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TERMINATORCARE

by George Passantino, Senior Fellow at the Reason Foundation

February 8, 2007

When Arnold Schwarzenegger stormed into the Governor’s office, he swore himself a disciple of the late, great economist Milton Friedman and has routinely cited his influence ever since.   In declaring January 29th Milton Friedman Day earlier this year, Schwarzenegger praised Friedman for helping to “restore our faith in the freedom of the individual to choose in every sense of the word – political, economic and social” How sad, if not utterly confusing then, that even as he honors Friedman’s contributions to a free society, Schwarzenegger is busy peddling a $12 billion nanny-state healthcare proposal that relies on coercion, new regulations, higher taxes, and social engineering.

It is impossible to reconcile Schwarzenegger’s devotion to a Friedman-esque philosophy with his new healthcare proposal.  On the one hand, Arnold commented that “when I was first exposed to his (Friedman’s) powerful writings about money, free markets and individual freedom, it was like getting hit by a thunderbolt."    Yet, his healthcare proposal is a stew of mandates on individuals, businesses, health care institutions, along with various “incentives” to encourage Californians to make healthy lifestyle choices.  

To Governor Schwarzenegger’s credit, “TerminatorCare” is built on the recognition that healthcare costs have spiraled out of control. He points to a sharp rise in bankruptcies driven by healthcare costs and the strains that healthcare debts place on families. 

Yet, like a bad doctor, he has diagnosed the cost and availability of health insurance as the disease, when, in fact, it is the symptom of a larger problem.   California’s problem is not that too many families lack insurance.  It is, in fact, that health care itself is too expensive. 

Ensuring that everyone has insurance will not solve that underlying cost problem and could actually make matters worse.  While insurance is a market-driven approach to help cope with unexpected events and costs, it can have the unavoidable consequence of increasing prices by stripping consumers of the cost discipline that comes with actually paying for a service.

As an example, only slightly more than half of Americans have vision insurance and yet, the vision-care industry has enjoyed a dramatic decline in the real cost, even as the range of services has exploded.  This revolution has been driven, in part, by a healthy competitive market where producers must compete for business with innovative products (disposable contact lens, lasik surgery, and light sensitive glasses) and low prices.   That is precisely because many of those consumers must actually pay for the services out of pocket.

While most people that need glasses can tell you precisely how much an eye exam and pair of glasses will cost, few individuals can tell you how much a typical doctor visit or how much a night’s stay in a hospital costs.  Insurance, while it can help cover unexpected costs, exacerbates this lack of consumer information—particularly when the patient never sees an actual bill.

Sadly, the regulations and mandates that Arnold prescribes will only accelerate price escalation.

Mandating that insurance companies cover anyone regardless of their current health will add unhealthy individuals to the coverage pool, driving up costs for everyone.    And the most insidious consequence of this mandate is that it may actually discourage insurance coverage by healthy people.

Guaranteeing that all individuals can be covered regardless of their condition is tantamount to allowing someone to buy automotive insurance after they have crashed their vehicle. Such a policy encourages people to not purchase health coverage until they suffer a severe illness or injury.

Although the Governor’s “individual mandate”—the decree that individuals must have healthcare—is designed to avoid this perverse incentive, it seems like a hollow and unenforceable provision.  While such a mandate exists for car insurance, a quarter of the state’s drivers still go without coverage—a larger share than individuals that do not have health insurance.

And sadly, the deeper one delves into universal coverage, the uglier the picture for taxpayers and businesses. 

If you mandate that everyone must have coverage, then it is a logical extension that you must provide assistance to families that can’t afford it. Hence, under the Schwarzenegger proposal a family of four, making as much as $61,000 would be eligible for taxpayer-subsidized insurance.  As inflation in healthcare costs eats away at the purchasing power of consumers, do not be surprised to see the range of eligible families expand as well.

Additionally, companies with 10 or more employees would either be coerced into providing healthcare for their employees or paying a 4% payroll tax. Given that healthcare costs are far greater that four percent of payroll, some businesses may abort their own coverage and ask their workers to shoulder this burden themselves.  Doctors and hospitals would not escape the tax sweep either, being forced to pay $3.5 billion in taxes while collecting only $2.2 billion in increased Medicaid reimbursements.

So what do we do about healthcare costs? Fortunately there are answers.

One obvious reform is the use of Health Savings Accounts in conjunction with High Deductible Health Plans.  This strategy includes purchasing (at lower cost) an insurance plan with a high deductible and banking the premium savings pre-tax into a Heath Savings Account that can be used for health costs below the deductible. This gives families the coverage they need but allows them to retain direct control over their health care purchases.  California, unlike most other states, taxes contributions to Health Savings Accounts. Changing this tax treatment would greatly expand the feasibility of HSAs in California.

Similarly, California regulators should relax restrictions on what products health insurance providers and plans can offer to consumers, including plans with higher deductibles, co-payments, and a range of benefits.  The state could also encourage lower-cost healthcare facilities like community-care clinics or clinics run by registered nurses.  Such steps would move the state toward market-driven healthcare, as opposed to one that is regulatory-driven.

Schwarzenegger praised the father of free market economics for his devotion to “the simple idea that we are responsible for our own lives, to live them as we see fit as long as it does not violate the liberty of others.”   By all measures, this latest healthcare proposal represents a troubling shift away from that world view and toward the grandiose view of government that drove Schwarzenegger to America in the first place.

George Passantino is a Partner in Passantino Andersen Communications, LLC and a Senior Fellow at the Reason Foundation.  In 2004, Passantino served as a Director of Governor Arnold Schwarzenegger’s California Performance Review.