California Health Plan Would Cause More Problems than it Solves

Published January 16, 2008

After nearly a year of tense negotiations, California Gov. Arnold Schwarzenegger (R) and Assembly Speaker Fabian Nunez (D) jointly announced they had reached a compromise on a plan to add 3.6 million of California’s 5 million uninsured citizens to the rolls of the insured by 2010.

Deemed “an incredible plan” by Nunez, the proposal–which, if passed by the state legislature, will appear on the California ballot in November–requires individuals to acquire private health insurance or enroll in a government program that will be expanded to meet the additional demand. The measure also would prohibit insurers from denying coverage to people because of existing medical ailments and would require them to spend at least 85 percent of premiums exclusively on medical care

Expected to cost $14 billion annually, the compromise plan will, if approved by voters, receive funding from four separate sources: a $2.3 billion tax on hospitals, a new payroll tax of 1 percent to 6 percent on businesses in the state, an additional $1.50 to $2.00 per pack tax on cigarettes sold in the state, and $2.3 billion more in funding from the federal government.

Read on.

The new program is being rushed through the legislature in two parts. The first, which lays out the changes and expansions to the state health care system, was presented to the General Assembly, passed by a party-line vote, and sent on to the Senate.

The second piece of legislation, which deals with the funding of the program, will work its way through the legislative process more slowly. As a tax increase, it requires 2/3 approval to pass. That some Republicans must get on board in order for the measure to make it onto the November ballot.

To this end, Schwarzenegger, who has already threatened members of the state legislature with a January special session to deal with the health care issue, can be expected to put as much pressure as possible on those members of his own party who can potentially be swayed on the issue.

Despite the cautious approach of state Senate President Pro Tem Don Perata (D), who wants to figure out how best to deal with California’s $14 billion budget deficit (without shrinking or eliminating entitlement programs) before agreeing to such a massive expansion of government programs, the governor’s proposal is expected to make its way through both houses of the state legislature before too long.

Unfortunately, this plan to lower the number of uninsured in bankrupt California is not only inefficient, but will cause far more problems for the health care system and the state economy than it will solve.

First, taxing the state’s hospitals an additional $2.3 billion will simply result in a price increase for those who purchase medical services, as the money lost to increased taxes must be recouped by the industry.

Second, funding yet another government program on the backs of tobacco consumers only stacks even higher the house of cards on which so many government programs are now being built. Due to the declining number of smokers in California (ostensibly the goal of the state and federal governments when they began levying prohibitive taxes on tobacco products several years ago), the pool of money from which to pull funding for legislators’ pet projects, including state health care, is steadily shrinking. Adding $1.50 to $2.00 per pack in taxes will just cause that pool to dry up even quicker, as people turn to the black market or out-of-state sources, or forgo cigarettes altogether.

Third is the payroll tax increase, which will take from small businesses and corporations alike a percentage of their payroll for the purpose of providing health insurance to uninsured workers. While this measure may allow Sacramento to claim a small victory in its quest to move more names into the “insured” column on the state’s rolls, adding to the tax burden will make less capital available for hiring new workers or paying existing ones.

This will ultimately result in depressed wages and exacerbated unemployment in California, as well as in even more businesses leaving the state (or deciding against coming) due to the oppressive tax climate. Based on tax climate, California already rates as only the 47th best state for business in the country (according to the nonpartisan Tax Foundation). The state’s next-door neighbor, Nevada, ranks third. How long can it be before more of California’s businesses, fed up with subsidizing (along with smokers) every one of Sacramento’s social welfare projects, pick up and move two hundred miles to the east?

Despite the changing economic landscape in the state and in America as a whole, the fact remains that there is no such thing as a free lunch. Added costs and taxes are eventually passed along to the consumer and to the taxpayer.

Leaving aside the issue of integrity–Schwarzenegger was elected and reelected, at least in part, on the basis of his willingness to take a “no new taxes” pledge–the cost of the Schwarzenegger-Nunez health care plan will be devastating to the citizens of California. Should this measure pass, they see their quality of health care decline, revenue to the state decrease, and employers leave the state … all for the sake of a state government’s vain desire to claim a Pyrrhic victory over the problem of the uninsured.

Jeff Emanuel ([email protected]) is a research fellow for health care policy at The Heartland Institute and managing editor of Health Care News.