Schwarzenegger’s Health-Care Shakedown

Last week, California Gov. Arnold Schwarzenegger proposed to guarantee health insurance to all Californians — including many illegal immigrants. How would Gov. Schwarzenegger achieve this feat? To paraphrase another California governor: If it moves, he taxes it. If it still moves, he regulates it. And if it stops moving, he subsidizes it.

Or more precisely, you subsidize it. Gov. Schwarzenegger would fund nearly the entire plan through Medicaid. Under that program’s rules, roughly half the funding comes from California and half from the federal government — in other words, from taxpayers in other states. But, if you look closely at how the program will be funded, it becomes clear that Schwarzenegger wants to bend the rules so non-Californians would pay over three times as much as Californians would.

The governor’s thinly veiled shakedown is both dishonest and emblematic of what ails America’s health-care system.

The centerpiece of TerminatorCare is a requirement that every California resident purchase health insurance. Though many call this an “individual mandate,” that’s just a fancy term for a sort of tax. Instead of spending your money itself, the government forces you to spend your money according to its instructions. The result is the same: You end up with less money to use as you see fit.

The governor claims a mandate is necessary because the uninsured’s medical costs get shifted to everyone else; a mandate would ensure that all Californians have coverage. Yet the governor vastly overstates the free-rider problem, which is dwarfed by the amount of waste in our health-care system. And requiring people to purchase insurance doesn’t mean they’ll do it. California requires drivers to purchase auto insurance, yet one in four California drivers are uninsured.

The governor also wants to tax employers four percent of their payroll if they do not offer health benefits. If this proposal becomes law, we can expect to see California employers dropping coverage: The tax would be less than what many employers spend on health benefits. If employees can readily gain health insurance apart from their employers, there will be less incentive for employers to provide health insurance, and a strong economic incentive for them not to.”

As for regulation, the governor would require insurance companies to cover all applicants, regardless of health status. He also proposes to limit how much insurers can charge those with high expected-claims. Such regulations are supposed to make coverage more accessible for sicker individuals, yet on balance they tend to make coverage less accessible. In states such as New York and Washington, these regulations have increased insurance premiums, increased the number of uninsured, and caused insurers to flee the state.

With regard to subsidies, the governor would increase spending on preventive care, reasoning that he can reduce health-care costs by catching diseases early. Yet when Stanford University economist Victor Fuchs polled health economists, only one out of nine agreed that greater spending on preventive care would even marginally reduce overall spending.

And then there are the subsidies. Schwarzenegger would expand government programs for the poor, including California’s version of Medicaid — i.e., Medi-Cal. In fact, he would expand these programs so much that they would cover many Californians who aren’t poor at all. Families of four making $60,000 per year — including illegal immigrants — would be eligible.

That would be dangerous: Such programs discourage people from climbing the economic ladder, because recipients lose benefits if their income rises. Expanding programs like these ensnares middle-class families in what experts call a “low-wage trap.” Such programs also tend to increase the cost of privately purchased medical care and insurance; expanding them would make private options even less affordable.

But the truly audacious part is that the governor wants non-Californians to pay for it all — or most of it, anyway — a fact that he and his advisors tried to disguise.

Here’s how it would work: The governor would increase Medi-Cal payments to doctors and hospitals by $2.2 billion, expecting Washington to chip in another $1.8 billion; that’s the way Medicaid works, with half of the costs being borne by the federal government. The governor would then tax $3.5 billion from the providers — i.e., from the doctors and hospitals, to whom payments had been increased by $2.2 billion. That means the state would recoup not just the $2.2 billion it originally paid the providers, but also $1.3 billion of what the federal government paid the providers. The proposed increase in payments to providers, which is subsequently revoked by taxes, is merely a ploy to get even more money from taxpayers in other states. It turns out that the governor wants to shake down non-Californians for over three-fourths of the costs of the increase.

If nothing else, the governor has highlighted what’s really wrong with America’s health-care system. Health care grows more expensive every year because everyone in the system is spending someone else’s money, and so no one spends responsibly. Even Medicaid encourages governors to make wild spending commitments because they can make taxpayers in other states pick up the tab.

The late Milton Friedman — a Nobel Prize-winning economist and philosophical mentor to Gov. Schwarzenegger — neatly summarized the problem with America’s health-care system: “nobody spends somebody else’s money as wisely or as frugally as he spends his own.”

Forcing more people to participate in this broken system is no solution. Health-care reformers need to change the incentives so that everyone starts acting responsibly.

Thanks to Gov. Schwarzenegger, reformers now have a poster child.

State & Federal Budgetary Effects of TerminatorCare (dollars in millions)
New spending (annual) State share Federal share Total
Increased Medi-Cal & Healthy Families Program Coverage $1,283 $1,357 $2,640
Subsidy for Persons 100% -250% of FPL $1,135 $1,135 $2,270
Prevention and Wellness Measures $150 $150 $300
Medi-Cal Rate Increase $0 $1,832 $1,832
Federal funds taxed back from providers ($1,264) N/A ($1,264)
Subtotal, new spending $1,304 $4,474 $5,778
Share of total new spending 23% 77% 100%

Revenue effects (annual)

Reduced tax revenue $900 $7,500 $8,400
Share of total 11% 89% 100%
Sources: Governor Schwarzenegger’s health-care team, author’s calculations
Michael F. Cannon is director of health policy studies at the Cato Institute and coauthor of Healthy Competition: What’s Holding Back Health Care and How to Free It (2005).