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The group, the National Federation of Independent Business, which says it has 350,000 members and lobbyists in 50 states, warned politicians and policy makers on Wednesday not to impose new health-benefit obligations on small employers.

The group said in a statement of principles that ‘a health care system built on employer mandates or on play-or-pay taxes is unacceptable.’ The Democratic presidential candidates, including Senator Clinton, Barack Obama and John Edwards, have generally called for requiring employers to provide coverage or to pay into a fund to help insure many of the 47 million people in the United States without coverage. Republican candidates have talked less about health care, usually supporting the Bush administration’s proposals for tax incentives to help pay for coverage.

‘We are opposed to payroll taxes,’ said Susan Eckerly, a vice president for the business federation. ‘They are the No. 1 job killer for the small-business owner.’ The organization has been working on health care issues with a broad group of lobbying allies, including the Business Roundtable, a group of corporate chiefs; the Service Employees International Union; the National Restaurant Association; AARP, the advocacy group for older people; and the building contractors lobby.

In its statement of principles, the federation called for universal health care, with a government safety net to help the neediest obtain coverage. But it opposed proposals to place health care under an umbrella of Medicare-style ’single payer’ financing. Government safety nets should not be allowed to ‘crowd out private insurance and care,’ the federation said.

A separate national survey released Wednesday by the Mercer benefits consulting firm found that both small and large employers were skeptical about ‘play or pay’ proposals that would require them to offer a health plan or pay into a fund to provide coverage for the uninsured.

Only 23 percent of small employers and 25 percent of large companies with 500 or more workers support play or pay, according to a telephone survey by Mercer. In Massachusetts, which introduced such a policy in October 2006, employer support was slightly higher, 30 percent.

Although small businesses say they are hard pressed by health costs, which are rising by double digit percentages each year for small companies, the federation said very few of its members that provide employee benefits had ended coverage. Only about half of the group’s members provide employee health coverage.

Ms. Eckerly said the small-business group had joined with restaurant owners and contractors in inviting all the presidential candidates to discuss health care on conference calls with hundreds of their members.

So far, she said, four Republican candidates, Mitt Romney, Fred D. Thompson, Rudolph W. Giuliani and John McCain, have taken part in these calls. Senator Clinton’s health policy advisers have briefed officials of the small- business federation.

Todd Stottlemyer, the group’s president and chief executive, said that Mrs. Clinton’s plan ‘recognizes the challenges facing small businesses’ by excluding firms with fewer than 25 workers from her proposed requirement that employers provide health insurance or contribute to the cost of coverage. ‘We have not endorsed any candidate,’ Mr. Stottlemyer added.

At the heart of the bill, as well as the governor’s proposal, is a massive expansion of Medi-Cal to cover not just the poor, but moderate to upper middle income Californians as well. The effect of this dramatic expansion will be to move not just the uninsured onto the Medi-Cal rolls, but also to move many workers off of their existing plans and into a government-run system. This plan represents the largest expansion of state-run healthcare since the creation of Medicare and Medicaid 40 years ago. Subsidies would be available to people between 300 percent and 450 percent of the federal poverty level through tax incentives.

The bill also includes a pay-or-play mandate, requiring California businesses to spend 6.5 percent of payroll on healthcare benefits or pay that same amount in a payroll tax. That’s an outsized $6.6 billion tax hike on small businesses, with an estimated impact, according to the National Federation of Independent Business, of 249,000 lost jobs over the next five years.

One point of contention between the governor and Assembly Democrats is which sin should be taxed for the additional billions of dollars to fund the plan.

Democrats want to tax smoking, while the governor would prefer to tax gambling by leasing the state lottery. But sin taxes are among the worst, most regressive state revenue sources. Whether it’s lottery revenue or cigarette taxes, it seems perverse to prey on the state’s poor, who disproportionately smoke and play the lottery, to fund the expansion of Medi-Cal and tax incentives up the income ladder.

