Arnold's Health Fiasco
by John Goodman

First, some background. Years ago I proposed an idea to Ira Magaziner and he ignored it. More recently, Governor Romney made the idea the center piece of his Massachusetts reform plan, although he tacked on an individual mandate and other regulations I find objectionable. This week, Governor Schwarzenegger took the same core idea and coupled it with so many bells and whistles it's hardly recognizable.

Here was my original proposal: Currently, the existence of free (charity) care encourages people to avoid private insurance. We should instead use the "free care dollars" to encourage people to privately insure. Dollars should follow people. If they buy private insurance, they get a subsidy. If they stay uninsured, the money stays in the safety net system. This requires no new spending. There is also no need for a mandate. The goal is 1) eliminate perverse incentives and 2) offer low-income families access to the same system everybody else participates in. (The same principle, by the way, also should apply to Medicaid enrollees).

The California plan is very different. It would require people to buy insurance, spend a lot more money, create more perverse incentives than it eliminates, raise everyone's health care costs, and create new burdens for low income families.

For a summary, see the Governors own description (http://gov.ca.gov/pdf/press/Governors_HC_Proposal.pdf).

Here are a few salient features:

• Medicaid (Medi-Cal) and S-Chip (Healthy Families) will be expanded and everyone eligible will be required to join.
• Everyone else will be required to buy private insurance and a minimum coverage plan will have a $5,000 deductible.
• The state will subsidize the insurance for lower income families, based on income.
• Insurers will be compelled to sell to all comers, with no discrimination based on health status.
• Employers who do not offer insurance will have to pay a 4% wage tax.
• Doctors will face a new 2% tax on their revenues and hospitals will pay 4%.
• Only about one-fifth of the state's cost will be covered by the diversion of charity care funds; the bulk of the cost will be paid by new taxes imposed on employers and providers.
• The plan is designed from top to bottom to maximize federal matching funds; in fact for every new dollar of state spending there will be an additional dollar of federal spending. Good for California perhaps, but bad for the rest of us federal taxpayers.

On this last point, think of it in the context of the new pay-as-you-go budget rules Democrats in Congress are expected to adopt. Republicans will not be able to propose a tax cut without offsetting (and unpopular) cuts inentitlement benefits. But Arnold is about to increase federal spending by $50 billion (over ten years) and no member of Congress will even have the opportunity to vote on it!

(Parenthetically, this is the best argument I've seen for scraping Medicaid's matching formulas and replacing them with block grants. It's great for states to experiment. But why should federal tax payers pay 50¢ on the dollar to foot the bill?)

Whenever you propose to force people to do what they are not otherwise disposed to do, all that really matters is the threatened penalty. Remember the uninsured rate for auto drivers (for whom insurance is mandated in all but three states) is only a few percentage points below the health uninsurance rate. In California, the "or else" seems to be almost an after thought. In ten single-spaced pages describing the plan, I could find only one sentence that addressed the question - with vague references to garnishing wages and withholding tax refunds. Bottom line: don't expect everyone in California to be insured.

There are also other things that could go wrong. Like the Massachusetts plan (but much worse than the Massachusetts plan), the California plan:

• Encourages people with unsubsidized insurance to get subsidized insurance instead (a lot of employers of low-income workers will drop their coverage and pay a 4% fine) and this will cause system costs to soar.
• Expands Medicaid and S-Chip, which in its own right will encourage employers of low-paid workers to drop their coverage.
• Encourages healthy people to exit the system (for example, by self insuring under federal law), leaving the sickest and most costly people behind - again driving up costs.
• Opens the door for future legislatures to convert an individual mandate into an employer mandate thereby encouraging businesses to leave the state.

Perhaps the worst feature of the plan is the new burdens it creates for the people it claims to help: low-income, uninsured families. Remember, these people are currently getting charity care; and according to the RAND, once they access the system, their care is just as good as everyone else's care. Under the new plan:

• Workers will get hit by the 4% wage tax (a tax nominally imposed on their employers).
• If they do not buy insurance, they will have wages garnished and tax refunds withheld.
• If they do buy insurance, they will have a $5,000 deductible catastrophic policy - of great benefit to California hospitals (and perhaps even to the family if they have assets), but of no benefit for the purchase of primary care.
• When they do seek care, they will face a new tax on their medical bills (nominally imposed on the providers).
• Although Medicaid reimbursement rates will be increased, the poor will not become empowered consumers in a medical marketplace; instead they will likely continue to get care exactly where they get care today (e.g. hospital emergency rooms).

In sum: Californians will pay more for their health care, low-income families will pay a lot more for their care, federal taxpayers will get taken to the cleaners, and the quality of care - especially the care delivered to low-income Californians - will probably not change one iota.

John C. Goodman is President of the National Center for Policy Analysis