California Health Insurance Plan a Bad Idea

Last Friday, after nearly a year of tense negotiations, California Governor Arnold Schwarzenegger (R) and Assembly Speaker Fabian Nunez (D) jointly announced that they had reached a compromise on a plan to add 3.6 million of California’s 5 million citizens without health care insurance to the rolls of the insured by 2010. Called “an incredible plan” by Speaker Nunez, the proposal — which, if passed by the State Legislature, will appear on the California ballot in November — includes a mandate requiring that nearly all Californians either acquire private health insurance or enroll in a government program which will be expanded to meet the additional demand. Further, the measure would prohibit insurers from denying coverage to people because of existing medical ailments, and would require them to spend at least 85% of premiums exclusively on medical care

Expected to cost $14 billion annually, the compromise plan agreed upon by Schwarzenegger and Nunez will, if approved by voters, receive funding from four separate sources: a $2.3 billion tax on hospitals, a new payroll tax of 1% to 6% on businesses in the state, an additional $1.50 to $2.00 per pack tax on cigarettes sold in the state, and $2.3 billion more in funding from the federal government.

The new program is being rushed through California’s state legislature in two parts. The first, which lays out the changes and expansions being made to the state health care system, was presented to the General Assembly Monday and, by Monday night, had been passed by a party-line vote and sent on to the Senate. The second piece of legislation, which deals with the funding of the program, will work its way through the state government more slowly, because, as a tax increase, it requires 2/3 approval to pass. This requirement means that some Republicans must get on board in order for the measure to make it onto the November ballot. To this end Governor Schwarzenegger has already threatened members of the state legislature with a January special session to deal with the health care issue. He can be expected to put as much pressure as possible on those members of his own party who might be swayed.

One obstacle to Schwarzenegger’s plan is state Senate President Pro Tem Don Perata (D), who wants to figure out how best to deal with California’s $14 billion budget deficit (without shrinking or eliminating entitlement programs) before agreeing to such a massive expansion of government health care programs. However, Schwarzenegger is expected to overcome Perata’s resistance shortly. 

But Schwarzenegger’s plan is not only inefficient, it will cause far more problems for the health care system and the state economy than it will solve.

First, taxing the state’s hospitals an additional $2.3 billion –despite the claim that the move is “supported by the industry” (LA Times, December 15) — will simply result in a raising of the prices being paid by those who purchase medical services to recoup the tax increased tax burden.

Second, funding yet another government program on the backs of tobacco consumers is not providing reliable funding: it’s a sucker bet. Due to the declining number of smokers in California, the pool of money from which to pull funding for legislators’ pet projects, including state health care, is steadily shrinking — and adding $1.50 to $2.00 per pack in taxes to what is already being charged will just cause that pool to dry up even quicker.

Third is the payroll tax increase, which will take from small businesses and corporations alike a percentage of their payroll for the purpose of providing health insurance to uninsured workers. While this measure may allow Sacramento to claim a small victory in its quest to move more names into the “insured” column on the state’s rolls, adding to the tax burden on small business owners will make less capital available for hiring new workers or paying existing ones. This will ultimately result in depressed wages and exacerbated unemployment in California, as well as in even more businesses leaving the state (or deciding against coming to it) because of the oppressive tax climate. According to the nonpartisan Tax Foundation, California already rates as only the 47th best state for business in the country. The state’s next-door neighbor, Nevada, ranks third; how long can it be before more of California’s businesses, fed up with subsidizing (along with smokers) every one of Sacramento’s social welfare projects, pick up and move two hundred miles to the east?

Leaving aside the issue of integrity — Governor Schwarzenegger was elected and reelected, at least in part, on the bases of his willingness to take a “no new taxes” pledge — the cost of the Schwarzenegger-Nunez health care plan will be devastating to the citizens of California. California is often the state that leads the nation in social program change.  How many states will be eager to follow California off a health care cliff?