By Christopher Lee
Washington Post Staff Writer
Monday, August 27, 2007; 1:12 PM

California did not start the current wave of efforts to overhaul the American health-care system, but what happens in Sacramento over the next few weeks could have a big impact on whether the drive gains momentum or peters out.

With three weeks remaining in the state's legislative session, Gov. Arnold Schwarzenegger (R) still has nothing to show for the grand proposal he made in January to create a system that would guarantee health insurance for all Californians. But with the resolution of a nearly two-month-long state budget impasse last week, the focus is turning back to health care, with hard-to-predict results.

The adoption of a comprehensive plan to overhaul health care in a big, politically influential state probably would spur similar efforts around the country and increase pressure on presidential candidates to tackle the issue. It could also have an impact in Congress, where a battle will resume next month over whether to expand the State Children's Health Insurance Program, which provides coverage for uninsured children in low-income working families.

Smaller states took the first steps. Massachusetts last year passed a law requiring all citizens to buy health insurance, and in recent years Vermont and Maine approved legislation intended to dramatically expand coverage to the uninsured, and Illinois made a priority of covering more kids. In 1974, Hawaii became the first (and still only) state to require that employers provide health insurance to their workers.

Other states considering major proposals include Pennsylvania and Wisconsin, while New Mexico, Colorado, Alaska and Minnesota are in the fact-gathering stage, said Laura Tobler, a health-policy expert at the National Conference of State Legislatures.

"It is a priority in probably two dozen states," Tobler said. "Historically, health reform seems to cycle. There was a big upsurge in interest in the early to mid-'90s, and we're seeing even more interest now. I think it's going to be on the hot list for the next year or two. States have led the way."

"If a breakthrough could occur in California, it would really be an earthquake in terms of health reform," said Drew Altman, president of the Henry J. Kaiser Family Foundation, a nonpartisan group that researches health-care issues. "A lot turns on whether it succeeds or fails. . . . Candidates will look at that when they decide how hard to push this. The Congress in 2009 will look at it. It will affect the whole psychology of the health reform movement that's building."

Schwarzenegger's plan -- which would require everyone to have insurance; would impose new fees on employers, doctors and hospitals; and would subsidize coverage for those who couldn't afford it -- has not made it into legislation. Instead, the Democrats who control the legislature fashioned their own bill. It differs in important ways from the governor's plan and probably has enough support to pass -- but the governor said last week that he would veto it.

With the clock running out, the governor and top California Democrats, including Senate President Pro Tem Don Perata and Assembly Speaker Fabian N??ez, are under pressure to reach a compromise, even as many Republican lawmakers and business groups remain opposed and predict legal challenges to whatever emerges.

"The time for action has come," Schwarzenegger told about 1,000 AARP members who rallied at the State Capitol in Sacramento last week. "I can guarantee you that we are going to get this done. We are going to create the health-care system that will bring down the costs and make sure that everyone in this state is insured."

N??ez said in an interview Friday that it would help if Schwarzenegger showed a little flexibility. The speaker plans to seek a vote this week on a new bill embodying the governor's proposal to show Schwarzenegger that it lacks majority support.

"He's got to get off his plan because it's pie in the sky right now," N??ez said.

Californians appear ready for change. In a Field Poll released last week, 69 percent of respondents said they were dissatisfied with the health-care system, up from 44 percent in December. The state has about 6.5 million uninsured, a number equal to the population of Massachusetts.

"Not only are Californians less likely to be covered than residents of 45 other states, but those who do have coverage are concerned it's not going to be there for them when they need it," said Anthony Wright, executive director of Health Access California, a nonprofit advocacy group.

The problem is not a lack of ideas. Under both the governor's proposal and the Democrats', employers would have to spend a minimum amount on health care for workers or pay money into a state-run purchasing pool through which people could buy private insurance. But the employer's fee under the Democrats would be higher -- 7.5 percent of payroll, compared with 4 percent of payroll under Schwarzenegger's plan.

Another difference: The governor would require physicians to pay 2 percent of their revenue to the state, and hospitals 4 percent, to help finance the new system. The Democrats' plan has no such charges. The governor would require everyone to have a basic level of health insurance; the Democrats have no individual mandate.

Both plans would expand public programs and subsidized coverage for low-income families. Neither is cheap. Schwarzenegger's plan would cost $12 billion annually and cover an estimated 4.1 million people; the Democrats' would cost $8.3 billion and cover 3.4 million.

Business groups would almost certainly challenge any compromise on the ground that the new employer "fee" is actually a tax and thus requires a two-thirds vote of the legislature, said Vince Sollitto, a spokesman for the California Chamber of Commerce. "It's inconceivable that that wouldn't be challenged in court," Sollitto said.

Another potential obstacle is the federal Employee Retirement Income Security Act, which prohibits states from directly regulating employer-sponsored health plans or passing laws that have a major financial impact on them. That is what prompted a federal judge last year to strike down Maryland's "Wal-Mart Law," which would have required the retail giant to spend at least 8 percent of its payroll on health care for its workers.

Political challenges are possible, too. Three years ago, California voters overturned a 2003 law that would have required employers to provide health coverage to workers or pay a fee to the state.

Getting something done will be difficult, analysts said. In Massachusetts, business groups, consumer advocates and politicians worked together to craft the new law, a sharp contrast to the fractious atmosphere in California. And getting permission from the Bush administration to expand the state's Children's Health Insurance Program is no sure thing.

"What's going to happen next? I really think it's anybody's guess," said Marian Mulkey, senior program officer with the California HealthCare Foundation, a nonprofit group that has been closely tracking the debate. "The next few weeks will be critical."

Wright, the consumer advocate, remains optimistic. "We recognize that there are at least 15 different ways that this can all blow up," he said, "but it seems like the public is there, the political will is there and the policy is close to being there."