HealthCare Reform Plan in California

TOPIC: Health Care Reform in California

"But when you look at the math, they actually benefit. Everyone is left with a better deal,
even though everyone has to chip in." (Governor Schwarzenegger)

Dear Friends and Colleagues:

Governors Schwarzeneggers bold healthcare reform proposal has triggered a wave of support and opposition.
I think its important to understand his proposal and to learn how to refine such an approach, so that it can achieve what it is supposed to achieve.
California now has about 6.5 million people who are uninsured or underinsured, a higher level than any other state. According to the Census Bureau, 15.9% of Americans lacked health insurance in 2005; in California, it was 19.4% ( in South Florida almost 30%!!).
The plan would require employers with 10 or more workers to provide health insurance or pay a 4% tax on all wages covered by Social Security: The plan would be financed by charging a "dividend" (i.e .TAX) of 2% on doctors' revenue and 4% on hospitals' and $10 billion to $15 billion in new money coming into the medical system from so many people being insured, as well as a proposed increase in the state's Medi-Cal plan.
Such a "tax", camouflaged as a "dividend", guarantees opposition from California physicians who already voiced their concerns.
David Henderson brings up a very important point; does universal coverage provided by the government work?
He raises two concerns:
"Why doesn't increased government power tend to solve the problem of the uninsured? There are two main reasons. First, when government provides health insurance, many people who take advantage of it drop their own privately provided health insurance. In a 1996 article in the Quarterly Journal of Economics, Harvard economists David M. Cutler and Jonathan Gruber found a 50% "crowding-out effect." As the federal Medicaid program expanded, for every two people who gained insurance through Medicaid, one dropped private health insurance. Although this is a net addition of one, the costs to taxpayers are much higher than expected because now half of the newly covered, instead of paying their own way as they previously did, become wards of the state.
Second, of the 46 million or so people without health insurance at any given time, about 45% will have health insurance within four months. This is one of the main findings of a 2003 study by the Congressional Budget Office, "How Many People Lack Health Insurance and for How Long?" That shouldn't be surprising in a country where most private health insurance is employer-provided and most unemployment spells last 11 weeks or less. Solutions that involve government mandates on employers or employees will, therefore, miss connecting with about half of the people who are uninsured at a given point in time."

Maybe Governor Schwarzenegger should consider the following:
1) Abolish or reduce government mandates, which have contributed to an increase in insurance premiums
2) Open the market place and let insurance providers from all over the US compete for customers, thereby allowing average citizens to buy health insurance in the same way as they currently can but car insurance.

Again David Henderson points out:
"In the last few decades, state governments, the main regulators of health insurance in the individual and small-group markets, have mandated coverages for many kinds of health care. According to the Council for Affordable Health Insurance (CAHI), a pro-market association of insurance carriers, there were 1,843 state mandates in 2006. Among the most common, and most expensive, mandates are chiropractic care, treatment for alcoholism and drug abuse, and mental health benefits. California's government mandates coverage for all of the above, as well as for many other benefits, including, for example, infertility treatment -- a very expensive benefit.
Abolishing these mandates would allow people who don't want to be covered for these things to buy cheaper insurance, while still allowing those who want them to buy and pay for them. Would such an approach work? That's like asking whether, if the government currently required new cars to have CD players, eliminating that requirement would lower the price of a car. Of course it would work.""
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Schwarzenegger Embarks
On Fight for Health Plan
By JIM CARLTON
January 9, 2007; Page A2

(See Corrections & Amplifications item below.)

California Gov. Arnold Schwarzenegger proposed a sweeping plan to mandate universal health care in the nation's most-populous state, putting forth measures that would require employers to pay into the health-care system as well as tax hospitals and doctors to help offset medical coverage's spiraling costs.

The move makes Mr. Schwarzenegger, a Republican, the latest governor to try to tackle a problem -- covering the uninsured -- that the federal government has been unable to solve. Massachusetts Gov. Mitt Romney, who is seen as a Republican contender for the presidency, struck a bipartisan deal with his state's legislature last year mandating universal health care in the Bay State. Mandates for some employers to pay more of their share if they don't already have been passed in Vermont and Maryland, as well as New York City and San Francisco. Maryland's law was thrown out by a federal judge last year after a legal challenge.

