-civilian transition for military medical personnel committed to medical professions. www.policymatters.net

Efforts to increase the overall supply of new PCPs could include: increasing funding of loan repayment programs, including the National Health Service Corps (NHSC); securing adequate funding for the Title VII health professions programs,2 which support both the training of PCPs and their placement in rural and poor urban areas; legislating tuition-increase caps on medical schools.

BacKgrOUNd
Health Care: Expansion of Coverage in the united States According to a January 2010 Gallup poll, 16.3 percent of United States residents are uninsured. At present, each year, the federal government spends approximately $54 billion to care for these uninsured people.3 The United States is the only developed nation without universal health care.4 There is an estimated unrealized economic benefit of forgone population health totaling approximately $1.007 trillion annually.5,6 There is widespread support for expanded health care coverage in the United States and, provided that Congress adequately funds it, the recent health reform legislation should result in a significant expansion. Failing to simultaneously adFall 2010Spring 2011

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Meeting the Need for Primary Care Physicians under Expanded Health Care Figure 1. demand and Supply Scenario: Present demand and Predicted universal Health Coverage

Reprinted with permission of the American Association of Medical Colleges.1 dress the need to increase the supply of primary care physicians will hamper efforts to expand coverage. Primary Care Physicians: Supply Shortage Will Worsen with Expanded Health Care Primary care physicians serve as the entry point for substantially all of a patients medical and health care needs. A PCPs areas of treatment are not limited by problem origin, as with other specialties, but rather run the gamut from organ systems to broken toes to hard-to-diagnose infectious diseases. Estimates of per-person need for PCPs range from 60 to 80 PCPs per 100,000 patients,7 while estimated actual numbers of PCPs range, by state, from 30 to 61 per 100,000 patients. Most developed nations, in order to support broad health care, have a PCP-to-specialist ratio of approximately 50/50. In the U.S., by contrast, that ratio is close to 30/70.8 A massive expansion in health care insurance coverage would dramatically increase demand for PCPs. A 2008 Center for Workforce Studies report finds that universal coverage would increase the supply shortage nationally by over 30,000 primary care physicians.9 Above (Figure 1) is a predicted demand and supply scenario under expanded health coverage. While it is unclear how close the 2010 health reform legislation will move the United States www.policymatters.net toward universal coverage in practice, the estimate of the demand for PCPs assuming universal coverage shows that, as coverage expands, the gap between supply and demand of PCPs widens.

PrINcIPal rEaSONS FOr THE PrIMary carE PHySIcIaN SHOrTagE


Medical students are increasingly choosing specialty disciplines over primary care training. The choice to pursue specialties other than primary care is propelled primarily by three factorsincome, geography, and liabilitywith national demographic changes playing a smaller, but still significant, role. Income disparity between Primary Care Physicians and Higher-Paying Subspecialties In contrast to specialty doctors, much of a PCPs salary is paid by Medicare, Medicaid, and the State Childrens Health Insurance Program (SCHIP). These social welfare programs pay set fees for services, as opposed to the monthly buy-in insurance fees paid by higher-end health care plans. Furthermore, federal social welfare programs will not cover the high cost of luxury (non-necessity) medical services. Thus PCPs receive lower fees than specialty doctors. Fall 2010Spring 2011

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PolicyMatters Journal Among all medical school disciplines, PCPs bring in the lowest salaries: The mean PCP salary is approximately 30 percent of the mean salary for either a radiologist or an orthopedic surgeon. PCPs also have the lowest percentage of filled residency positions, which is 42.1 percent compared to a high of 93.8 percent, again for radiologists and orthopedic surgeons; there is a significant correlation between mean salary level for different medical school disciplines and the percentage of filled residency positions for those disciplines, suggesting that lower pay may be discouraging students from becoming PCPs.10 This wage discrepancy translates to a longer payback period for medical school loans and a strong disincentive to become a PCP. Geographic Impediments to Primary Care Physician Placement The insufficient number of primary care physicians in the United States disproportionately affects rural and poor urban communities. Most medical students do not come from either rural areas or poor urban centers, and most medical students return to their homes or move to major, generally wealthy, urban centers to begin their careers. Also, the average medical student requires six to eight years of education prior to field placement. By the time medical students graduate, most make decisions based on lifestyle and family-building, and are less flexible with regard to field placement locations. liability Concerns due to breadth of Services and Relative lack of Expert Assistance Primary care physicians are medical generalists and treat large, diverse populations for a wide variety of ailments. Though not a specialist, a PCP may be required to diagnose very specialized conditions, often without expert assistance. This is particularly true in communities with underfunded health facilities. As a result, medical students fear the costs of being held legally liable for misdiagnosis or mistreatment. For students selecting career paths, this is often a substantial deterrent from PCP training.11 National demographic Changes According to statistics from the federal Health Resources and Services Administration, elderly people are far more likely to use health services than younger people are. As the demographics of the United States shift and baby boomers retire, the demand for physician services will increase. This demand also overburdens the specialty physician supply, since much, but not all, of this work can be done by primary caregivers. are feasible solutions available to address this problem. Recommendations can be broken into two overarching categories: mitigating demand and increasing supply. Part 1: Mitigating demand for Primary Care Physicians Options for decreasing demand are organized here according to their political feasibility and impact. The first recommendation is simply a funding request. Given the current employment crisis, as well as the dearth of prior research and analysis on this subject, the second recommendation, augmenting the responsibility and authority of nurse practitioners, is considered more feasible than the third recommendation, an expensive investment in medical technology aimed at reducing employment needs. Finally, a politically unwieldy but potentially high-impact partnership with the U.S. military to retrain and employ former military personnel is also recommended. Recommendation 1: Fund Community Health Centers in Underserved Areas Rural communities and poor urban communities will be most impacted as demand for PCPs continues to outpace supply. In underserved areas, community health centers staffed by medical assistants, volunteers, and nurse practitioners often fill the gap. If these staff members are authorized to perform intake and diagnostic procedures, it may be possible to support much of a rural communitys needs without either building a new facility or relocating PCPs to an underserved area. In addition, evidence suggests that some funding previously allocated toward emergency room transportation (to and from hospitals in rural areas) and staffing (in overburdened urban centers) can be used to strengthen community health centers. Recommendation 2: Increase Responsibilities of Nurse Practitioners Distributing workload among medical personnel will decrease the need for physicians, who are difficult to place in underserved communities. Nurse practitioners (NPs) perform a broad array of tasks that comprise the bulk of patients needs at primary care medical facilities. NPs can order, perform, and interpret diagnostic tests from lab work to x-rays; they can diagnose and treat acute and chronic conditions, including diabetes, high blood pressure, infections, and injuries. NPs are also authorized to prescribe medication and manage a patients overall care. Since NPs undergo less training than physicians, they enter their careers with less debt. NP training schools are more prevalent in and near underserved areas than medical schools are. For this reason, reliance on NPs for other duties currently performed by PCPs would alleviate some pressure for physicians to relocate to these areas.12 The underutilization of NPs is largely attributable to legislative opposition from powerful political organizations and Fall 2010Spring 2011

PHYSICIANS

rEcOMMENdaTIONS
The national PCP shortage is on the radar of federal policymakers. During the health care reform debates of 2009, the shortage came up in almost every congressional debate. There www.policymatters.net

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Meeting the Need for Primary Care Physicians under Expanded Health Care their associated lobbyists. Physicians organizations, including the American Medical Association, are reluctant to relinquish responsibilities, primarily for fear of losing wages to NPs. For example, California recently passed a law allowing NPs to administer anesthesia to patients unsupervised. This prompted the California Medical Association and the California Association of Anesthesiologists to file a joint lawsuit claiming the shortage of anesthesiologists is not severe enough to warrant this revision of responsibilities.13 However, given the vast increase in demand for PCPs with the newly passed health care legislation, this opposition may diminish. Recommendation 3: Invest in Medical Technology Information technology (IT) exists that will allow medical facilities to communicate with each other regarding diagnoses, lab work, and patient history. This type of information-sharing system could make many traditionally PCP-only duties unnecessary: intake procedures, repetitive testing, lab testing, and, perhaps most important, obtaining expert assistance would all be possible without having to move PCPs to underserved areas. However, these technologies lack necessary funding for both development and deployment. The Senate Finance Committee issued a report in May 2009 proposing that additional funding be allocated directly to IT development for the medical sector.14 The Patient Protection and Affordable Care Act (HR 3590 1561) called for the development of new technologies through the Health Information Technology Policy Committee (HIT Committee) no later than 180 days after its approval. Now, more than a year later, recommendations for the safe, efficient, and affordable deployment of health IT remain unreleased.15 Nonetheless, there is strong political support for the research and development of IT systems to streamline health care in both wellserved and underserved communities. Recommendation 4: Transition Former Military Personnel to Community Medical Service There are many trained medical corpsmen returning from combat. A federal bill directed at transitioning these medical military personnel into civilian life, similar to the GI Bill, may be politically and economically prudent. The government has invested in their training, and the political appeal of finding jobs for them is strong. Many medical military personnel come from underserved U.S. communities and may be willing to return home in a new, medical capacity. During the corpsmens transition period from military medical work to community medical service, their salaries and further medical training specific to rural and underserved-area medical needs could be funded by the Department of Defense (DOD) or the Department of Veterans Affairs (VA), each of which has readier access to funds than many health-care-specific agencies. Legislation encouraging DOD or VA support of rural medical needs within the U.S. might substantially contribute www.policymatters.net to meeting the needs of underserved communities at a politically achievable cost. Currently, data are scarce regarding money already invested in military medical personnel training. The DOD has commissioned studies to determine training time in military graduate medical education (GME) compared to civilian GME, as well as the burden placed on military GME by the ongoing military presence in Afghanistan and Iraq.16,17 The results of this study, as well as further analysis, are necessary to understand the political and economic impacts of this recommendation. PART 2: Increasing Supply of Primary Care Physicians Recommendations for increasing the supply of PCPs are again structured here according to projected political feasibility and impact. The first recommendation, expanding funding for the National Health Service Corps, is directly aimed at increasing PCP supply in underserved areas. Further, funding alreadyexisting federal programs eases implementation. Similarly, it is easier to increase funding for loan repayment to address shortages in the health care workforce than to pass legislation for tuition-increase caps for medical education institutions; therefore, the cap is listed last. Recommendation 5: Expand Funding to Bolster the National Health Service Corps The National Health Service Corps (NHSC), a component of the Department of Health and Human Services (DHHS), is the largest loan repayment program for medical students. The NHSC repays loans to students committed to working with underserved communities, called high-need health professional shortage areas (HPSAs). Currently, there are 3,800 health care practitioners providing health care services through the NHSC. Forty percent of their clients are uninsured, and an estimated four million people rely solely on these practitioners for all of their health needs. Funding for the NHSC doubled in the fall of 2009 via the American Recovery and Reinvestment Act, allowing for the addition of 4,000 more loan-repayment scholars and for more underserved communities to receive assistance. The NHSC believes this new investment will double field strength by 2011.18 This is clearly a step in the right direction, but it may not be sufficient. Perhaps more importantly, without substantively addressing medical students preferences, this funding will do little to alter the status quo. Opposition to funding the NHSC stems from a fear that increased funding will not increase program utilization. Loan repayment through the NHSC requires a two- to four-year commitment to work in an underserved community, which students are reluctant to make, resulting in underutilization of the program. However, data and historical trends encourage investment in the NHSC program: The last time funding was increased, in 2008, enrollment in the proFall 2010Spring 2011