It’s hard to believe that more big government is a solution for healthcare affordability, rather than the problem. For the past decade, we’ve seen falling prices in sectors of the economy that are highly competitive, such as consumer electronics, apparel and communication, while, at the same time, we’ve seen runaway price increases in the areas of the economy that have the most government intrusion: healthcare and education. Medicaid programs, in particular, have seen galloping costs that are straining state budgets nationally especially here where Medi-Cal already faces substantial cost issues.

Government just can’t do a good job controlling costs not just because of bureaucratic waste and mismanagement, although those are issues but because when people use a government service, it appears to be free, although it’s actually quite expensive for taxpayers.

There are similar problems in the private insurance markets, where people perceive healthcare as free and, therefore, have little incentive to control costs. Health Savings Accounts, which have grown from around 4.5 million covered lives in 2006 to about 8 million in 2007 nationally, offer a compelling solution to this problem. These accounts allow workers to put pre-tax dollars in accounts that they can use to pay for routine medical services, while relying on high-deductible health plans to cover catastrophic costs. These plans have low, and in many cases falling, premiums; they eliminate the tax loophole of employer-based plans and empower individuals as healthcare consumers with an interest in controlling costs.

Unfortunately, California remains one of only four states that doesn’t allow a state income tax deduction for Health Saving Accounts contributions, limiting the attractiveness of these plans here. A Republican alternative healthcare reform bill, ABX18, which was rejected in committee, would have brought California in line with the 46 states that already have deductibility.

The Republican bill also contains an innovative idea that would dramatically reduce the cost of health insurance-interstate competition. One reason health insurance is expensive in California is a raft of regulations and coverage mandates for a wide variety of services that many people simply don’t need.

Every health plan in California has to cover things like alcoholism, contraceptives, hearing aids, well-child care, acupuncturists and speech therapists, according to an analysis by the Council for Affordable Health Insurance. The Republican bill would leave all of these mandates in place, but it would allow a consumer interested in a less-comprehensive, more affordable plan to look out of state for more options.

California is clearly at a crossroad on healthcare, and the outcome here will help determine what happens in the rest of the country, too. Expanding big government programs at the (considerable) expense of taxpayers will shift costs around, but is far less likely to actually contain them than empowering individual consumers would be. While it looks like the Democrats’ big government bill is headed for passage, voters will have the final say on the funding plan. If they are concerned with affordability both of healthcare and of living and working in California they will vote no.

The department seeks to retroactively change the rules in the middle of the game for the entire industry and proposes to fine Blue Shield Life more than $12 million for being the first company subject to the new rules. The departments position is fundamentally inconsistent with its past practices, grossly unfair, and not within its authority.

The department proposes new legal standards for underwriting and rescission that conflict with decades of court decisions. For many years, Blue Shield Life has filed its application forms and insurance policies with the department, which approved them. Those documents clearly set forth the requirement t hat people who apply for insurance must submit accurate and complete responses regarding their medical history, as well as the consequences for not doing so.

Now, after having approved these applications and policies for many years, the department has determined that the documents do not meet their new standard and wants to apply that judgment retroactively. If the department wishes to establish new rules or create new regulations, the law provides a procedure that includes fair notice and the opportunity for comment. It is fundamentally unfair and contrary to law for the department to make new policy without following those rules.

In addition, the departments interpretation of rescission law is simply wrong. For many years, the courts including the California Supreme Court have clearly stated that an insurer need not demonstrate that an applicant intended to deceive the insurer in order to rescind a contract, as long as the misrepresentation was of such significance that the policy would not have been issued. The department does not have the authority to create a new standard that is contrary to settled interpretation of the law, and that contradicts the statutes themselves, much less to apply this incorrect standard retroactively.

The departments position on attachment is also on shaky legal ground. The department attempts to use the technicality of not stapling an application to a policy to assess more than two million dollars in fines. In reality, California law does not require an insurer to staple the application on the policy. The insurer can also endorse the application onto the policy. During the audit period, we properly endorsed applications onto the policies in a manner that the department had never criticized before. Indeed, we were using the exact same method that other health insurers had been using for years a method that was in full compliance with the only court decision that had interpreted the “endorsed on” requirement under California law.

