Arnold's Health Care Flop (Wall Street Journal Editorial)

After Arnold Schwarzenegger unveiled his universal health-care plan for California in January, almost everyone was laying down palms in Sacramento. Here was a Republican Governor putting aside political squabbling and "doing big things that Washington has failed to do," as Time magazine put it. What a change seven months later, with the plan on the cusp of collapse. There's a lesson here about health-care "bipartisanship" when it's merely a cover for bad policy.

The California legislature is now in the second month of the fiscal year without a budget. Deadlocks are routine because the state requires a two-thirds majority of each house to pass spending bills, though they rarely drag on this long or bitterly. Republicans are taking a hard line on spending and a $1.4 billion operating deficit; and even though the budget is just one Senate Republican vote shy of passage, a deal is unlikely before a recess ends on August 20.

Since the legislative session ends in September, that would mean it's curtains for Governor Schwarzenegger's health-care reform. The estimated $12 billion in new taxes that the plan requires also need a two-thirds majority of both houses. Which is unlikely when the legislature can't even agree on a budget without them. To get around that, the Governor calls them "levies," not taxes. Nice try.

The health-care plan is one reason for the gridlock, which speaks to a political as well as policy failure. In trying to round up Democrats, the Governor ended up alienating Republicans. No wonder: His plan was never that conservative or market-based. Like former Governor Mitt Romney's plan in Massachusetts, it turns on an individual mandate. That is, it requires all residents to buy insurance or get it from the state or their employers -- or otherwise face penalties such as garnished wages.

Once again, a state's universal health-care dreams have run up against fiscal realities. Besides the budget fight, the plan's viability was contingent on $3.7 billion in annual subsidies the Governor has been requesting to expand MediCal (Medicare) and "Healthy Families," part of the State Children's Health Insurance Program. This money is unlikely to materialize, given that the 2006 federal budget called for $4.6 billion in health-care cuts to California over the next decade.

The plan also ran into a buzzsaw because of the damage it would do to California's employment and insurance markets. In what's called "play or pay," businesses would have to cover their employees or pay a 3.5% payroll tax to fund a new state-run insurance program for low-income workers. Doctors would be required to pay 2% and hospitals 4% of gross revenues to fund the same -- assuming they could stay in practice at all.

Governor Schwarz-enegger's "bipartisanship" also provided an opening for state Democrats, who have long desired, but have usually been frustrated in passing, a liberal overhaul of the health-care system. They saw his plan and raised, proposing a 7.5% payroll tax -- another example of "play or pay" becoming "pay or pay." It would also compel onerous insurance regulations like mandated coverage levels and premium ceilings.

The Governor has tried to make the Democratic plan a selling point for his "less burdensome" alternative. But he would merely over-regulate insurance in other ways. He wants "guaranteed issue," which means insurers must accept all comers, allowing people to wait until they're sick to buy insurance. He also wants "community rating," which means that insurance premiums cannot vary based on age or health status. Cost-drivers like these are already a main reason between four million and 6.5 million Californians are uninsured now.

In beating the drum for his plan, Mr. Schwarzenegger has often deplored what he calls the "hidden tax" of the current health-care system. Supposedly that describes the extent to which the costs of treating the uninsured shift to those who have insurance, thus making an argument for universal care.

Yet researchers at Stanford led by Dan Kessler ran the figures and demolished this claim. The total burden of this "cost shifting" in California amounted to only 2.8% of premiums in the 2000s. That's not nothing, but in the Governor's hands this modest hidden tax is an excuse for larger unhidden taxes. Perhaps the puncturing of this argument will prevent it from being deployed in the 2008 health-care debate, though don't count on it.

If Arnold's plan does fail, it will join "universal" health-care dreams in Illinois, Wisconsin, Pennsylvania and other states that were also unveiled to hosannas but flopped once the fine print and costs were exposed. Alas, the failure of these state reforms probably won't diminish political agitation for similar attempts that Democrats or Mr. Romney might propose in Washington. But it should.

New Report from Hoover Institution Disputes Study That Shaped California’s Proposed Health-Care Reforms - May 21, 2007

A new report from the Hoover Institution disputes findings in a key study that has been used by advocates of health care reform to shape California’s proposed health-care reforms.

In The Uninsured’s Hidden Tax on Health Insurance Premiums in California: How Reliable Is the Evidence? the authors, John Cogan, Matthew Gunn, Daniel Kessler, and Evan Lodes, demonstrate that the New America Foundation (NAF) study contains several errors that inflate the so-called hidden tax, seen as a boon by reformers.

“The NAF study overstates the amount of care received by uninsured persons,” said Kessler, Hoover senior fellow and associate professor at the Graduate School of Business at StanfordUniversity, “and it understates the revenues currently available to fund that care.”

The authors note that the foundation implausibly assumes that privately insured persons bear all the costs of the uninsured. “Even if the insured did bear all the costs, it would only be 2.8 percent of the insurance premium, not the 10 percent the foundation study estimates,” Kessler added.