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PolicyMatters Journal gram increased accordingly. Recommendation 6: Secure Funding for Title VII Health Professionals Programs Title VII student loans were designed by Congress to address shortages in health care professionals. These low-interest loans are given on a need basis for research and general practitioner studies. Title VII loans are funded through interest on the repayment of other student and graduate loans. In 2006, President George W. Bush attempted to rescind over half of the funds held by Title VII. This attempt failed in Congress.19 However, it is advisable to secure this funding in perpetuity. It would also be prudent to expand funding beyond the present loan pool. Securing additional funding now would allow for the number of PCP students receiving medical education to increase dramatically and ramp up supply. Furthermore, because the funding is allocated toward general shortages in the health care workforce, there is flexibility to adjust to future changes in the health care system. Recommendation 7: Legislate Tuition-Increase Caps for Medical Schools Median private medical school tuition and fees increased by 50 percent between 1984 and 2004. Median public medical school tuition and fees increased even moreby 133 percentduring that same time period as a result of states tightening public education budgets.20 Tuition increases at this pace are unsustainable and certainly harmful to efforts to increase the number of PCPs in the United States. Legislation should cap tuition increases for private schools and mandate state-level maintenance of comparative public graduate medical education tuition and fees. This would decrease student debt and allow for more flexibility in job choice.

cONclUSION
The obstacles posed by the shortage in PCPs can be overcome by appropriate allocation of funding, targeted loan-repayment programs, and careful redistribution of responsibilities in underserved areas. Ignoring the swiftly growing demand for PCPs will result in an overwhelmed health care system, and will be injurious to national efforts toward universal health care. The policy recommendations in this article serve as guidelines for increasing supply and mitigating demand such that universal health care with a sustainable physician supply becomes an achievable goal in the near future.

PHYSICIANS

Teal V. Brown is a Master of Public Policy student at the Goldman School of Public Policy, University of California, Berkeley. Prior to beginning her graduate work in the fall of 2009, Teal was an associate with the Aspen Institute and program manager of the annual Aspen Ideas Festival. At present, Teal researches stove distribution mechanisms in Sudan for the Berkeley Darfur Stove Project and is a graduate student instructor of business ethics and politics in the Haas School of Businesss undergraduate program.

ENdNOTES
1. M. Dill and E. Salsberg, The Complexities of Physician Supply and Demand: Projections Through 2025, Center for Workforce Studies, American Association of Medical Colleges, November 2008. 2. B. Harrison et al., Title VIIs decline: Shrinking investment in the primary care training pipeline, October 2009, http://www.graham -center.org/online/graham/home/publications/ onepagers/2009/op61-title-vii.html. 3. Gallup-Healthways Well-Being Index, Percentage of Uninsured in the U.S. Remains Elevated, January 2010. 4. J. Hadley, J. Holahan, T. Coughlin, and D. Miller, Covering the Uninsured in 2008: Detailed Examination of Current Costs and Sources of Payment, and Incremental Costs of Expanding Coverage, Kaiser Commission on Medicaid and the Uninsured, August 2008, http:// www.kff.org/uninsured/upload/7809.pdf. 5. D. Light, Universal Health Care: Lessons From the British Perspective, National Institutes of Health, September 2002. 6. R. Schoeni and W. Dow, Economic Value of Improving the Health of Disadvantaged Americans, technical report, Overcoming Obstacles to Health: Report from the Robert Wood Johnson Foundation to the Commission to Build a Healthier America, January 2008.

7. J. Hadley and J. Holahan, The Cost of Care for the Uninsured: What Do We Spend, Who Pays, and What Would Full Coverage Add to Medical Spending?, Kaiser Commission on Medicaid and the Uninsured, 2004. 8. J.M. Colwill, J.M. Cultice, and R.L. Kruse, Will Generalist Physician Supply Meet Demands of an Increasing and Aging Population?, Health Affairs 27 (2008): 23241. 9. J. Arvantes, Primary Care Physician Shortages Can Be Traced Largely to Pipeline Issues, American Association of Family Physicians, September 2009, http://www.aafp.org/online/ en/home/publications/news/news-now/ professional-issues/20090923medpac-pcps.html. 10. J. Groch, Primary Care Physician Shortage Linked to Lower Income, MedPage Today, September 2008. 11. Interview, Dana Mueller, MD, General Practitioner, School of Medicine at the University of Virginia. 12. S. Christian, C. Dower, and S. Robitaille, Scope of Practice Laws in Healthcare: Rethinking the Role of Nurse Practitioners, Center for the Health Professions at the University of California, San Francisco, January 2008. 13. C. Clark, Doctors Sue to Stop Nurse Anesthetists from Administering Anesthesia Unsupervised, HealthLeaders Media, February 2010.

14. U.S. Congress, Senate Finance Committee, Expanding Health Care Coverage: Proposals to Provide Affordable Health Care Coverage for All Americans, May 2009. 15. HR 3590, Patient Protection and Affordable Care Act, 111th Congress of the United States of America. 16. U.S. Census Bureau, Table No. 493: Military Personnel and Expenditures, Statistical Abstract of the United States: 2010 (129th Edition) Washington, D.C., 2009, http://www.census.gov/compendia/ statab/cats/national_security_veterans_affairs/ military_personnel_and_expenditures.html. 17. E. Burckhalter, Graduate Medical Education in the Department of Defense, Journal of Military Medicine 161(2)(1996): 1024. 18. U.S. Department of Health and Human Services, Key Facts About the National Health Service Corps, http://www.hhs.gov/recovery/programs/ nhsc/nhscfactsheet.html. 19. M. Shick, Title VII Student Loan Programs, American Association of Medical Colleges, http:// www.aamc.org/advocacy/library/laborhhs/ labor0028.html. 20. American Medical Association, Advocacy Policy based on the AAMC 2009 Graduate School Questionnaire, http://www.ama-assn.org/ama/ pub/about-ama/our-people/member-groups -sections/medical-student-section/advocacy -policy/medical-student-debt.shtml.

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A Conversation with Former California Senator Gloria Romero

Improving Education and Closing the Achievement Gap: A Conversation with Former California Senator Gloria Romero
INTERVIEW bY ENRIquE RuACHO, VIANEY NuEz, ANd dANNY YOST, JR.
Former California Senate Majority Leader Gloria Romero, Ph.D., represented East Los Angeles in the California State Assembly and Senate from 19982010. She is now the California State Director for Democrats for Education Reform. She was the first woman and minority to chair the California Senate Education Committee. In this position, she advocated for education reform and civil rights. Her experience includes authoring Californias Parent Trigger legislation and Californias Race to the Top, a prominent part of President Obamas education reform agenda. PolicyMatters sat down with Senator Romero on March 29, 2011, to discuss many aspects of education policy, including her parent trigger legislation, higher education, the disconnect between funding and equity in performance, and how Democrats represent both students and teachers.

Sen. Gloria Romero earned her bachelors and masters degrees from California State University, Long Beach, and her Ph.D. in psychology from University of California, Riverside. She has taught at the University of Southern California and at her alma mater, CSU Long Beach. Prior to serving in state office, Romero was elected to the Los Angeles Community College Board. PolicyMatters Journal (PMJ): You wrote in the Huffington Post that Our kids only get one shot at an education . . . that prepares them for a successful future. Every year that we spend arguing and delay making the necessary reforms, we fail another year of should-be graduates. Given the tax revenue climate gripping California and other states, how should the not-so-Golden State align its priorities if taxes are not extended by voters? Senator Romero: This is not about the money. Money matters, but the Getting Down to Facts study by Stanford clearly showed that even if we were to pump millions into the same system, were going to get the same outcomes. So the question is, What do we want? I live in Lincoln Heights/El Sereno, Los Angeles. Right around the corner from me: Lincoln High School, the site of the very first walk-out in the 1960s, when Latino students blew out of the schools and just said, Were not getting an education. www.policymatters.net

Fifty percent dropout rates back then; kids not going to college. These were supposedly the glory days, when we had all the money, right? So its not about the money. It comes down to priorities, values. Follow the money. Even if we get the taxes extended, without reforms, were going to keep getting the same outcomes. So I look at it and think: my wish would be that if we are to extend taxes, these should be tied to needed reforms. The last teacher in, first teacher out? Lets link teacher performance to student outcomes and be able to identify teacher quality. Otherwise, we are simply going to be saying, Just give me, give me, give me, and still get the same output. Its not acceptable. PMJ: Ronald Reagan once called higher education a privilege, not a right. Given that the U.S. economy has undergone structural changes toward an information-based economy since he was the governor of California, how would you respond if such a statement were made today? Senator Romero: Higher education is more critical than its ever been. It is a global economy. We know that today the major competition is not between the Republicans and the Democrats. Its between the United States and the rest of the world. We can go to China, to India, to RusFall 2010Spring 2011

