Schwarzenegger Plan Would Drive Up Costs: Experts

Published March 1, 2007

Once they’d had a few days to analyze the details of Gov. Arnold Schwarzenegger’s (R) proposal to legislate health insurance for all California residents, health policy experts from coast to coast responded with horror. The plan, they said, will not guarantee access to health care for all Californians, but it will cost taxpayers nationwide.

“Contrary to published reports,” said Michael Cannon, director of health policy studies at the Cato Institute, a think tank in Washington, DC, “Schwarzenegger’s plan would have taxpayers in other states pay for 77 percent of the new spending. [That’s] a perfect example of the moral hazard that makes our health care system unsustainable.”

Schwarzenegger didn’t see it that way when he outlined his plan to the state legislature in Sacramento on January 8.

“My proposal is a beginning. I look forward to a vigorous and open debate. Everything will be on the table, and I want to hear from everyone. If we have the will–and I believe that we do–we can heal our broken system,” Schwarzenegger said. “We can create a model the rest of the nation can follow.”

Individual Mandate

In a 10-page proposal offering few details, Schwarzenegger proposed expanding Medi-Cal, the state Medicaid program, to include working families earning twice the federal poverty level as well as middle-income families.

Other families would be required to purchase individual insurance policies if their employers do not provide one.

“It’s easy to say, ‘Everyone has to be insured.’ It’s also wrong. An insurance mandate is unconstitutional,” said Twila Brase, president of the Citizens’ Council on Health Care, an advocacy group based in Minnesota.

“It coercively picks the pockets of taxpayers,” Brase continued, “forcing them to give up their hard-earned dollar for the choices of others. The plan threatens the citizens’ right to private property. If the government can force people to buy one type of commercial product, which company’s product will everyone be forced to buy next?”

Brase pointed out several problems with universal coverage plans. “Universal coverage institutionalizes the problems that have led to high prices and kept people from buying health insurance,” she said. “It exacerbates the consolidation of the health insurance market, the prevalence of expensive prepaid health care, and the availability of government programs the uninsured can tap into when they get sick.

“The governor is going the wrong way, and his action threatens to lead the rest of the nation down the wrong road,” Brase said.

Massachusetts Model

Schwarzenegger drew heavily on the Massachusetts model, passed into law in April 2006, which mandates that every uninsured resident in the state either purchase a private health insurance policy or sign up for a state-subsidized plan.

California’s plan, however, is even more audacious. While Massachusetts had roughly 550,000 uninsured residents at the time, California currently has 6.5 million, more than 1 million of whom are illegal immigrants.

California leads the nation in uninsured residents. According to the U.S. Census Bureau, 15.9 percent of all Americans “went bare” in 2005, but in California the percentage was 19.4. Expanding the state Medicaid system, which uses federal matching funds, to cover them would cost taxpayers nationwide.

‘Money Laundering’

Grace-Marie Turner, president of The Galen Institute, a think tank in Virginia, called the plan “money laundering.”

“While the governor promises increased Medicaid payments to doctors and hospitals, he then would tax them at the rate of 2 percent for physicians and 4 percent for hospitals for the privilege of delivering their services. This is where the money laundering comes in–boosting payments to doctors and hospitals to snare more federal matching Medicaid money, then getting at least some of the original money back from the providers through new taxes,” Turner explained.

Sally Pipes, president of the Pacific Research Institute (PRI), a think tank in San Francisco, said the governor’s plan won’t fix any problem the state currently faces, but may intensify several.

“Our health system does not have a revenue problem,” Pipes said. “It has a spending problem, caused by the fact that almost nobody currently has the right incentives to spend money responsibly or effectively. By significantly increasing the amount of money flowing through the government, the governor’s plan will make this worse.”

Insurance Questions

The insurance industry was left with more questions than answers after Schwarzenegger’s initial announcement, said Bruce Denton, vice president of the National Association of Health Underwriters’ western regional chapter.

“He talked about shared responsibility, which we can all agree on, but there were no details. That’s what we’re kind of waiting for,” Denton said.

Even without details, Denton foresaw one big problem with the governor’s plan. “Insurers would have to offer guaranteed acceptance [of all enrollees regardless of their health condition], and whenever that has been done, it’s devastated the industry,” he noted.

Other analysts noted Schwarzenegger’s plan would allow the state to dictate how health insurance plans can operate, how much they can spend, and to whom they must sell policies–all factors that drive up the costs.

Tax Question

The governor proposed levying “fees” on health care providers and hospitals as one means of raising $3.7 billion for the new $12 billion system. Physicians would be required to pay 2 percent of their gross revenue, hospitals 4 percent.

At press time, a dispute over whether the “fees” are actually “taxes” was still being waged by the governor’s office and analysts. The semantics are important: Approval of a fee requires only a simple majority vote in the legislature, but a tax requires two-thirds consent.

“It would be extraordinarily difficult to argue this is anything other than a tax,” Jon Coupal, president of the Howard Jarvis Taxpayers Association, told the Los Angeles Times on January 9. “It is a government exaction that is not voluntary. The consequences of not paying it are substantial penalties. How is that not a tax?”

Better Method

Instead of creating a bigger government program, a better means of providing access to care through affordable coverage would be to increase competition, analysts said.

“What should the state do? Pare down the plan,” Turner advised.

“Get the government out of the way and encourage even more competition among insurers, provide direct subsidies for people to purchase health insurance that they can afford and that is portable from job to job, and lift the burden of regulation so the Golden State can show the rest of the country how this should be done,” Turner suggested.

Karla Dial ([email protected]) is managing editor of Health Care News.

For more information …

“Ready for Ahnoldcare?” by Ronald Bailey, Reason Online, January 12, 2007,

“When are ‘fees’ not new taxes?” by Peter Nicholas and Evan Halper, Los Angeles Times, January 9, 2007, (registration required)

“Word war over health plan,” by Aurelio Rojas, Sacramento Bee, January 9, 2007,