California, with 36 million residents, could influence other states to follow suit. But Mr. Schwarzenegger also faces potentially one of the fiercest battles of his political career, because his plan calls for some level of sacrifice from many of the parties affected.

The governor anticipated criticism in his remarks yesterday to a Sacramento gathering of his staff and business executives, saying the long-term rewards of having lower medical costs would make the pain worthwhile. "It appears we are taking something away from everyone here," Mr. Schwarzenegger said by video link as he recuperated from a broken leg injury he suffered while skiing over the holiday break in Sun Valley, Idaho. "But when you look at the math, they actually benefit. Everyone is left with a better deal, even though everyone has to chip in."

The governor said his plan to charge a "dividend" of 2% on doctors' revenue and 4% on hospitals' would be more than offset by what his office estimates would be $10 billion to $15 billion in new money coming into the medical system from so many people being insured, as well as a proposed increase in the state's Medi-Cal plan.

California now has about 6.5 million people who are uninsured or underinsured, a higher level than any other state. According to the Census Bureau, 15.9% of Americans lacked health insurance in 2005; in California, it was 19.4%.

The Schwarzenegger plan drew some skepticism. "There may be some unintended consequences," said Joel Fox, president of the Small Business Action Committee in Sacramento, in a panel discussion organized by the governor's administration after the speech. "For example, will some businesses opt out of covering employees and go into the pool [of state-insured workers], thus overwhelming the pool? Will some companies cherry-pick their employees so that they hire those more easily covered, instead of guys like me that are older?"


Allan Zaremberg, president of the California Chamber of Commerce, questioned whether the plan would really make health care more affordable for those who already are insured. Mr. Zaremberg said the taxes on doctor and hospital revenues could be passed onto consumers and the companies that already provide insurance in higher premiums.

Others praised the plan. Officials of Blue Cross of California called it "bold and visionary," singling out the provision to provide medical coverage to all uninsured children in the state, even those of illegal immigrants. "Taking each part separately, there's something for everyone to hate, but taken as a whole, there's a lot to like," said Bruce Bodaken, chairman, president and Chief Executive of Blue Cross of California.

Some other business leaders, including the chief executive of California-based grocery titan Safeway Inc., are also backing the plan. One reason: They already pay to fund medical plans for their employees, and resent the competitors who don't. On balance, the governor likely will have a tougher time persuading members of his own party to back the measure than the Democratic lawmakers who control the California Legislature. Indeed, Mr. Schwarzenegger's plan isn't hugely different from versions recently proffered by state Senate President Don Perata and Assembly Speaker Fabian Nunez. Mr. Nuñez said in an interview that he just had a few issues with the governor's plan -- most important, that it would shift money from one program for the poor into this health-care program. "On its face, this is a good start," Mr. Nuñez said.

he California government could allow any Californian to buy health insurance from any willing insurer in any state and be subject to the regulations of that state. That way, people could shop for the degree of paternalism they want. If they want insurance from a state that requires many coverages, they could do so and pay the high premiums that result. If they want bare-bones coverage, they could do so also. The result would surely be that some of the current uninsured would buy insurance. Were I in the market for individual insurance and given the choice, I would not bother paying for coverage for alcohol or drug abuse.

---- Mark Golden contributed to this article.
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Terminatorcare
By DAVID R. HENDERSON
January 10, 2007; Page A17

MONTEREY, Calif. -- On Monday, Arnold Schwarzenegger presented his proposal for reducing the number of Californians who lack health insurance. His proposal is almost indistinguishable -- except in details -- from that of the Democrats who dominate the California Assembly and Senate.

The Democrats tend to favor solutions involving regulations, government spending and taxes, and Senate President Pro Tem Don Perata's proposal -- the main contending Democrat plan -- hits the trifecta. It would require employers to provide health insurance; give them the option of paying a tax instead of providing health insurance; and increase spending by expanding both the Medi-Cal and Healthy Families programs, which provide care to low-income children -- including children of illegal immigrants and the disabled.
[graphic]

Mr. Schwarzenegger's solution hits the trifecta also. He would require employers with 10 or more workers to provide health insurance or pay a 4% tax on all wages covered by Social Security: Look for employers with 10 to 12 employees to get creative about outsourcing. And look as well, as Harvard economist Jonathan Gruber has documented, for wages to fall in firms that offer health insurance because of the mandate. Gov. Schwarzenegger would throw in a 2% tax on doctors and a 4% tax on hospitals to help fund Medi-Cal, California's name for Medicaid. And he would expand Medi-Cal to adults earning as much as 100% above the poverty line and to children, even those here illegally, in poor and middle-income families. He hopes, by doing this, to shift $5 billion of Medi-Cal's annual cost to the federal government.