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sia, South Korea, and find different levels of economic prosperity linked to educational achievement. So rather than even talking in terms of privileges and rights, higher education is a necessity. This is an age of information. You cannot excel in this economy any longer with a high school diploma of the past. It is more complicated, and we need greater cognitive skills and intelligence in order to conduct the work that we do. So, I think that it is important for us to fight to maintain access to higher education. I come from the community college systemthat was my entrance. To me, when we look at the community colleges, those are what I would call the Ellis Islands. Theyre the first landing. I would like to see greater investment and support of community colleges. In particular, I would like to see more dual-enrollment systems and greater opportunities for transfers between community college and four-year universities, like the Cal State system in which I happen to be teaching. And then there are the UCs, which are critical in terms of research and support. I think there is a way that we can construct and develop them so that they can further collaborate with each other. We tend to keep them in silos. Were not always sure what each of them is really doing. But given that resources are scarce, I think that there are smarter ways to have them interface and link with one another. And I would definitely highlight access to community colleges as a critical role in increasing our higher educational achievement. PMJ: Career technical education, what some might call an alternative to a university education, is also identified as an approach to narrowing the achievement gap. Do you think this is an effective approach? Senator Romero: Im bothered by this question. First of all, everybody should have career technical education. I dont care if youre a history major, an English arts major, or a civil engineering major. But the way that we have historically looked at career technical educationand these were the old shop classes in my dayscreates the question: Who are we targeting? Who are we telling, basically, You go there! It comes down to tracking. So if we could develop a means by which career technical education is more than just a fancy term to keep doing the tracking that we historically have seen, then we can open up the door and look at it. But right now, the question is: Who are we tracking, and for what purpose? Id like to see continued emphasis on education and access to higher education. Weve seen from the global economy that we need more college graduates. Id like to see great rigor and relevance in career technical education. Theres certainly a role and a need. Then, probably, we all should have access to career technical education. I just dont want to see the old tracking.

PMJ: Earlier this month, the California legislature increased the age minimum for kindergarten. At the same time, the legislature also eliminated state-funded child care. What do you think will be the impact on education? What would you recommend to families and communities who will pay the price? Senator Romero: This was an interesting issue, and this question has been around for a long time. Theres long been the argument that there is too much of a disparity in age gap in kindergarten, and we did begin to see the statistics. A child who might be four-and-a-half or four-and-threequarters is cognitively at a different stage than somebody who may be five-and-a-half or six. We kept seeing over and over the data coming that once you enter school, if you are at the lower end of that age gap where you dont have the background, you dont have the reading skills, even the socialization skills, you get left behind. You enter in behind and you stay behind. So that data was pretty clear-cut and convincing. The argument overall was to maintain kindergarten until age six. Having said that, it does, of course, raise the issue of who is there. Now, to a large extent, this is going to affect especially Latino students given the numbers and the growth patterns in the state. Im bothered of course, too, by the cutting of funds on child care. It is a budget crisis, so cuts are going to be happening regardless. I think that it shows that we have to have an early focus on literacy, really on some basicsreading. Reading is a gateway skill. If you can read, you can learn, you can excel, you can move forward. So I think as we start looking at cuts in certain areas, I would really begin to focus on looking at early childhood development, as early as we can. To a certain extent, you cant do math if you cant read the problem. So it still comes down to reading and literacy. And thats where I think we would start if you have to prioritize. As far as parents, we ask, Who pays the price overall? Next year theres already another projected shortfall. So thats why I think we can do this year after year, talking about budget cuts, yet there wont be extensions for five years. I think its an opportunity to do some reforms. There is going to be some short-term immediate pain as we all feel the brunt of budget cutbacks, and less slots, and hurting of especially poor people who depend upon child care programs. But I think it compels us to think about what types of reforms we should demand in education to have it ready. Its not going to be a pretty year. And it hasnt been for a few years, but it is, as people are saying, the new normal. PMJ: CalWatchdog.org describes the parent trigger law as only a Band-Aid on a gaping wound. Would you elaborate on the purpose of the law in the context of other reform measures? Is it central, or is something deeper needed?

CONVERSATION

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A Conversation with Former California Senator Gloria Romero

Senator Romero: The bottom line is: Do we believe in parents having the rights? When I wrote that parent trigger law, I got limited to seventy-five schools in the negotiations, and I would have put in for many more. But I fundamentally believe that parents are the only sector of the public education system that doesnt have a conflict of interest. They dont have an economic stake in the public education system, except for the welfare of their childrenhow their children excel. Parents really are the ones who are not fighting for a piece of that economic pie, and they have the right to advocate for their children. Its about empowerment. Saying the parent trigger law is a Band-Aid is like saying the Preamble to the United States Constitutionwe, the people, have the right to petition our governmentis a Band-Aid. I look at this thinking about the Compton parents, thinking about my mother, thinking about others who are bound by zip code and in a school where we are essentially trapped. Theres no way out and this district is not changing, because, you know what? You bring me money. You are my debit cards. Its a fiefdom, its territory, its turf! And with school districts, they will not make the changes because its in their economic interest not to do so in their own balance sheets. Then parents do have the right to say, We the people with our John Hancock . . . thats as democratic as democracy can get! I think it is empowerment. Its power to the parents. Thats not a Band-Aid. That is, I think to me, a real signal that parents care about their children, will fight for their children, and that we as a state should not hinder or block parents understanding that education is what enables us to even have access to an American dream. PMJ: The Democratic Party simultaneously represents many public education workers and so many parents of their struggling clients the youth. How could the party reconcile the divergent interests of the two camps? Who represents the struggling youth and their parents in the party? Senator Romero: Thats a product of just how everything is entangled. I think the reason we started Democrats for Education Reform is we believed there is a real problem in our public education system. But the Democratic Party has become very entrenched, in terms of who contributes and who maintains, and it becomes very hard to go up against the money that is fed to pump the machine. So theres great complacency. By the same token, we find that within these interests, there are divergences. I think its more a question of looking at disconnects, a disconnected leadership from its rank-and-file. Because even as I talk about teachers unions or other public sector workers, like for example SEIU, its important to recognize that its not just this monolith. Many rank-and-file teachers and others will chalwww.policymatters.net

lenge their own executive boards of their unions. And were seeing more and more of that happening. I think thats good. I think thats again just saying, Im examining the conscience of my own organization. And saying, Dont block education reform in my name. I dont think any longer that change is coming from Sacramento. Its got to be pushing, its got to be mobilizing, its got to be people working with other parents in Compton or community groups in San Jose or Sacramento. But probably one of the last places it will be in is Sacramento because of the entrenched interests. But thats where you build. We have to build coalitions and movements in public education, and rekindle a civil rights movement centered around education. PMJ: How much of the educational achievement gap has to do with issues such as student motivation, parent support, and home environment? Does policy have a role to play in these arenas? Senator Romero: That becomes a those kids argument, and I have heard that too often. I believe every kid can learn. I believe that a teacher is paramount and is the most important variable in a childs educational life. I have found that in communities of high poverty and children of color, high teacher turnover is facilitated and promulgated by contracts, rules, and policies. That is not acceptable. Absolutely every child is a responsibility. And parents, I believe, are the first teacher and have a responsibility. But even when I try to write laws giving parents power, like parent trigger, the same special interests that complain about those parents are the first ones to stand up and say, You cant have that power; thats us! So theres a real contradiction here. I think that it is about the policies that are promulgated by school districts that, for too long, have disenfranchised students opportunities to learn. At the same time, I think I want to do a parent empowerment campaign. I want parents to know not only their rights, but their responsibilities. I want to be able to provide laws and opportunities that give rights to parents. If people are really sincere when they say the parents are responsible, then they should be the last ones to stand up and complain about any laws, whether its parent triggers, open enrollment, charters, you name it. When parents say, I want to have a say in my kids education, then dont block me when I mobilize in order to try and effectuate that change. We cant talk out of both sides of our mouths. PolicyMatters would like to extend a special thank you to Vianey Nuez of the Goldman Latino Speaker Series, as well as the Youth Policy Committee, the Graduate Assembly, and the Csar E. Chvez Institute at San Francisco State University for making this interview possible. Fall 2010Spring 2011

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The Floating Gasoline Tax: Carbon Dioxide Mitigation and Revenue Generation Potential
DrIES BErGHmaN
EDITED BY JOHN ERICKSON, JOSHUA SMITH, AND HOPE RICHARDSON

Volatility of the price of gasoline leads to uncertainty in the budgets of consumers and businesses. Revenues are needed to help close the gaping federal budget deficit. Greenhouse gas emissions represent an environmental concern that remains unmitigated. The article offers a proposal that addresses all three of these concerns. Pegging gasoline prices consumers face at $4 per gallon, and then establishing a floating gasoline tax would, the author asserts, hold prices steady for consumers while also raising needed funds for the federal government and decreasing climate-change-causing air pollution.

INTrOdUcTION
Gasoline prices are volatile. They usually exhibit strong seasonal variation, but between 2005 and 2009, this variation became much more pronounced. Prices hit an all-time high in the summer of 2008, when a gallon of unleaded regular gasoline cost $4.05.1 Americans responded by drastically reducing consumption. Gasoline consumption is now holding steady around 2008 levels,2 even though prices have dropped dramatically since then.