The basic premise behind many recent California health-care reform plans is that Californians who have health insurance bear a large part of the financial burden of the health-care services provided to the uninsured. Many reform advocates believe that the amount of money involved in the practice of shifting costs from the uninsured to the insured (the hidden tax) is large enough that the proposed reforms, which include mandates and new taxes, will actually reduce those premiums. Not so, say the Hoover authors.

Cogan and Kessler are also coauthors, with Glenn Hubbard, of Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System, which recommends federal policy changes to improve U.S. health-care markets.

Healthy, Wealthy, and Wise: Five Steps to a Better Health Care System

This short and focused book offers five suggestions to help lower our society's overall healthcare expenses, improve availability, while putting it on a more sound footing for controlling future cost growth. Discussing healthcare is a complicated issue and much of the public discussion is distorted by various kinds of self-interest, lack of knowledge about the technical aspects of the problem (both medical and economic), and different views of what the desirable outcomes would be. This one hundred-page book is a wonderful basic foundation so we can discuss the health care issues from a common ground.

Our present private health care system suffers from several market distortions that prevent efficiencies. First, it arose from a wartime wage & price controlled economy in 1942 when companies began offering "fringe benefits" since they couldn't raise wages. The next biggest problem is that what we really have is pre-paid healthcare rather than true insurance. Insurance is based on the notion of sharing risk not the notion of no-risk no cost. Imagine if we have pre-paid lunches. Wouldn't the natural inclination be to consume bigger lunches than you normally would? Maybe even combine two meals of the day? You would not want to be paying for something you weren't getting the full benefit from, so you would over consume and costs would rise. That would spur the desire for more consumption and a vicious cycle gets worse.

The notion that healthcare should be provided at no cost is pernicious. The government has no money of its own so we have to pay for our healthcare even if the government "provides" it. But worse than the payment problems this causes is the notion that we should be free to use our income on everything else but healthcare and that somehow when we use our own income for healthcare we view it as a kind of oppression. However, we use our income for many less necessary and some very foolish things. The amount of money we waste on foolish things like diet fads, pills, patent medicines, magnets & bracelets that do nothing, and various quack treatments has got to be a large fraction of our actual health care expenditure. We need to spend our money on health with greater awareness and understanding.

So, what are the five recommendations the authors make in this book?

1) Change the tax law to reduce the preference for medical-care purchases through employer-based insurance.

This is an important change because it will allow for people to make health care purchases with their own income and buy their own insurance with PRE-TAX dollars. As it is now, everything is biased towards shifting it to the employer program because anything we pay for is AFTER-TAX and therefore much more costly. Since everything is pushed to the employer pre-paid healthcare it exacerbates the over consumption problem.

2) Reform regulation markets for health insurance.

This is about lowering costs by making national insurance pools and reforming state specific regulations that add unusual costs to the insurance market through specific popular mandates. This is the suggestion I am least comfortable with, however I do understand the notion and think it is definitely worth investigating. What we don't want is a national reform that solely benefits the insurance industry shareholders at the expense of the insured the way our, say, sugar supports keep us paying four times the world price for sugar.

3) Expand provision of health information.

This has two components. The first is to limit discoverability of information that flows between organizations with the purpose of quality improvement. The second is to rate organizations and doctors in a way that provides good information to consumers of healthcare. While I like the notion in the simple abstract, the real problem with this is, for example, that not all cardiologists have the same risk profile of patient. Nor are all the same in their approach to patients. All systems of "grading" are subject to gaming and I wonder how this will be prevented in such a national system.

4) Control anticompetitive behavior by providers and insurers.

Yes, we do need real markets for market forces to do their work in cost containment. But, yes, businesses and businessmen (and women) do want to limit competition and enhance profits (rent seeking behavior in economic terms). So, one of the very most important things our lawmakers and regulators can do is ensure that a strong market and strong competition exists. There is evidence that hospitals and insurers are working to limit competition and using their influence with lawmakers to strengthen their position and raise costs. This is quite important.

5) Reform the malpractice system.

There is no question that the lottery approach to non-economic damages has driven up insurance costs to the point that access to health care providers in some states is impaired. We definitely need to control non-economic costs of malpractice lawsuits. The other aspect of reform, since these kinds of mistakes are well known and the process well understood, is to do what we can in holding down legal costs. This is fought tooth and nail by trial lawyers because they make tens of millions of dollars from these lawsuits. However, those tens of millions of dollars going to lawyers do not help the healthcare of anyone except the lawyers and the families and their employees.

You can see that I have difficulties with some aspects of the proposals in this book and you will likely have some of your own. However, I think they make a great place to start the discussion we must have for the reform that will come one way or the other. I just hope we have the will to make it a strong, active, and constructive reform rather than a passive contraction that will do much more harm than good.

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