We are outraged by the excessive penalties for nonsubstantive issues. They are not justified by the facts and we will fight them vigorously. For example, nearly two million dollars of the departments proposed penalties have nothing to do with customer service. They involve minor disputes over the timing and format of responses to the auditors inquiries that are technical in nature and rarely result in fines, and we strongly disagree with the auditors allegations on these matters.

Other fines were levied for providing information electronically rather than in hard copy. There is no precedent for imposing fines of this magnitude for what is largely a collection of technical disputes and inadvertent errors. We acknowledge unintentional mistakes in a number of cases examined by the auditor, none of which involve rescission or underwriting, and we have taken appropriate corrective actions. Many of these cases involve human error and the appropriate staff members have received remedial training. In the vast majority of these incidents, the allegations made by the department involve misjudgments that typically do not result in severe penalties.

Moreover, a majority of the alleged violations concern short-term health contracts that constitute a tiny percentage of our membership and were administered by a third party. We no longer sell short-term health. It also bears noting that this is only the beginning of a process. It does not represent a final judgment on the departments charges, which will be made by judges in legal and administrative proceedings. When all the facts are presented, it will be apparent that the penalties proposed by the department far exceed the penalties historically imposed for similar behavior, and that many of its positions are legally and factually without support.

Finally, we recognize that too many Californians are unable to obtain health coverage, particularly if they are not eligible for group coverage and have preexisting medical conditions. Thats why Blue Shield Lifes parent company, Blue Shield of California, has long supported universal coverage and has actively lobbied for a solution the past five years. If coverage for all could be achieved, every Californian would have insurance regardless of health status and rescissions would be eliminated entirely.

While Nzqez has done most of the negotiating with Republican Gov. Arnold Schwarzenegger, aides to the speaker and governor say Perata who disagrees with the plan’s funding may determine whether a health care bill clears the Legislature by year’s end. Nzqez and Perata have disagreed on substantive issues before.

The speaker bristled earlier this year, for instance, when a Senate committee approved legislation supported by Perata to combine term limits and redistricting changes into a single ballot measure. After the speaker’s aides called the proposal unconstitutional, the Democratic leaders agreed to put only the term limits measure on the Feb. 5 ballot.

Nzqez wants to move the health legislation Assembly Bill 1x beginning today, when he has scheduled a vote in the Assembly on the bill he has negotiated with the governor. In the three months since Schwarzenegger called a special session on health care, the speaker has scheduled other votes only to cancel them because there was no deal.

Even if the bill finally clears the Assembly, Perata has not agreed to put it to a vote of his members. Earlier this month, he told Democratic senators at a retreat they would not be returning to Sacramento before the new year. And last week, the senator said he wanted to wait to see the fallout from California’s $14 billion deficit and what cuts the governor proposes next month.

“It’s a very difficult conundrum for a member (of the Legislature) to have to explain that we’re going to have to cut some jobs and (program) eligibility, but we’ll have a real good deal in a couple of years,” Perata said after a meeting in the governor’s office.

Any health care plan would not provide coverage until 2010, while the across-the-board budget cuts the governor is seeking could be implemented next year. Schwarzenegger maintains the proposed health care plan, which would require contributions from employers, workers, hospitals and other sources, would not need more state spending and would prevent some budget cuts.

California already faces the possibility it may have to drop children from the state’s Healthy Families program because of insufficient federal funding. Nzqez left last week’s meeting with the governor a half hour after Perata and with more optimism. He told reporters “we don’t have a final deal, (but) the framework for a deal is certainly there.”

“If you asked me right now what are the outstanding issues, I wouldn’t be able to answer that question,” the speaker said. “I think we’re that close.” Close a description Nzqez and Schwarzenegger have used repeatedly for weeks to characterize the negotiations depends on who’s measuring.

Nzqez and Perata have yet to agree on a critical funding source for the proposed $14 billion health care expansion. The speaker has persuaded Schwarzenegger to scrap his plan to lease the state lottery to help pay for the plan and instead agreed to hike the state’s 87-cent tax on a pack of cigarettes. Nzqez’s aides say he wants a $2-a-pack increase, but the governor prefers a $1.50 hike.

