The California Health Plan Collapse: Another Big Lesson in What Not to Do in Health Policy

Conn Carroll /

The collapse of Governor Arnold Schwarzenegger’s California health plan was anti-climactic. For months, it was clear that the complex $14 billion proposal reached by Governor Arnold Schwarzenegger and liberals in the California state legislature was a political non-starter. In the process of hammering out the details with the help of liberal health policy analysts, the Governor managed to alienate entire classes of groups and institutions which should have been his natural allies: the business community, doctors and hospitals, Republicans in the state legislature and the conservative voters in the state, and voters of every partisan persuasion who did not think it was a good idea for taxpayers to subsidize health insurance for illegal aliens. Alienating that many constituencies over one issue is a unique achievement. So, it was a good lesson in the politics of health care reform, and what exactly not to do.

The obvious and more important- and broadly overlooked- fact about the now dead California Plan is that it was not even a reform, if that word has any meaning at all. It was largely an expansion of the status quo. What Schwarzenegger and his legislative allies proposed was, with minor exceptions, simply to accept the current structure and financing of the existing health care system- the mix of public and private, employer-based health insurance arrangements that exist today- expand it, and then slap mandates on both employers and individuals to force them to participate in today’s flawed system. New taxes on doctors and hospitals, plus cigarette taxes- a thoroughly unreliable stream of funding- would be imposed to finance the thing. Not surprisingly, many liberal policy analysts are now saying that the failure of California is proof that health care cannot be reformed at the state level, and that only Washington can be entrusted with getting it right. Drew Altman, president of the Henry J. Kaiser Family Foundation, recently told The Washington Post, “California’s failure, after coming so close, underscores the lesson that too many states don’t have the political will or the resources to reform health care on their own, and thus the need for a national solution of some kind.”

No, not quite. Aside from reforming the inequitable and inefficient federal tax treatment of health insurance, Washington can do little to improve the health care system. States can reform health care, but real reform means real reform. It means changing the structure of the health insurance markets, so that individuals and families, not government officials or employers or managed care executives, control the dollars and make the key decisions in the system. It means reviewing and repealing old and outdated insurance rules and regulations, while developing innovative and imaginative solutions to adverse selection and risk adjustment or designing pooling arrangement. It also means changing the structure of health care financing, in particular, redirecting the billions of dollars of existing government subsidies from health care institutions to individuals and families so that they can get private health insurance that they want and that they like. No, this is not easy. It’s heavy lifting. But it can be done. And every state in the union is inherently capable of doing it.