In 2008, the United States emitted approximately 6,000 megatons of carbon dioxide. While U.S. emissions are stabilizing, they are the second-highest in the world, after those of China.3 Moreover, U.S. residents generate the highest amount of carbon dioxide per capita in the world. The transportation sector accounts for approximately one-third of these emissions. The sharp rise in gasoline prices in 2008, however, precipitated a significant drop in overall consumption: Nationwide carbon dioxide emissions due to gasoline in 2008 were approximately

GAS TAX

Figure 1

Daily per Capita Consumption vs. Price


450 400 350 Cents 300 250 200 150 100 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 Gallons
Price (cents) Gal/person/day

9 -0 Ja n

-0

-0

-0

-0

-0

-0

Ja n

Ja n

Ja n

Ja n

-0

Ja n

Ja n

Ja n

Ja n

-1

Source: EIA; Census

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The Floating Gasoline Tax Figure 2

Floating Tax Rate, Final Price of $4/Gallon


200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0%

36 megatons lower than in the previous year.4 This suggests that once gasoline prices rose enough, the higher price did have an effect on overall consumption. It also suggests that high gasoline prices are an effective tool to mitigate greenhouse gas (GHG) emissions, which are of special concern to policymakers seeking to curb climate change. In this paper, I will examine the potential effect of a floating gasoline tax, which would rise or fall to keep the price at the pump at a certain steady level. To capitalize on the positive environmental externalities associated with high gasoline prices, I will assume a steady price of $4 per gallon. While the choice of $4 is somewhat arbitrary, the $4 price did create a profound decrease in per capita consumption in 2008, as shown in Figure 1 on page 32. In addition, the summer of 2008 saw the first decrease in aggregate vehicle miles traveled (VMT) since the Federal Highway Administration began collecting data on the subject in 1970.5 Accordingly, $4 seems like a good price to illustrate the effects of a floating gasoline tax. To achieve a steady price of approximately $4 per gallon, if the average retail price of a gallon of gasoline were $2.50, the tax amount would be $1.50, the floating tax rate would be 60%, and consumers would pay an average of $4.6 If the average retail price rose above $4, the consumer would still pay $4; the tax would turn into a subsidy, paid with tax revenue from previous months. To maximize positive effects in future years, the final price could be adjusted using the Consumer Price Index to keep pace with inflation. Practically speaking, the exact amount of the tax could be adjusted by a federal agency every week, based on the previous weeks average retail price. Variants of this idea have been discussed for some time. For example, Severin Borenstein proposed a program that would keep the retail price of gasoline steady at around $3 per gallon www.policymatters.net

as long as the wholesale price of oil stays below $82 per barrel.7 Borensteins scheme is different from the one presented in this paper because it bases the tax on the wholesale price of oil, as opposed to the retail price of gasoline. It also presents a price floor (retail prices of gasoline increase when the wholesale price of oil goes above $82 per barrel) rather than a price freeze (retail prices stay the same, even if the wholesale price goes above $4 per gallon). In addition, during the 2008 presidential campaign, the Republican nominee, Senator John McCain, proposed suspending the federal excise tax of 18.4 cents per gallon.8 While McCains proposal is probably the most well-known proposal to amend the gas tax in recent memory, it was very different from the proposal discussed in this paper. His proposal created an unconditional decrease in the retail price of gasoline, while my proposal generally creates an increase in the retail price of gasoline. Moreover, McCains proposal was only a temporary measure, intended to ease the financial strain on consumers during the summer driving season. The proposal outlined in this paper, on the other hand, is intended to be a long-run restructuring of gasoline taxation, and, if implemented, would likely have a substantial effect on consumer behavior. Figure 2 shows what the tax rate would have been from January 2002 to September 2010 using a final price of $4 per gallon (excluding any current taxes on gasoline). The maximum rate is 188%, in February 2002; the minimum rate is 2%, in July 2008;9 and the average rate is 70%. Generally, the floating rate is much higher than the current excise tax of 18.4 cents per gallon (which, on a percentage basis, was 7% in September 2010), and approaches the rates for most European countries. Indeed, the United States has some of the lowest gasoline Fall 2010Spring 2011

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PolicyMatters Journal taxes in the developed world; nearly 120 countries have higher tax rates, including Bangladesh, Gabon, and North Korea.10 In other words, it is highly likely that the United States could sustain much higher gasoline taxes than it currently has. Nevertheless, like most sales taxes, the gasoline tax is considered to be regressive. Increasing the gasoline tax could raise serious equity concerns, because lower-income households would be affected more than higher-income households. For example, during the 2008 gas price spike, many lower-income households experienced significant losses in quality of life because they had to spend more on gasoline than they otherwise would have.11 However, when considering expenditures instead of income, research suggests that low-expenditure households actually devote a smaller share of their budget to gasoline than do their counterparts in the middle of the expenditure distribution.12 Moreover, the tax would have the effect of stabilizing a previously unpredictable portion of household expenditures, which could benefit all households. For example, between November 2007 and June 2008, prices rose by 40%; then, by December of that year, they had been cut in half. These price differences complicated household budgets and made financial planning extremely difficult. After consumers make initial adjustments to a higher price, the floating tax could do much to stabilize household budgets and improve long-term financial planning. While the equity concerns surrounding higher gasoline prices are not to be underestimated, this paper will explore effects on revenue generation and greenhouse gas emissions, and leave a detailed discussion of important equity issues to future papers. ing this value by overall consumption). I estimated the following functional form using multiple regression: Equation 1

Q is the number of gallons of gasoline consumed per person per day; P is the price in cents; U is the unemployment rate; is a constant; represents a dummy variable for each month; and represents the error term. Unemployment is included in the model to control for the economic well-being of both individuals and businesses. If unemployment is high, individuals and businesses generally consume less gasoline, regardless of prices or the time of year. While median income could serve as a better proxy, such data are not available on a monthly basis. Dummy variables for each month are included to control for consistent seasonal variation. I experimented with various functional forms for the demand equation, but these did not meaningfully impact the models accuracy. I used a natural log specification because it yields a constant-elasticity demand curve, rather than having elasticity vary with price. This makes effect size comparison easier. To estimate the regression, I assembled a data set consisting of 105 monthly observations (January 2002 to September 2010) from the following sources: Quantity of gasoline consumed per person per day: U.S. Sales to End Users, Total Refiner Motor Gasoline Sales Volumes. Released December 1, 2010, by the Energy Information Administration,13 divided by monthly population estimates from the United States census.14 Gasoline price in cents: U.S. Energy Information Administration, November 2010 Monthly Energy Review. Released November 24, 2010. Table 9.4., Motor Gasoline Retail Prices, U.S. City Average.15 Adjusted to the Consumer Price Index using September 2010 as a baseline. Unemployment: Labor Force Statistics from the Current Population Survey.16

( )

( )

( )

GAS TAX

METHOdS
To predict the effect of a floating gasoline tax, I estimated a demand equation for gasoline, which allowed me to simply plug in $4 as a price for a given observation. This demonstrates how consumption would have changed (by plugging the original values into the regression, changing price to $4, and noting the difference), how much emissions would have been reduced (by converting individual consumption reductions to nationwide emissions reductions), and how much revenue would have been generated because of the tax (by calculating the tax amount for a given month, then multiplyTable 1. Summary statistics for key variables
Variable Price in cents (Sept. 2010 dollars) Daily per capita consumption (gal) Monthly consumption (thousand bbl) Unemployment rate (percent) Observations 105 105 105 105 Mean 249 1.276 275,975 6.2

Std. Dev. 60 0.044 12,628 1.8

Min 139 1.159 238,713 4.4

Max 406 1.358 298,827 10.1

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The Floating Gasoline Tax

Table 2. Regression Results


Variable Natural log of price Natural log of unemployment February March April May June July August September October November December Constant Coefficient -0.04535 -0.08575 0.024895 0.034106 0.051717 0.070301 0.078504 0.085863 0.089023 0.040561 0.051056 0.043448 0.049704 0.593789 Standard Error 0.006082 0.005531 0.006709 0.006726 0.006765 0.006797 0.006808 0.006807 0.006809 0.006809 0.006965 0.006931 0.006916 0.035545 T-score -7.46 -15.5 3.71 5.07 7.64 10.34 11.53 12.61 13.07 5.96 7.33 6.27 7.19 16.71 P less than 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 0.001 95% Conf. Interval -0.05744 -0.09673 0.011569 0.020745 0.03828 0.056799 0.06498 0.072342 0.075498 0.027036 0.037221 0.029681 0.035966 0.523183 -0.03327 -0.07476 0.038221 0.047467 0.065155 0.083803 0.092027 0.099384 0.102548 0.054086 0.064892 0.057216 0.063442 0.664395

rESUlTS
Model Estimate Estimating the regression yields the output shown in Table 2. The models adjusted R2 value is 0.83, indicating a good fit. Every estimate is highly significant, including the estimate for price, which we will use to predict the effects of the floating tax. The coefficient for the gasoline price variable tells us that, for a given unemployment rate and month, daily per capita consumption decreases by 0.045% for every 1% increase in the price of gas, and that there is a 95% chance that the true value of the decrease lies somewhere between 0.057% and 0.033%. Note that unemployment also has a highly significant effect.17

When calculated for all observations, the equation yields the results shown in Figure 3 on page 36. If the floating tax rate had been in effect from 2002 to 2009, reductions would have peaked in 2004 at 49 megatons per year. However, in 2008, when gasoline prices hit an all-time high, and the floating tax rate would have been at its lowest level, emissions would have actually increased by 8 megatons. In 2009, reductions increased again to 28 megatons. These reductions would have decreased total United States CO2 emissions19 by a non-trivial amount, as shown by the gray line graph in Figure 3. Reductions would have peaked in 2004, at 0.81%. In 2008, the tax would have increased emissions by 0.14%.20 While the increase in 2008 is unfortunate, the fact that it was so small and that the 2009 decrease was so large is encouraging, and 2008 was highly unusual because gasoline prices hit their highest level ever. Overall, years with low average gasoline prices have high carbon dioxide decreases under the floating tax scheme, while years with high average prices have low decreases. More specifically, there exists a strong negative correlation (r = 0.85) between actual average yearly price and the yearly carbon dioxide reduction under the scheme. These results highlight the importance of pricing in reducing carbon dioxide emissions. As stated in the introduction, per capita consumption has

carBON dIOxIdE MITIgaTION


By plugging in $4 as the price for each month, we can estimate daily per capita consumption. Then we can subtract this value from the actual consumption and convert it to tons of CO2.18 We can multiply this value by the number of people living in the United States during that month and by the number of days in the month. Finally, we simply sum the values for each month to arrive at the yearly CO2 decrease. Expressed in terms of the regression above, this equates to: Equation 2

))
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PolicyMatters Journal Figure 3

Reduction in CO2 (Megatons) vs. Decrease in Total U.S. CO2 Emissions


CO2 Decrease (Mt) 50 Megaton Decrease 40 30 20 10 0 -10 2002 2003 2004 2005 2006 2007 2008 2009
Source: EPA

Decrease Relative to Total US CO2 Emissions 1.00% 0.80% % decrease 0.60% 0.40% 0.20% 0.00% -0.20%

stayed at 2008 levels, even though prices have dropped dramatically since then. This indicates that consumers greatly changed their behavior in the medium term, despite the fairly short duration of the price spike. If the floating tax were applied consistently on a long-term basis, consumers would likely decrease their gasoline consumption even more than the model predicts because additional efficiencies (that are not controlled for in the model) would be gained. Examples of such efficiencies include the purchase of more fuel-efficient vehicles and changes in travel patterns.

