Schwarzenegger’s Health Care Plan May Turn Uninsured Into Criminals

Universal health care plan isn't ready, could hurt businesses

Governor Arnold Schwarzenegger’s plan to reform the Golden State’s health care system and offer universal coverage resembles his early movies: It is audacious, ambitious – and rather awful. The plan’s biggest flaw is that instead of putting affordable health coverage within the grasp of the working poor, it penalizes them.

Instead of rushing ahead, California ought to wait until July when the preliminary results of a near-identical experiment in universal health coverage in Massachusetts come out. Consigning California’s 6.5 million uninsured to an untried scheme is neither wise nor humane.

The centerpiece of both the Schwarzenegger and Massachusetts plan is an individual mandate that will require everyone in the state to purchase health coverage. Both the conservative Heritage Foundation and the liberal New America Foundation support this idea on grounds that it will stop the uninsured from passing on the tab for their care to others. In California, uncompensated care costs an average family about $1,186 a year in hidden taxes and higher health insurance premiums.

But even though 47 of 50 U.S. states mandate auto insurance for similar reasons, about 14 percent of all drivers nationwide remain uninsured and 25 percent of California’s drivers don’t carry insurance. To prevent people from likewise skipping health insurance, Schwarzenegger proposes a complex set of subsidies backed by rather draconian enforcement methods that could turn the uninsured into tax criminals.

Arnold’s plan will expand Medicaid to cover more children. He will extend subsidies on a sliding scale of income for adults and allow every uninsured individual to use his or her pre-tax dollars to purchase coverage just like companies do. (This last provision is a bright spot in Schwarzenegger’s plan because it would establish much-needed tax-parity between employers and individuals on health care.)

But while these subsidies will cost California at least $12 billion per year, according to Schwarzenegger’s own estimates, about 1.1 million of the Golden State’s uninsured legal residents won’t qualify because they exceed the minimum income threshold of $41,500 for a family of three. These families would still be required to buy insurance.

Even then, it’s not clear that people, whether they are receiving government subsidies to help cover their costs or not, will be able to find affordable coverage. Theoretically, a cheap, bare-bones policy that costs only a few hundred dollars a month can fulfill the mandate. However, nearly all of these types of health plans were driven out of California by onerous regulations requiring insurance companies to cover everything from hair prostheses to in-vitro fertilization.

While Schwarzenegger has not spelled out exactly how he will enforce his health care mandate, his proposal explicitly hints at employing a version of the Massachusetts plan, which will involve requiring all residents to include their health insurance policy number on their state tax returns to demonstrate coverage. People who fail to do so will lose their personal tax 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 around $3-4,000 for individuals and $8-10,000 for families, this could well mean thousands of dollars in annual fines for poor families.

These fines might still be much cheaper than buying insurance. In that case, many low income families could opt to pay the fines or avoid filing taxes altogether (becoming tax fugitives) rather than buying health coverage. In effect, a program meant to help low-income people will tax them or turn them into criminals.

Moreover, these people will have fewer job options because under the governor’s plan companies with 10 or more employees who don’t offer coverage will have to pay a 4 percent payroll tax per worker, something that will cause many of them to never employ more than nine people.

Whether this approach can deliver anything resembling universal coverage without unleashing such perverse unintended consequences might become clear after July 17, the deadline for Massachusetts residents to demonstrate they have health coverage. California would be wise to hit pause on Schwarzenegger’s health care movie until it sees what works – and what doesn’t – in Massachusetts.

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