Perata, meanwhile, believes any “tobacco tax is flawed” because the industry will spend “a huge amount of money” to defeat the proposal at the ballot box next November.

A $2.60-a-pack increase, sponsored by California’s hospital industry and health care advocates, was opposed by Schwarzenegger and rejected by voters last year. Nzqez maintains the Legislature must produce a bill that Schwarzenegger signs by Friday to allow time to collect signatures to place the financing proposals on the November 2008 ballot.

Perata wonders: What’s the rush? “The Indian tribes qualified a constitutional amendment in 21 days, the track and card clubs qualified a referendum in less than 30 days,” Perata said. “So it’s possible to get something on the ballot before November without doing it this week.”

Nzqez said there’s still a chance that Perata will agree to hold a vote on health care this week. “In the last week, or week and half or so, Senator Perata has been less engaged that I have in these negotiations,” the speaker said before Thursday’s meeting. “He’s been brought up to speed in the last two, three days, and I think the Senate has re-engaged in these conversations.” On Friday, Schwarzenegger played down Perata’s reluctance to take up the bill this week.

“He’s a big believer in making sure that everyone has insurance, and he just wants to now iron out some of the last-minute details,” the governor said during an appearance in Southern California to promote his plan.

The state Assembly is expected to consider the bill next week, but it is not clear when - or even if - the state Senate will do the same as pressure mounts to sideline the sweeping health care measure in the face of the state’s mounting fiscal problems.

With the state facing a projected budget deficit of $14 billion in the fiscal year that begins in July, Schwarzenegger said Friday that he plans to declare a fiscal emergency a move that would trigger a special session of the Legislature in January to deal with the problem.

Still, administration officials and the leader of the Assembly voiced optimism that the health care legislation would be finalized in the coming weeks.

“I don’t think there’s any argument that this framework is something that will provide fundamental health care reform for the people of California,” Nzqez, D-Los Angeles, told reporters late Thursday after a meeting with Schwarzenegger.

As proposed, the bill would seek to cover all 6.8 million uninsured Californians by expanding government programs, mandating employer participation and offering tax credits to middle-income families that might have to buy policies on the open market.

The legislation would require that all residents have health insurance and that all insurance providers accept applicants regardless of their health status. A new public pool would be created for purchasing policies for uninsured residents that would offer a variety of options for people who are not covered at work.

The ambitious program would be funded by a package of new fees and taxes that is planned to be put before voters next November. If approved, the new system would take effect in 2010.

Funding would include:

– A $2.3 billion fee on hospitals that would be offset by a big increase in payments made for services for enrollees of government programs.

– Employer fees that would run from 1 percent to 6.5 percent of payroll and would generate an estimated $2.7 billion.

– About $5 billion in new federal support, mostly for the Medi-Cal program.

– A new tax on tobacco products that would cost up to $2 a pack although no final agreement has been reached between the governor and Nzqez on that component.

While the package is structured to have no impact on the state’s general fund, there are growing concerns about that assurance in light of estimates from the governor’s office that next year’s deficit could reach $14 billion.

Senate President Pro Tem Don Perata, D-Oakland, said Thursday that he would not bring the health care bill to his members for consideration until he understands how budget cuts next year will impact health services.

“It’s hard to explain to people how you can be talking about expanding the health care program at the same time you are making deep cuts in the present health care program,” Perata said. “I think that’s the only stumbling block.”

Schwarzenegger said Friday at a news conference in Los Angeles that passing health care reform will help the state’s budget crisis because the new program would bring in billions of new federal dollars.

“Some have feared that this will kind of clash, doing health care reform and the budget crisis,” said Schwarzenegger. “But actually this health care reform is essential, and a big part to actually help our budget crisis, because when you have a crisis like we have, you will have to make cuts across the board, and that means also in Medi-Cal. But here we are pumping $4 billion more into Medi-Cal, so this is actually very important.”