Recall that in June and July 2008, the price was about five cents above $4, and that under the floating tax scheme, customers would have received a subsidy to keep the final price at $4. The subsidy amounted to approximately 1.5% of the original price and would have cost the federal government around $1.4 billion during the two months it would have been in effect. Nevertheless, tax revenues were much greater than subsidy outlays, and the federal government would have collected $95 billion in net revenue in 2008. Consumers would have been better off because they would have been insulated from erratic price swings. Directing the revenue source would be heavily politicized. Some of it would have to be set aside to pay for the subsidy needed to stabilize prices if they rise above $4 per gallon. One possibility could be simply to use it to help plug the deficit. As shown in Figure 4 on page 37, tax revenue could reduce the deficit by 80% in 2002 and by 15% in 2009. The taxs ability to reduce the deficit naturally depends on the magnitude of the deficit itself. While revenues in 2009 were the highest in five years, the gargantuan size of the budget deficit means that tax revenue barely makes a dent. A second possibility could be to direct the revenue to infrastructure improvements, renewable energy projects, and transportation research. Naturally, the volatile nature of the revenue stream generated by the tax would make it difficult for budget planners to direct the revenue. One solution could be to collect revenue for one year, deposit it in a special fund, and distribute it during the next budget cycle. However, a detailed discussion of revenue distribution is beyond the scope of this paper.

GAS TAX

rEvENUE gENEraTION POTENTIal


In addition to causing large reductions in CO2 emissions, the floating tax also generates a very substantial amount of revenue. We can calculate yearly revenue from the floating tax as follows: Equation 3
( ) ( )

This equation yields the result shown in Figure 4. If the floating tax had been in effect from 2002 to 2009, it could have generated as much as $309 billion dollars21 in 2002. At their lowest, in 2008, revenues would have been about $95 billion. As with carbon dioxide reductions, the effect is greatest when gasoline prices are low and smallest when prices are high.

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The Floating Gasoline Tax Figure 4

Revenue Generated vs. Revenue as Portion of Federal Budget Deficit


Tax revenue generated Billions $320 $280 $240 $200 $160 $120 $80 $40 $2002 2003 2004 2005 2006 2007 2008 2009 0% 25% 50% 75% Revenue generated as portion of deficit 100%

Source: Congressional Budget Office

cONclUSIONS aNd FUTUrE rESEarcH


A floating gasoline tax could be a significant tool to help reduce problematic carbon dioxide emissions. In addition, it could generate billions of dollars in tax revenue to help reduce the U.S. federal budget deficit. It has several other benefits, including the stabilization of volatile gasoline prices, and the creation of long-term consumption efficiency. This paper merely explored some possible outcomes of the floating gasoline tax. Future research could concentrate on issues and problems that were not addressed in this paper, including equity issues and tax regressivity, political and policy strategies for tax implementation, long-term efficiencies gained because of consistent high prices, analysis to find the price point where carbon dioxide reductions are maximized, analysis of the specific reduction cost (cost per ton of carbon

avoided), improved model specification, and comparison to other gasoline demand equations.

Dries Berghman is graduating in May of 2011 with a Master of Public Policy degree from the University of California, Berkeley, focusing on energy policy. His current project involves analyzing the environmental impact and financial and political feasibility of creating a municipally-owned utility in Santa Fe, New Mexico.

ENdNOTES
1. All price figures are expressed in September 2010 terms unless noted otherwise. Prices also include existing taxes. 2. This article was written in November 2010. 3. International Energy Agency, CO2 Emissions from Fuel Combustion, IEA Statistics 2010, http:// www.iea.org/co2highlights/. 4. To arrive at the figure for 2008, I converted Energy Information Administration monthly gas consumption to tons of carbon dioxide emissions, assuming 8.788 kg of carbon dioxide per gallon of gasoline (per Environmental Protection Agency

guidelines), and then summed over the twelvemonth period. 5. U.S. Department of Transportation, Federal Highway Administration, Historical Monthly VMT Report, http://www.fhwa.dot.gov/ policyinformation/travel/tvt/history/. 6. An individual retailer could charge more than $4 if they so choose, perhaps to send market signals about quality, but I will ignore that possibility in this paper. 7. Severin Borenstein, The Implications of a Gasoline Price Floor for the California Budget and Greenhouse Gas Emissions, Center for the Study of Energy Markets Working Paper #182, University of California Energy Institute,

December 2008. 8. John Broder, Democrats Divided Over Gas Tax Break, New York Times, April 29, 2008. 9. In July 2008, drivers would have received a 2% subsidy. 10. GTZ, International Fuel Prices 2009, http://www.gtz.de/de/dokumente/gtz2009-enifp-full-version.pdf. 11. Jad Mouwad, Gas Prices Soar, Posing a Threat to Family Budget, New York Times, February 27, 2008, http://www.nytimes.com/2008/02/27/ business/27gas.html. 12. James M. Poterba, Is the Gasoline Tax

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Regressive? Tax Policy and the Economy, Vol. 5 (1991): 145164. 13. Accessed at http://www.eia.gov/dnav/pet/ pet_cons_refmg_d_nus_vtr_mgalpd_m.htm. 14. Accessed at http://research.stlouisfed.org/ fred2/release?rid=59. 15. Accessed at http://www.eia.doe.gov/mer/ query/mer_data.asp?table=T09.04. 16. Accessed at http://data.bls.gov/PDQ/servlet/ SurveyOutputServlet?series_id=LNS14000000. 17. In fact, my previous research and the values in this table show that the effect of unemployment on gasoline consumption is almost twice as big as the effect of price. 18. See Note 4. 19. U.S. Energy Information Administration, Emissions of Greenhouse Gases Report: Carbon Dioxide Emissions, December 3, 2009, http://www.eia.doe. gov/oiaf/1605/ggrpt/carbon.html. 20. Total emissions data for 2009 were not available when this analysis was conducted. 21. All dollar figures are in September 2010 terms.

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Meaningful Civic Participation: A Conversation with Emeryville Vice Mayor Jennifer West

Meaningful Civic Participation: A Conversation with Emeryville Vice Mayor Jennifer West
INTERVIEW bY dANNY YOST, JR.

Emeryville Vice Mayor and City Councilmember Jennifer West is a first-year Master of Public Policy student at the Goldman School of Public Policy at the University of California, Berkeley. West has served as a councilmember since 2009, through a time of budget crisis. In November 2010, she was elected vice mayor by her colleagues on the city council. A mother of two daughters, ages five and ten, West has participated with fellow parents to set family-friendly city policy. West shares how she has successfully engaged and empowered her community while governing, and how she has strived to increase transparency. PolicyMatters sat down with Vice Mayor West in the courtyard of her cohousing residence on April 1, 2011, to discuss civic participation, education policy, and women in politics.

Vice Mayor West earned her bachelors degree from Wesleyan University and her certificate in education at McGill University in Montreal. Her professional experience ranges from teaching and supervising student teachers to facilitating community meetings and working on state and local political campaigns. She served as the Assistant Finance Director for Barbara Boxers first Senate campaign. She was also an active member of the California Teachers Association, and has served on the bargaining team for her local union, the San Lorenzo Education Association (SLEA). PolicyMatters Journal (PMJ): At a Goldman School forum, you mentioned you look for more ways for the public to participate in the process. How do you try to gain the participation of your constituents? Have your efforts been effective? Vice Mayor West: Its a mixed bag. Theres a flow of information that goes both ways. I inherited, from the city councilmember [who preceded me in office], a list of e-mail addresses that he had accumulated over time. This is a great tool for me to communicate with folks once a month. I post more frequently to my blog to get information out to the community. I have, I think, an open and approachable attitude. So peowww.policymatters.net

ple stop me, talk to me, call me, or e-mail me partly because of the information that I give out and because they see me as someone they can relate to. I think having an open persona is an important tool also. I dont think anyone else is doing as much outreach as I am doing. It is important. One thing that Ive really emphasized is trying to get folks to apply to vacancies on committees. We have a lot of committees; we have a need for interested and active members. Often well have one or two vacancies and only one or two people applying, and I think thats a shame. I mean, thats nice that everyone who wants to get on [a committee] gets on, but Im also looking for people with a progressive mind getting on, not just the same people. So I have encouraged people to apply to committees. Finally, I try to get people to come to events. Because of my background as a facilitator, I think its really important for people to not just come and sit and listen, but also to have a chance to share their point of view. That doesnt always happen, so I push for our staff to incorporate meaningful participation, not just the regular old heres what were doing kind of stuff. Theres a lot of rubber stampingoh, yes, we had a public meeting and no one showed up kind of thing, but thats not good enough. All Fall 2010Spring 2011

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PolicyMatters Journal

the consultantsand we hire a lot of consultants for projects in Emeryville because we have a small staffif theyre doing something and theyre not getting a lot of public participation, then theres something wrong. I know [strong public participation] is possible. PMJ: What are some policy initiatives that youve pursued? How have you pursued them? And were you successful? Vice Mayor West: One of our successes was saving the Emeryville Child Development Center from being outsourced. Staff recommended that we close it. The community really rallied, saying, No, this is a great center. We like our center. We like the people who work here.

PMJ: Have you run into any difficulties in building this facility? Vice Mayor West: Actually, we had to have state legislation, carried by Nancy Skinner (our Assembly member), to even make it possible for us to jointly own and run a facility like this. The governor, last year, signed legislation that would allow us to go forward on the project. The school district floated a bond measure last November, which passed handily for $90 million. Were going to move forward on it. Now, with the state threatening to end use of redevelopment funds, its hard to know what the citys participation will be, because the city is supposed to put in $25 million. We dont know if the project would be deemed far enough along to withstand the legal scrutiny if redevelopment goes away under Jerry Browns recommendations. I am hopeful the project will go forward.

