Arnold’s Wrong Model

Bush may promote state health plans, but California isn't a good model

Tomorrow, President Bush will give his State of the Union address. In it, he will announce his health care reform plan, and perhaps mention model states. But not all states are great models, either for Washington or for other states. Take California. Governor Schwarzenegger’s recently released plan to offer universal coverage to all Golden State residents is audacious, ambitious, and rather awful. The plan’s biggest flaw is that far from putting affordable health care coverage within the grasp of the working poor, it will penalize them.

Universal coverage is the latest hot idea among governors, Republicans and Democrats alike. Mr. Schwarzenegger’s proposal was modeled after Massachusetts’ plan that went into effect last year. Twenty other states including New Mexico, Washington, Minnesota, Michigan, and Connecticut are contemplating similar plans. By contrast, Governor Spitzer so far seems to be resisting the universal coverage bandwagon. In fact, in his 2007 State of the State address he expressed modest health care goals, promising only universal health care access.

Mr. Spitzer’s restraint might save the Empire State a lot of unnecessary anguish and spending given that President Bush is offering his own solution to the swelling ranks of the uninsured. The root cause of this problem is that the federal tax code lets employers use their pre-tax earnings to purchase health coverage but does not let individuals do the same. This ties health coverage to employment and makes it far more expensive for unemployed people — or those whose employers don’t offer insurance — to purchase it out-of-pocket. Mr. Bush wants to reform the tax code so that individuals can get the same tax treatment that employers get. If his proposal passes, it will diminish the need for state action, allowing California and Massachusetts to drop their plans.

That would be very good given that the centerpiece of these plans is an individual mandate that will force everyone in the state to purchase health care coverage. Both the Heritage Foundation and the New America Foundation support this idea on grounds that it will stop the uninsured from passing on the tab for their care to others.

But even though 47 of 50 American states mandate auto insurance for similar reasons, about 14% of all drivers nationwide remain uninsured. To prevent people from likewise skipping health care insurance, Mr. Schwarzenegger is proposing a series of subsidies but also some rather draconian enforcement methods.

Mr. Schwarzenegger’s plan will expand Medicaid to cover more children. And he will give subsidies of $12 billion on a sliding scale of income for adults to purchase insurance. This will still leave out about 1.1 million of the Golden State’s uninsured legal residents — those earning over 250% of the federal poverty level or about $41,500 for a family of three — who won’t qualify for any help.

But it’s not clear that even people receiving subsidies will be able to afford coverage. Theoretically, a cheap, bare-bones policy can fulfill the mandate. However, they are hard to come by because California, like most other states, has driven them out of the market through its extensive regulations requiring insurance companies to cover everything from hair prostheses to in-vitro fertilization. Additional health care subsides without deregulating the insurance and hospital industries won’t lower the cost of coverage — they will raise it.

But just because Mr. Schwarzenegger will be unable to deliver affordable health care coverage does not mean that California residents will get a pass from his mandate. While Mr. Schwarzenegger has not yet given all the details of how he will enforce it, his proposal explicitly hints at a Massachusetts-style strategy.

This involves requiring all residents to include their health care insurance policy number on their state tax returns to demonstrate coverage. People who fail to do so will lose their personal exemption the first time around. Continued failure would invite fines that, in Massachusetts, are equal to half of a standard policy. Given that such policies average between $3,000 and 4,000 for individuals and between $8,000 and 10,000 for families, this could well mean thousands of dollars in annual fines.

But these fines might still work out cheaper than buying insurance. So some people will either pay them or stop filing tax statements. In effect, a program meant to help low-income people will tax them or turn them into tax fugitives. Moreover, these people will have fewer job options because employers with 10 or more employees who don’t offer coverage will have to pay a 4% payroll tax per worker, something that will encourage them to keep their work force below 10 employees.

Forcing people to spend their money on state-prescribed ends is repugnant in a free society. But whether this approach can deliver anything resembling universal health care coverage or is merely wishful thinking, it will trigger hurtful unintended consequences that will start becoming clear after July 17, the deadline for Massachusetts residents to demonstrate coverage. At the very least, the California Legislature ought to put the governor’s plan on hold until then and even be prepared to jettison it altogether if President Bush’s proposed tax reforms gain traction after tomorrow. Mr. Spitzer, meanwhile, should continue to show his admirable restraint.

Ms. Dalmia is a senior analyst at the Reason Foundation, a Los Angeles-based free-market think tank. An archive of her work is here. Reason’s California research and commentary is here.