There are two problems with such solutions. First, they infringe on economic freedom, preventing, in Robert Nozick's phrase, "capitalist acts between consenting adults." Second, government solutions rarely work.

Why doesn't increased government power tend to solve the problem of the uninsured? There are two main reasons. First, when government provides health insurance, many people who take advantage of it drop their own privately provided health insurance. In a 1996 article in the Quarterly Journal of Economics, Harvard economists David M. Cutler and Jonathan Gruber found a 50% "crowding-out effect." As the federal Medicaid program expanded, for every two people who gained insurance through Medicaid, one dropped private health insurance. Although this is a net addition of one, the costs to taxpayers are much higher than expected because now half of the newly covered, instead of paying their own way as they previously did, become wards of the state.

Second, of the 46 million or so people without health insurance at any given time, about 45% will have health insurance within four months. This is one of the main findings of a 2003 study by the Congressional Budget Office, "How Many People Lack Health Insurance and for How Long?" That shouldn't be surprising in a country where most private health insurance is employer-provided and most unemployment spells last 11 weeks or less. Solutions that involve government mandates on employers or employees will, therefore, miss connecting with about half of the people who are uninsured at a given point in time.

But what if the governor could solve some of the problem by making health insurance cheaper? He can -- not by regulating more, but by deregulating.

Let me explain. In the last few decades, state governments, the main regulators of health insurance in the individual and small-group markets, have mandated coverages for many kinds of health care. According to the Council for Affordable Health Insurance (CAHI), a pro-market association of insurance carriers, there were 1,843 state mandates in 2006. Among the most common, and most expensive, mandates are chiropractic care, treatment for alcoholism and drug abuse, and mental health benefits. California's government mandates coverage for all of the above, as well as for many other benefits, including, for example, infertility treatment -- a very expensive benefit.

Abolishing these mandates would allow people who don't want to be covered for these things to buy cheaper insurance, while still allowing those who want them to buy and pay for them. Would such an approach work? That's like asking whether, if the government currently required new cars to have CD players, eliminating that requirement would lower the price of a car. Of course it would work.

It is important, though, not to overstate its benefits. The gain to Californians from abolishing these mandates would not be huge. CAHI compiled data from America's Health Insurance plan and eHealthInsurance for the individual market and from the federal government for the small-group market and found that in 2003, although California had more mandated coverages than all but six other states, it had among the lowest insurance rates for individual health insurance policies ($1,885 versus a top rate of $6,048 for New Jersey.)

The reason, explains CAHI, is that in other ways California is much less regulatory than many other states. It does not, for example, require guaranteed issue on individual policies -- which drives up premiums by forcing insurance companies to supply policies to all comers, regardless of health status. Yet the governor's proposal would reverse this somewhat and prevent insurance companies from saying no because of age and health.

California should not, contra Gov. Schwarzenegger, do new regulatory harm; rather it should repeal existing regulations that cause harm -- so as to make health insurance even more affordable.

There is one other way to deregulate: The California government could allow any Californian to buy health insurance from any willing insurer in any state and be subject to the regulations of that state. That way, people could shop for the degree of paternalism they want. If they want insurance from a state that requires many coverages, they could do so and pay the high premiums that result. If they want bare-bones coverage, they could do so also. The result would surely be that some of the current uninsured would buy insurance. Were I in the market for individual insurance and given the choice, I would not bother paying for coverage for alcohol or drug abuse.

If a version of Gov. Schwarzenegger's plan passes, the only thing certain is that there will be more regulation, more government spending and more taxes. A better path would be to deregulate, and thus achieve some increase in the number of insured -- without new spending or taxes or regulation.

Mr. Henderson, a research fellow at Stanford's Hoover Institution, was the senior economist for health policy with President Reagan's Council of Economics Advisers (1982-84). He is co-author of "Making Great Decisions in Business and Life" (Chicago Park Press, 2006).