This is an asset; this is our jewel. If you outsource it, number one, youre going to have lower-paid staff because when you look around, daycare providers are generally PMJ: How would this facility change the connection between Emlow-paid. In the end, the Council did not go with the staff eryville residents and their schools? recommendation and decided to maintain the center with a pared-down budget. So we adopted a budget that then had Vice Mayor West: When I first ran for council, I wasnt to be implemented by a staff that didnt really think it was sure that this facility was the best way for a small district wise. And its been seven, eight months now, and its still like ours to use funds. But as a teacher, I know the impornot going that well. tance of reaching Its definitely not out to the comfully enrolled, which Where I live, Im represented at the State munity through [is necessary] to Assembly by Nancy Skinner, at the State the students make your budget Senate by loni Hancock, in Congress by and through the balance. I feel barbara lee, and in the Senate by barbara schools. So, this As a policy, thats good about boxer and dianne Feinstein. I think its not school facility as not the way I would want things to go. typical of the country, but Im grateful for where an example of It feels backwards. I live, and the power of women in politics here community schools, This kind of going beyond just a is noticeable. stopgap measure is traditional educanot ideal because tion structure. Its it doesnt have the cutting-edge, like buy-in of the staff or the people who are implementing Harlem Childrens Zone, among others. Emeryville has it. So were still kind of limping along. Yes, we saved the been touted as an example for others to follow. center. Long term, how is its viability? I dont know; there The danger is in becoming a legacy project. There are still has to be some more work done on that. people, I think, who really wanted to see this move forward before they retired from Emeryville public life, and may want to have their name on the plaque. Thats a danger. I PMJ: You were a teacher before joining the city council. Have you think you really have to look carefully at what the needs are. found opportunities to push education policy in Emeryville? If so, However, Im all for this project becoming the best project how? it can be. The community element will make it a better Vice Mayor West: We have a really strong connection in project and make it more meaningful for our schools. How Emeryville between the city council and the school board. do we cross the threshold where its going to bring together We have monthly city/schools joint meetings. The main the whole community, as well? thing that weve worked on in concert with the school I bring a family perspective to our citys political leadership, district is to build a new facility that would be joint-use. It and supporting the schools is just one element. I also adwould be a K-12 school, a rec center, and a library. So it vocate for more parks and open space, better connectivity, incorporates city components and school components. www.policymatters.net Fall 2010Spring 2011

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Meaningful Civic Participation: A Conversation with Emeryville Vice Mayor Jennifer West

and better ability to get around town without a carwith a stroller, on a bikeand retail that is not meant to attract the regional shoppers, but where residents feel like we belong. We also need developments that encourage families to settle here and stay, with units that are bigger than a studio or a one-bedroom, with a safe play area. Cohousing is ideal for families. Affordable units are also important. To support the schools, we must build housing that supports more families, and the city now has that issue in mind. A Goldman student is doing her [advanced policy analysis project] for the city and school district this spring, looking at familyfriendly housing policy. I cant wait to read her report! PMJ: As a woman in politics, do you feel like youre in the minority? Vice Mayor West: I think being a woman, and being a teacher, were distinct advantages for me in my campaign.

There were three of us runningtwo men and meand they were both businessmen. The ballot designations were businessman, businessman, teacher. It was a bump up for me being a woman on the ballot in that setting. If there had been a whole bunch of women running, it might have been different. The other thing is that where I live, Im represented at the State Assembly by Nancy Skinner, at the State Senate by Loni Hancock, in Congress by Barbara Lee, and in the Senate by Barbara Boxer and Dianne Feinstein. I think its not typical of the country, but Im grateful for where I live, and the power of women in politics here is noticeable. Its hard to find a man that has been elected here to a high-profile legislative office!

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PolicyMatters Journal

Prescription for Prior Authorizations: A Better Way


LEaH KrIEGEr
EDITED BY KASANDRA GRIFFIN, RASHI KESARWANI, AND PILAR MENDOZA

Prescription drug spending constitutes a significant proportion of health care costs in the United States. To manage these costs, the government and private sectors utilize independent corporations known as pharmacy benefit managers (PBMs) to administer prescription drug benefit programs for employers or health plans. Under this current system, PBMs require that prescriptions for certain drugs receive prior authorization (PA) before they can be filled, creating additional costs and other problems for both health care providers and consumers. This paper explores three alternative ways of reducing spending and inefficiencies present in the current system. The first alternative allows prescribers a fixed number of preauthorized PAs; the second alternative looks at reform through federal regulation; and the third analyzes an instant prescription drug approval model that reduces the role of PBMs.

BacKgrOUNd
Spending on drugs, as a component of health care costs, has become increasingly important in recent years, because more illnesses are managed by drugs and the number of prescriptions continues to increase.1 In 2009, $2.5 trillion was spent on health care in the United States, including hospital care, physician and clinical services, retail prescription drugs, research, and infrastructure; $249.9 billion of this was spent on prescription drugs. Prescription drug spending accounted for 12 percent of 2009 total personal health expenditures, excluding health insurance costs, government administrative costs, public health activities, research, and structures and equipment.2 These costs are shared by government (Medicare/Medicaid), the private sector (out-of-pocket expenditures), and private health insurance.3 To combat rising drug costs, government entities and private insurers have turned to pharmacy benefit managers (PBMs) to reduce spending. PBMs are independent corporations that administer the prescription drug benefit programs for employers or health plans. The three largest PBMs are Medco, Caremark, and Express Scripts. One of the tools used by PBMs to manage prescription costs is requiring that certain drugs receive prior authorization (PA) from the PBM before dispensing. Usually, a plan has a formulary with a list of preferred drugs, and any drug not on the list requires special approval. Some drugs have a step therapy requirement in which a drug will not be approved unless a cheaper drug is tried first and proven to be ineffective or not tolerated by the patient. This paper will show that while PA requirements do help to www.policymatters.net

control costs, they incur consequences not adequately quantified in the market. The question is not whether costs need to be controlled, but whether the PA is the optimal tool for managing these costs and whether PAs provide quality care as defined by a balance of efficiency and efficacy. Good management, according to the Academy of Managed Care Pharmacy (AMCP), means one of these measures: (1) better health at the same or lower cost, (2) equal health at lower cost, or (3) much better health at slightly higher cost.4 It is not clear that PAs satisfy any of these criteria. The goal is to find alternate ways of reducing drug spending without the unintended consequences to patients, physicians, and pharmacists and the increased risk of abandoned prescriptions. With the passage of health care reform legislation in 2010, this goal is even more important because more Americans will have access to private health insurance coverage that uses PBMs to manage drug costs.

PRESCRIPTIONS

SHOrTcOMINgS OF THE PrIOr aUTHOrIZaTION SySTEM


In a perfect world, both physicians and patients would know what drugs are on the plans formulary, and physicians would prescribe accordingly. In reality, this does not occur. In a typical scenario, the consumer will find that a drug requires a prior authorization only at the point of sale in the pharmacy. Even when the PA process works efficiently, the consumer will experience a delay, because the pharmacist must reach out to the physician for an alternate prescription that will be covered by the plan. Fall 2010Spring 2011

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Prescription for Prior Authorizations: A Better Way It is difficult for the consumer to ascertain whether a particular drug will be covered prior to the denial.5 Attempts to solve this problem have proven insufficient. Medicare, for example, has a website in which one can search for a drug and determine if it is on a plans formulary. However, formularies can change after the enrollment period. R. Lopert and S. Rosenbaum state that an objectively sensible and rational choice of plan can prove to be a costly mistake as prices rise throughout the year, new drugs are prescribed, or formularies are varied.6 If the physician agrees to the substitution recommended by the PBM, the pharmacist will fill the prescription with the cheaper drug, and the PBM has achieved lower costs.7 There are unintended consequences, however. Both the pharmacist and the prescriber have spent extra unreimbursed time on the prescription, and the patient has experienced a delay. Alternatively, the physician may conclude that substitution is not appropriate and request a prior authorization. This is more costly, because the physician pulls up the patients records and contacts the PBM or health maintenance organization (HMO) via phone or fax. If the initial request is denied, the process may be reiterated as the physician supplies additional medical information until the prescription is approved or the denial is final. This process is onerous for the physicians staff. According to Ken Terry in an article in Medical Economics, it can add five to ten hours of staff time per week in a small practice, and may require a medium-sized practice to hire an extra medical assistant.8 Pharmacists also report increased time processing the prescriptionsan online survey of pharmacists reports that they spend an average of 4.6 hours per week processing PAs, and that the time impact is increasing.9 Physicians will sometimes agree to the substitute drug, even when not clinically ideal, because they do not want to undertake the task of requesting the PA.10 As the PA process unfolds, the patient has not received any medication. This delay may have a medical impact, or the patient may be in pain. Filling the prescription may necessitate additional trips to the pharmacy, difficult for a sick person, or an additional burden on the caregiver.11 Patients with chronic illnesses or physical disabilities find the PA process especially challengingin the attempt to alleviate complicated conditions, they use more drugs and are more likely to use offlabel drugs than the general population.12 If the PA is denied, there are still several options open to the consumer: 1. Pay for the prescription out of pocket. In this case, the consumer participates in a market distorted by large players and will not pay a competitive-market price for the drug. In addition, Medicare and other insurers do not count these expenses toward the deductible or offer any reimbursement.13 2. Appeal. Most drug care plans have an appeals process, but these vary in ease of use and incur further delays. The Medicare appeals process is especially difficult to traverse, because it can require substantial scientific documentation from the physician and has both time limits for the different levels of appeal and notices that are difficult for patients to understand.14, 15 3. Abandon the prescription. In recent years, abandonment of prescriptions has increased. Together, health-plan denials and abandoned prescriptions leave more than 14 percent of prescriptions unfilled and are factors in the problem of non-adherence to prescribed therapy. Drug-related morbidity, which includes both suboptimal prescribing and poor adherence to prescribed drug regimens, has an estimated cost of $289 billion per year, or about 13 percent of health care costs.16 The PA system assumes a motivated patient with the competence to follow through and track the PA. Unfortunately, that is not always the casea denied prescription for Lipitor might mean no cholesterollowering drug taken at all. The problem is especially marked with respect to psychiatric medication; one PA program in Maine resulted in a drop of 32 percent in initiation of treatment for bipolar disorder.17 Another cause of abandonment is that a patient may not be aware of the denial or the need for a PA. This is common when patients have numerous prescriptions. A patient may assume that a drug is no longer required if it no longer appears in the bag from the pharmacy.18 Despite PBMs promotion of evidence-based medicine, there has actually been scant study of the effect of PAs on medical outcomes and, as one team of researchers found, there appears to be a large gap in studying the impact of drug management programs.19 Pharmacy benefit Managers and the Prescription drug Market PBMs manage drug costs in a market where drugs can be extremely expensive, because consumers are cushioned from the real cost of drugs and normal market forces do not keep prices down. Prescribers, as well, have little incentive to prescribe cost-effective drugs. PBMs, due to their buying power, can negotiate better prices and rebates for drugs in exchange for the agreement to keep these drugs on the formulary; the corollary is that other drugs are not included in the formulary for non-medical economic reasons. There is another inherent problem in this broad use of PBMs. Government entities and private plans hire PBMs to manage drug spending, but PBMs, as private entities, have their own Fall 2010Spring 2011