The fiscal emergency declaration was put into law as part of Proposition 58, approved by voters in 2004, which requires the governor to propose legislation aimed at fixing the immediate problem and gives the Legislature 45 days to approve the governor’s recommendation or draft its own proposals.

Pamela Hope Cincotta and Joyce Kraus, who are both in their 40s, were treated by doctors employed by the California Emergency Physicians Medical Group (now known as CEP America). The group contracts with numerous hospitals around the state to staff its emergency rooms. Cincotta, who suffers from migraines, osteoporosis and an autoimmune disease, sought emergency room care at San Ramon Hospital, and Kraus visited the ER for an undisclosed medical condition at John Muir Memorial Hospital in Walnut Creek, according to the lawsuit.

Kraus, who was uninsured at the time, was charged $363 and Cincotta, while covered by health insurance, may have experienced a gap in her coverage. She was billed as if she were uninsured, about $1,000, said Ron Bochner, a Santa Clara-based attorney for both women. They were billed high “list prices” that bear little relation to the actual cost of the care provided and are far higher than what insured patients are asked to pay, the lawsuit says.

“Whether you’re a hospital or a doctor, you can’t price gouge,” said Kelly Dermody of Lieff, Cabraser, Heimann and Bernstein, the San Francisco law firm that brought a well-publicized hospital overcharging case against hospital conglomerates Sutter Health and CHW.

Dr. Wes Curry, president of CEP America, said the group had not received anything “official” and would address the lawsuit as it proceeded. “We’re confident that our billing practices are proper.” In recent years, consumer advocates, the courts and lawmakers have pressured the nation’s hospitals to stop charging uninsured patients so-called “list prices.”

They too have objected to aggressive collections policies that have caused some patients to lose their homes. Insured patients typically pay a portion of discounted rates negotiated by their health plans, while California’s nearly 7 million uninsured residents face the full fare.

After a 2004 class action lawsuit Lieff Cabraser filed against Sutter Health and CHW on behalf of six uninsured patients from Northern California, the two hospital corporations in 2006 agreed to a settlement requiring them to refund some money to eligible patients and to provide discounted care to the uninsured.

Assembly Speaker Fabian Nunez had scheduled his Democratic bill for a vote on Dec. 5 or Dec. 6, but he did not call the body into session. We are continuing to negotiate with the administration and stakeholders and are optimistic we will have an agreement soon, Nunez spokesman Steven Maviglio said.

The Assembly Health Committee on Nov. 14 approved AB 1X, sponsored by Nunez and Democratic Senate President Pro Tem Don Perata by a party-line 11-4 vote.

The bill aims to expand health insurance to cover the state’s millions of uninsured, in part by tripling cigarette taxes to $2.87 per pack and requiring businesses to spend up to 6.5% of payroll on health care or contribute to a state fund. It also includes a fee assessed on hospitals at 4% of revenue.

Schwarzenegger, a Republican, vetoed an earlier bill, saying it placed too high a burden on employers and didn’t cover everyone in the state. The number of Californians without health insurance has been estimated at about 6.7 million. Under that bill, employers would have been required to contribute 7.5% of Social Security wages toward their workers’ health care or pay an equal amount to a state fund that would provide coverage. Unlike the governor’s initial proposal unveiled in January, the measure did not mandate that individuals buy health insurance.

Alan Katz, vice president of public affairs for the California Association of Health Underwriters, said a compromise during the current special legislative session is increasingly unlikely. Both Nunez and Schwarzenegger have limited flexibility in their maneuvering, said Katz, who previously served as chief of staff to former California Lt. Gov. Leo McCarthy.

If the governor moves too far toward the Democrats position the business community will balk. If the speaker moves too far toward the administrations position, hell lose the support of the unions and their allies, he said.

One significant stumbling block is in financing. Schwarzenegger is calling for raising funds by “leasing” the state lottery to a private operator in lieu of new tax mandates. Another is the state budget, which could be running a major deficit by the end of the fiscal year.

If a compromise health-care reform bill is reached, its financing provisions would still have to be ratified by voters in a November 2008 ballot question.