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California's proposed health care "solution": Not individual and not responsible


Earlier this week, Gov. Arnold Schwarzenegger unveiled a sweeping new health care plan for California. At the heart of his proposal is the simple notion of personal responsibility. That all Californians should be required to provide for the health care needs of themselves and their families. To achieve this goal, the governor wants to mandate that the every Californian be covered by a health insurance policy "substantial enough to protect families against catastrophic costs." Gov. Schwarzenegger calls his plan an "individual mandate," but it's not. In fact, it expands the Medi-Cal welfare medical payment system and imposes new taxes on employers, doctors and hospitals to pay for additional subsidies. Instead of helping Californians to become more responsible for their own health care, it makes more of them wards of the state.

There is a better way. Why not go with the governor's original insight? Make it a true individual mandate. Just as the governor proposes, require every Californian who can afford health insurance to buy at least enough to cover catastrophic medical expenses. Insurance should cover low-probability, high-cost events, not routine maintenance. Here the governor's plan is already moving in the right direction. He proposes that the minimum health insurance benefit must be a $5,000 deductible plan with maximum out-of-pocket limits of $7,500 per person and $10,000 per family. Gov. Schwarzenegger notes that for the majority of uninsured individuals, such coverage can be purchased today for $100 or less per month for an individual and $200 or less for two persons.

In fact, using Reason's Los Angeles address I obtained a quote for a plan 45 year old male with a $5000 deductible and 30 percent coinsurance for $92 per month and another from Health Net with an annual $4000 deductible and no coinsurance after the deductible for $111 per month. I also got a Health Net quote covering a couple with two teenagers with a 25 percent coinsurance up to a $3000 family deductible and an out of pocket limit of $8000 for $264 per month, or $3,168 per year. Annual out of pocket expenses were capped at $8000 and the maximum lifetime benefit was $6 million per person. Aetna offered a plan with no coinsurance and a family deductible and annual out of pocket limit of $10,000 for $348 per month, or $3,976. The lifetime maximum benefit was $5 million per person. Clearly the governor knows what he is talking about.

However, instead of imposing more taxes on California employers to pay for his proposals, the governor should be at the forefront of trying to free Californians from the shackles of employer provided health insurance. Employers do not buy homeowners, life, or auto insurance for their employees, why should they buy their health insurance? And if you lose your job, you don't lose your car insurance or your homeowner's insurance. Why should you lose your health insurance? One reason only—ridiculous federal tax laws that allow employers, but not individuals, to purchase health insurance with pre-tax dollars.

Rather than paying an employee $1,000 more in wages, of which $400 will be taxed away, companies purchase $1,000 in additional health insurance tax-free. In this way companies funnel more than $140 billion a year in federal tax breaks to their workers. The tax-free status of employer-provided health insurance encourages generous coverage that allows employees to ignore the prices of medical services, which in turn encourages providers to charge more and more. Employees, seeking to take advantage of their coverage, tend to over-utilize the system, which also puts pressure on prices. One more obstacle prevents health insurance from being tied to individuals rather than to jobs—the feds require that employers purchase group insurance.

The way to fix this problem would be for Congress to pass legislation enabling every individual to buy his or her health insurance with pre-tax dollars. Employers then could hand over the money they've been spending on health insurance to employees who could buy the policies that best suited their needs instead of the policies that best suits their employers' bottom lines.

While Gov. Schwarzenegger's hands are tied by current federal tax law, his plan is, nevertheless, already taking a step in the right direction. The governor's proposal requires that employers who do not offer insurance set up Section 125 plans. These are IRS-sanctioned plans to which employees can contribute pre-tax dollars that they can use to purchase health insurance. This lowers the real cost of health insurance to individuals by about 40 percent.

What to do about insurance that is already being purchased for by employers? The Dallas-based National Center for Policy Analysis believes there may be loophole in federal law in which health reimbursement accounts (HRAs) could be used by companies to buy individual health insurance policies for their employees with pre-tax dollars. HRAs are accounts through which employers can reimburse employees with untaxed dollars for health care expenses, including health insurance premiums. The chief problem with this work-around of federal barriers is that if an employee switches jobs to a company which does not offer a similar arrangement, he can't take his current health insurance and premium payments with him. The governor should encourage more employers to use HRAs in this way, so that employees can more easily take individual responsibility for their health insurance as they follow their careers.

"There is no economic reason that employees can't enroll in health plans that meet their needs and retain them as they travel from job to job," explains NCPA president John Goodman. "Employers should be able to buy personal and portable insurance for their employees with pre-tax dollars, just as they are able to buy group insurance today."

Removing the obstacles that prevent Californians from switching to less expensive high-deductible individual health insurance policies will encourage smarter comparison shopping. That alone will go a long way toward reining in rising health insurance premiums and enabling a substantial proportion of California's 6.5.million uninsured to purchase affordable private health insurance.

But what about those who can't afford to buy even at the lower prices? The governor wants to subsidize the purchase of health insurance for lower income Californians. Helping them buy health insurance is the right idea. But why not instead provide them with a means-tested health insurance voucher and let them purchase whatever private insurance they choose? If it turns out that they can purchase the minimum required policy for less than the voucher, they could buy additional coverage or deposit the leftover in a Health Savings Account.

For Californians below the poverty line, the governor wants to enroll them in various state programs, especially Medi-Cal, California's version of Medicaid. Instead why not empower the poorest Californians with health care vouchers too and allow them to buy private insurance. Where would the money come from to pay for vouchers? Consider this thought experiment. In 2005, Medi-Cal spent $34 billion providing for the health care needs of 10 million Californians—that averages out to about $3400 per person. Assuming all the cash were given to a family of four as a voucher, that conceivably means that the family could purchase a high deductible policy for about $3400 and leaving them more than $10,000 to cover the deductible. This rough calculation suggests that boldly moving to a real individual mandate could dramatically reduce bureaucratic and regulatory hassles while providing affordable health insurance for all Californians.

One thing that must be said about the governor's scheme--it is certainly better than Sen. Ted Kennedy's (D-Mass.) recent proposal. As the new chairman of the Senate Health, Education, Labor and Pensions Committee Sen. Kennedy said earlier this week that he wants to nationalize health insurance by extending Medicare to cover all Americans. That would stop medical innovation in its tracks and eventually guarantee that we would all get the same equally bad health care forever.

Individual responsibility for health insurance is the right aspiration. It's too bad the governor's current plan falls very short of that ideal.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.