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PolicyMatters Journal profit motivesthey have an incentive to add drugs to formularies based on manufacturers rebates that increase profits. In fact, the Medicare prescription drug benefit assumes that this profit motive will encourage PBMs to seek cheaper sources of drugs and/or rebates, which, in turn, will keep down the cost of drugs to the government. There is no countervailing incentive to deter formulary changes that reflects the true social cost of the changing formularies. Full Costs of the Prior Authorization System M. Lennertz and A. Wertheimer find that PAs reduce medication costs but note that administrative costs for PAs are high.20 One study estimates costs for each PA as $20 for the PBM and $17 for the physicians office.21 Pharmacist cost can be estimated as follows: A survey of pharmacists found median time spent on PAs per week of about 4 hours for a total of 1,417 prescriptions, on average, per week.22 As PBMs control about 75 percent of the prescription market and about 5 percent of drugs require PA, pharmacists spent approximately 4 hours on 53 PAs or 4.5 minutes per PA; at an hourly rate of $50, this equals $3.75.23 Total administrative cost per PA is provider cost ($17) + PBM cost ($20) + pharmacist cost ($3.75), or $40.75. These figures do not include any negative health outcomes, which have significant additional costs. A study of prior authorization of psychiatric drugs among Texas Medicaid providers found a moderate burden on patient care outcomes.24 Another found increased hospitalizations and emergency care among psychiatric patients whose drugs were switched for non-clinical reasons.25 Another study called switching drugs medically risky for patients in longterm care facilities who had hypertension, heart disease, diabetes, HIV, and bipolar disorder.26 Anecdotal evidence points to increased health care costs as well. It seems clear that the problem is greater for psychiatric drugs because patients are less compliant and because reactions to drugs are more variable. Terry gives the example of a patient stable on Zyprexa, an expensive but effective psychiatric drug that is often taken when all other treatment options have failed. When the patient needed a refill, the Medicare plan required a PA, creating an obstacle for this mentally ill patient.27 The risk in this case of the substituted drug not being effective is substantial, and the resultant loss in quality of life and the potential future costs are great. Alternative 1: Give physicians a fixed number of preauthorized PAs UnitedHealthcare recently announced a new pilot in which it intends to pay oncologists a fixed price to cover total cost of treatment per cancer patient rather than making payments per drug infusion. This change removes the personal financial incentive for the doctor to do additional treatments. However, it also introduces a danger that oncologists will provide lower levels of care if they are not paid incrementally. UnitedHealthcare plans to monitor outcomes and adjust the payment schedule based on the outcomes to minimize this potential risk.28 It is possible to apply a similar approach to other aspects of drug spending, targeting high-cost drugs and creating pilot programs for them. One idea is to give physicians a fixed number of PAs to use at their discretion before a formal PA is needed. The number would be based on the number of patients they treat that are managed by the PBM and by the number of PAs that were approved the previous year. This could be adjusted monthly based on the current patient load. Doctors could then prioritize the highest needs for off-formulary drugs among their patients. If the initial allotment is used, the usual PA process might apply, or some other exception procedure could be instituted that would include disincentives. This idea has major advantages: Systems for tracking the number of fills per prescriber as well as a way for physicians to check their usage of PAs will be needed. But the investment of time and money needed to implement these systems would be minimal, because PBMs already have prescriber databases that associate each prescription with the prescriber. The administrative overhead related to PAs, which is substantial for PBMs,29 will be reduced; these savings will offset the costs of new systems needed. Physicians will be empowered to treat patients medically without being second-guessed by PBMs, but will have an incentive to avoid the administrative burden associated with excessive PAs. Providers are likely to use their PA allotment sparingly, thus naturally reducing drug costs. Patients will not suffer the health care dangers or inconvenience of the PA process as frequently, thus improving health care quality. Pharmacists will not incur the costs of PA processing as often. This plan can be implemented using medical knowledge available today, in the same way that PAs Fall 2010Spring 2011

PRESCRIPTIONS

THrEE alTErNaTIvES TO PrIOr aUTHOrIZaTION IN MaNagINg drUg SPENdINg


As explained above, there is no controversy about whether costs need to be controlled, only about whether prior authorizations are the best method. Below are several proposals to reduce prescription spending while also reducing the problems of the current PA system. www.policymatters.net

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Prescription for Prior Authorizations: A Better Way are used today. As more research becomes available, allotments can be adjusted or formularies finetuned. The existing PA process will still be available, though its use will be discouraged. A challenge to the implementation of this system will be possible physician resistance to tracking of their PAs. Physicians will need to be educated about the benefits of the plan. There is also a possibility that physicians may not allocate the limited number of PAs equitably. Alternative 2: Increase federal regulation Different government entities have recognized the need for controls in the implementation of PAs, and reforms have been implemented in some states Medicaid policies.30 None of these tools would work alone to solve the problem, but they are each incremental improvements to the existing system. Some of these reforms could be implemented on the federal level, such as the following: Once a formulary has been marketed to the public, no change should be permitted until the next open-enrollment period. This will increase information transparency. Although consumers still cannot always know ahead of time which drugs they will require, this step will reduce the confusion that providers and consumers experience due to rapidly changing formularies. An exception to this rule should be made in the case where an on-formulary drug is shown by new medical evidence to be significantly inferior to an off-formulary drug. Patients with serious illnesses, stable on their current medications, should be grandfathered in or transitioned: Minnesota, for example, requires a 180day transition period.31 Pharmacists should be paid an increased professional fee for prescriptions that require a PA. Thus the cost will be shifted to the plan where it rightly belongs. This will not impact the total cost of the PA, but will eliminate the unfair burden to pharmacists, who have no control over the prescribing process. The federal government should fund studies on the impact of PAs on total health costs versus total drug costs. Although PAs have been widely implemented, there has been very little research on their impact on health outcomes and health costs. These proposals, combined, would eliminate the worst abuses of the PA process and mitigate some of the unreimbursed costs. Equity will increase as consumers know which drugs are www.policymatters.net on the formulary when selecting a plan, and physicians know which drugs to prescribe. Quality will increase as seriously ill patients will not suffer the risk of a drug switch, and there will be fewer gaps in care due to unexpected PAs. However, this comes with a cost, because PBMs will be less nimble and less able to react quickly to changed drug prices. Once these costs are factored in, the PA process will become more expensive, less attractive to PBMs, and less effective at reducing drug spending. However, some of the increased drug spending will be mitigated by reduced total health care costs, since patients may be less likely to suffer the negative impact of switching drugs or abandoning therapy. The regulatory approach is a compromise between the need to cut costs and the need to be equitable to consumers. Neither goal is totally met, but the worst problems are mitigated. Alternative 3: Allow physicians to request instant approval for prescriptions In 2007, a North Carolina Medicaid program introduced modified PAs for proton-pump inhibitors (drugs like Prilosec that treat gastroesophageal reflux disease) with twofold goals: (1) to generate drug cost savings and (2) to avoid some of the unintended consequences of traditional PA programs, such as increased gaps in therapy and clinician dissatisfaction.32 In order to accomplish this, physicians had the option of requesting the PA directly with the prescription, and the PA was automatically approved. The program proved to be very effective. Despite the ease of use, physicians did not use instant approvals (IAs) at a higher rate and switched to the plans preferred drug at the same rate as when traditional PAs were required. However, the gaps between medicine fillsa measure of qualitywere cut in half for the instant PAs as compared to traditional PAs. For a certain subset of regularly filling patients, the gaps were cut even more, to one-fourth of their prior levels.33 Furthermore, about three-fourths of physicians surveyed indicated that they liked the instant PAs better than traditional PAs. This program illustrates that providers working with the PBM can contain costs without the unintended consequences resulting from adversarial relationships. The method used for instant approval in North Carolina was simple: The physician wrote the medical criteria and requested the IA on the prescription pad. There was no back-and-forth communication between the physicians office and the plan administrator, thus saving the average practice about $17 per PA. In addition, the cost to PBMs of administering a traditional PAabout $20 per PAwas eliminated,34 as was the cost to pharmacists of processing the PAan estimated $3.75 per PA. Costs of Instant Approval I estimate the cost of educating physicians to be about $1 Fall 2010Spring 2011

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PolicyMatters Journal per PA, and I estimate administrative costs at no more than $2 per PA. This process can be automated, and forms can be downloaded from the plans website. If the total cost of $3 is subtracted from $40.75, instant approvals save an estimated $37.75 per PA. The pilot project in North Carolina found that physicians did not abuse instant approvals and drugs were switched to lower-cost drugs at the same rate as traditional PAs. My analysis assumes the validity of these findings, and therefore anticipates no impact to the total cost of the drugs. Benefits of Instant Approval Instant approval offers the following advantages: Physicians are empowered. They can request the PA automatically by certifying that medical criteria have been met, without being second-guessed by the PBM. There is little risk of inequitable distribution as the same rational criteria are used for all patients. Pharmacists do not incur unreimbursed costs, because PAs are automatically granted. PBMs incur minimal costs as physician tracking is not needed. Physicians incur minimal costs because the PA decision is made at the time of prescribing. The method is simple, easy to implement, and has been successful in North Carolina. Quality of care improves as gaps in care are reduced. A possible risk is that when this alternative is extended to a larger population, the positive results of the North Carolina program will not be replicated.

a cOMParaTIvE dIScUSSION OF THE THrEE PrOPOSEd alTErNaTIvES


In order to compare the costs for the three alternatives, the following data were used: 3.9 billion prescriptions were filled in the U.S. in 2009.35 The current number of PAs, 146.25 million, was estimated as follows: PBMs cover 75 percent of drug spending and 5 percent of drugs require PA;36 hence PAs = (.75)*(.05)*3.9 billion. It is unknown exactly what percentage of prescriptions require a PA; this information is not published by PBMs. This calculation is used as a substitute and represents a rough estimate of the total.

