Governor Schwarzenegger Misunderstands California’s Lessons for Federal Health Reform

California Governor Arnold Schwarzenegger recently wrote a letter to congressional leaders expressing concern about three elements of the looming federal health care take-over: increasing Medicaid costs; wellness, prevention, and quality; and coverage for all. The July 31 letter shows that the governor has failed to learn the lessons of his own wrong-headed effort.

In January, 2008, governor Schwarzenegger fell inches short of the goal-line after a year-long attempt to take over Californians’ access to medical services. His misguided “health reform” alienated both those who advocate individual liberty and those who advocate government monopoly (“single payer”) over health care.

The governor relied on job-killing tax hikes on small businesses and multi-billion-dollar transfers from the federal treasury. “The federal government,” he says, “must help states reduce their Medicaid financing burden, not increase it.” He advocates bureaucratic “tweaks” to free states from federal oversight when they ratchet up their Medicaid spending.

Partial federal funding of Medicaid, the governor fails to understand, is itself the primary cause of this program’s reckless expansion. Between 1997-1998 and 2006-2007, Medi-Cal (California’s Medicaid program) grew at an annual rate of 7 percent, nearly doubling. And fully one-third of this increase was due to increased enrollment. Federal matching give California an incentive to rope more people into government dependency for their health care, and the problem is getting worse.

Until 2009, the U.S. government matched California’s Medicaid spending. The state had to spend one dollar to draw down another dollar from taxpayers’ federal dues. However, the stimulus act that President Obama signed increases the match to 1.616. That is, the state only has to spend 38 cents to draw down a federal dollar. The “stimulus” allocates more than $11 billion to California for 2009 through 2011, which means the state has to ratchet up its own spending by more than $4 billion to attract the money. This is a death spiral of government spending, and it will get worse if the federal health “reform” passes. The bill that came out of the House Energy and Commerce Committee at the end of July had a match of 1.93. (And this was an amendment inserted by the “Blue Dog” Democrats.)

Governor Schwarzenegger repeats that government can motivate us to live healthier lives, and that central planning of medical services will lead to better quality than returning health dollars to patients to spend on the care that their doctors recommend. What’s remarkable, for a governor, is his faith that the federal government, through “community transformation grants,” is better suited to do this than the communities themselves.

Governor Schwarzenegger continues to promote “coverage for all” rather than increasing individuals’ choice of medical services, in consultation with their doctors. His letter encourages Congress to impose an individual mandate to buy health insurance, and force health insurers to issue policies to all applicants without regard to their risk of illness. This is a recipe for reducing competition in health insurance, not increasing it. California’s experience with a so-called health insurance “exchange” should warn Congress of the perils from this level of government interference.

In 1993, California outlawed pricing risk in the small-group market for health insurance. This means that the law forced health insurers to issue coverage to any small business that applied, at premiums priced within a narrow range. It also established an exchange, the Health Insurance Plan of California, originally set up within the government but spun off to the non-profit Pacific Business Group on Health in 1999 under the new name of PacAdvantage. It never enrolled more than 150,000 people and closed down in 2006.

According to a report by economist Elliot K. Wicks, for the California Health Care Foundation, PacAdvantage was unable to achieve administrative efficiencies and suffered from adverse selection. Wicks suggests that insurers enrolled businesses with below average medical costs directly and encouraged those with higher than average costs to apply to PacAdvantage. The result is what economists call a “death spiral,” and predictable when insurers are forbidden to price risk.

The nation needs governors’ input on the consequences of a federal health take-over. It’s a shame that governor Schwarzenegger never learned the lesson of his own failure at “reform.”

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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