Figure 1. A Comparison of Costs for the Three Alternatives


Total number of PAs (in millions) Fixed PA Allotment for Physicians Total PA Increase in drug savings Total cost of spending compared to alternative compared to current current (in millions) (in millions) (in millions)

Alternative

Cost per PA

Total PA cost

(in millions)

146.2

$5.00

$731.25

$5,228.44

$0.00

$5,228.44

PRESCRIPTIONS

Federal Government Regulation

131.6

$40.75

$5,363.72

$595.97

$1,464.58

$868.61

Instant Approval

146.25

$3.00

$438.75

$5,520.94

$0.00

$5,520.94

Current PA System Without Change

146.25

$40.75

$5,959.69

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Prescription for Prior Authorizations: A Better Way The cost per traditional PA was calculated as total of provider administrative cost of $17 + PBM administrative cost37 of $20 + pharmacist administrative cost of $3.75 (calculated on page 44) = $40.75. PBM administrative costs are high because of live customer service representative intervention and computer tracking needed for each PA. The cost for instant approval PAs was calculated as the total of $1 per PA for physician education and $2 per PA for administrative costs such as new prescription forms. The cost of the fixed allotment PA program was calculated as the total of $1 per PA for physician education, and my estimate of $4 per PA for plan administration (this amount is greater than the administrative cost for instant approval because tracking of physician allotment is needed). The total number of PAs for the federal government regulation option were assumed to be reduced by 5 percent for grandfathered prescriptions and by 5 percent for increased pharmacist professional fees (which will make PAs unattractive to PBMs where the margin is small). Because of these reductions, drug spending is assumed to increase by $100 per prescription filled without PA that previously required the PA. The cost of new research is estimated at $2.08 million to pay for five grants at $0.416 million each. The National Institutes of Health awarded $5 billion for biomedical research in over 12,000 grants, which averages to $0.416 million per grant.38 tion of efficiency and equity of the three alternatives. It is easier to implement than alternative one, fixed allotment, because it does not require tracking of physicians and yields the greatest health care cost savings, as much as $5 billion in total administrative costs, while removing most of the negative effects of the traditional PA. Unlike alternative two, federal government regulation, which increases costs, it retains the drug-cost savings of the standard PA. The instant approval alternative raises few concerns about equity as transparent criteria are used to determine the application of the PA. The North Carolina pilot showed improved health care quality, affecting both gaps in care and provider satisfaction, although additional research is needed. Instant PAs appear to best address the larger question of total health care costs rather than the narrow scope of drug costs alone. As Medicare Part D is one of the biggest players in the prescription drug market, the government can take the lead by implementing the instant approval option within the Medicare Part D program. Before implementing in full, Medicare could test a pilot drug category, such as lipid regulators, which are the top-prescribed drugs in the U.S.,39 have both brand-name and generic alternatives, and are often subject to PA requirements.40 As in the North Carolina pilot, the traditional PA will still be available for providers who dont use the instant PA (because they are unaware of the program or not willing to participate). After one year, the costs and medical outcomes for the two groups (traditional and instant) can be compared. In addition to providing a basis for evaluating the program, these outcomes will provide sorely lacking research data on the efficacy of prior authorizations and the impact on total health care costs. If the Medicare Part D pilot program is successful, instant approval can be extended to other drugs and to other programs. Editors note: The North Carolina results were based on a single pilot study. Additional research would be needed to verify the programs validity and scalability.

rEcOMMENdaTIONS
Alternative three, instant PA approval, has the best combina-

Leah Krieger is a Master of Public Affairs student at the City University of New York, Baruch Colleges School of Public Affairs. Her policy focus is health care policy with a special interest in unintended consequences. She has experience in IT systems development.

ENdNOTES
1. Kaiser Family Foundation, Prescription Drug Trends (May 2010), http://www.kff.org/ rxdrugs/upload/3057-08.pdf. 2. U.S. Department of Health and Human Services, Centers for Medicare and Medicaid Services, Medicare and Medicaid Statistical Supplement, 2010 Edition: Table 1.1. Personal Health Care

Expenditures (PHCE), by Source of Funds: Selected Calendar Years 19602009 and Table 1.4. Total Personal Health Care Expenditures (PHCE), by Type of Service: Selected Calendar Years 19802009, http://www.cms.gov/Medic areMedicaidStatSupp/. 3. Centers for Medicare and Medicaid Services, National Health Expenditures Accounts: Definitions, Sources, and Methods, 2009, http://www.cms.gov/

NationalHealthExpendData/downloads/dsm-09. pdf. 4. A.P. Holtorf, C. McAdam-Marx, D. Schaaf, et al., Systematic review on quality control for drug management programs: Is quality reported in the literature? BMC Health Services Research 9, no. 1 (February 2009): 38. 5. Florida Legislature, Office of Program Policy Analysis and Government Accountability (OP-

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PolicyMatters Journal
PAGA), Medicaid Reform: Oversight to Ensure Beneficiaries Receive Needed Prescription Drugs Can Be Improved; Information Difficult for Beneficiaries to Locate and Compare, report no. 0855, September 2008, http://www.oppaga.state. fl.us/summary.aspx?reportnum=08-55. 6. R. Lopert and S. Rosenbaum, What is fair? Choice, fairness, and transparency in access to prescription medicines in the United States and Australia, Journal of Law, Medicine and Ethics 35 (Winter 2007): 643. 7. M. Lennertz and A. Wertheimer, Is prior authorization for prescribed drugs cost-effective? Drug Benefit Trends 20 (April 2008): 136. 8. K. Terry, Prior authorization made easier: as more and more drugs require preauthorization, savvy physicians are finding ways to minimize the time and expense, Medical Economics, October 19, 2007. 9. M. Sipkoff, Pharmacists find themselves at mercy of prior authorization: survey shows, on average, 4.6 hours per week are spent channeling the approval process, Drug Topics 152, no. 9 (August 11, 2008): 28. 10. Terry, Prior authorization made easier. 11. J. Tilly and L. Elam, Prior Authorization for Medicaid Prescription Drugs in Five States: Lessons for Policy Makers, a report of the Kaiser Commission on Medicaid and the Uninsured, April 2003, http:// www.kff.org/medicaid/4094-index.cfm. 12. Kaiser Family Foundation, Medicare, Health Reform, and the Challenges for People with Disabilities, transcript of September 8, 2010, policy forum, available at http://www.kff.org/medicare/ upload/090810_kff_disability_transcript.pdf. 13. National Mental Health Association, Medicare Part D Frequently Asked Questions: Benefit Design, http://www.mentalhealthamerica.net/ medicare/MedicarePartD-FAQBenefitDesign. pdf. 14. Lopert and Rosenbaum, What is fair? 15. V. Gottlich, Beneficiary Challenges in Using the Medicare Part D Appeals Process to Obtain Medically Necessary Drugs, a Kaiser Family Foundation report, September 2006, http://www.kff.org/ medicare/upload/7557.pdf. 16. Kaiser Family Foundation, Prescription Drug Trends. 17. C.Y. Lu, M.R. Law, S.B. Soumerai, et al., Impact of prior authorization on the use and costs of lipid-lowering medications among Michigan and Indiana dual enrollees in Medicaid and Medicare: results of a longitudinal, population-based study, Clinical Therapeutics 33, no. 1 (2011): 135. 18. Health Assistance Partnership, Summary of Medicaid Network Call on Prior Authorization of Prescription Drugs in Medicaid, March 27, 2003, accessed at http://www.healthassistance -partnership.org/. 19. Holtorf, McAdam-Marx, Schaaf, et al., Systematic review on quality control for drug management programs. 20. Lennertz and Wertheimer, Is prior authorization for prescribed drugs cost-effective? 21. D.A. Bukstein, G.A. Cherayil, A.D. Gepner, et al., The economic burden associated with prior authorizations in an allergist office, Allergy and Asthma Proceedings 27, no. 2 (2006): 11922. 22. Sipkoff, Pharmacists find themselves at mercy of prior authorization. 23. PayScale.com, Hourly Rate Snapshot for Pharmacist Jobs, accessed December 22, 2011, http://www.payscale.com/research/US/ Job=Pharmacist/Hourly_Rate. 24. C. Brown, E. Nwokeji, K. Rascati, et al., Development of the burden of prior authorization of psychotherapeutics (BoPAP) scale to assess the effects of prior authorization among Texas Medicaid providers, Administration and Policy in Mental Health 36, no. 4 (July 2009) 27887. 25. J. West, D. Rae, A. Huskamp, M. Rubio-Stipec, and D. Regier, Medicaid medication access problems and increased psychiatric hospital and emergency care, General Hospital Psychiatry 32, no. 6 (Nov.Dec. 2010): 61522. 26. B.R. Cote and E.A. Petersen, Impact of therapeutic switching in long-term care, The American Journal Of Managed Care 14 (November 2008): SP2328. 27. Terry, Prior authorization made easier. 28. R. Abelson, Insurers Test New Cancer Pay Systems, New York Times (October 19, 2010): b1. 29. Lennertz and Wertheimer, Is prior authorization for prescribed drugs cost-effective? 30. Tilly and Elam, Prior Authorization for Medicaid Prescription Drugs in Five States. 31. Health Assistance Partnership, Summary of Medicaid Network Call. 32. S.E. Wegner, T.K. Trygstad, L.A. Dobson, et al., A physician-friendly alternative to prior authorization for prescription drugs, The American Journal of Managed Care 15, no. 12 (December 1, 2009), 11522. 33. Ibid. 34. Ibid. 35. Kaiser Family Foundation, Prescription Drug Trends. 36. Ibid. 37. Wegner et al., A physician-friendly alternative. 38. U.S. Department of Health and Human Services, 2011 Budget in Brief, accessed March 23, 2011, at http://www.hhs.gov/asfr/ob/ docbudget/2011budgetinbrief.pdf. 39. IMS Health, Top Therapeutic Classes by U.S. Sales, April 6, 2010, http://www.imshealth. com/deployedfiles/imshealth/Global/Content/ StaticFile/Top_Line_Data/Top%20Therapy%20 Classes%20by%20U.S.Sales.pdf. 40. Lu, Law, Soumerai, et al., Impact of prior authorization.

PRESCRIPTIONS

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