By Dan Baren

When California Gov. Arnold Schwarzenegger rolled out his sweeping universal health care proposal earlier this year, most Republicans attacked the plan as a misguided and exorbitantly costly expansion of big government. The Governor's defenders countered that Schwarzenegger's proposal mirrored the plan enacted in Massachusetts by Gov. Mitt Romney.  Surely, they reasoned, conservatives shouldn't be too troubled with Schwarzenegger's plan if Romney, a champion of conservatives from coast to coast, had done the same thing in the Bay State.

Romney's supporters flatly rejected this comparison--arguing that the Massachusetts plan was far more efficient, affordable and market-based than Schwarzenegger's proposal.

Who was right?  Actually, neither side.  The truth lies somewhere in the middle.

Romney's Commonwealth Charter plan isn't nearly as ambitious, expensive or expansive as the Schwarzenegger proposal, but the Massachusetts law suffers from a smaller dose of the same bugaboos that conservatives loathe in the Schwarzenegger plan--namely government mandates, higher taxes and excessive regulation.  And like Schwarzenegger's plan, the Massachusetts law also manages to increase dependency on the already over-burdened state Medicaid program and to expand mandatory insurance benefits.

But while conservatives have rightfully directed blame at Schwarzenegger alone for this faulty proposal, Romney, at least, has an excuse. His original plan envisioned a vast deregulation of the state's health insurance system in conjunction with individual mandates.  His plan also contained no new taxes and no compelled employer mandates. As described by the Heritage Foundation (a supporter of the plan), Romney's objectives were laudable--expanded coverage, while providing greater consumer choice and satisfaction, value-focused competition among insurers and providers, and ultimately a reduced burden on the state's taxpayers. "The key to the Massachusetts plan is a new way of organizing the marketplace to enable consumers to compare and purchase health insurance plans," opined the Heritage Foundation in an April 2006 publication.
And in selling his plan, Romney trumpeted it as "a conservative idea to insist that individuals have responsibility for their own health care. I think it appeals to people on both sides of the aisle:  insurance for everyone without a tax increase."  On the pages of the Wall Street Journal, Romney lauded his plan claiming "every uninsured citizen in Mass. will soon have affordable health insurance and the costs of health care will be reduced.  And we will need no new taxes, no employer mandate and no government mandate to make this happen."  

Unfortunately, the Democratic-dominated Massachusetts legislature had other ideas.  The legislature took an axe to Romney's deregulation plans (most notably his plan to eliminate the state's anti-free-market community-rating system for insurers), and added a number of big-government items--including a Medicaid expansion for children, and the establishment of costly mandates on the vast majority of employers in the state.

Romney vetoed eight sections of the health care legislation, including the employer mandate.  Romney also vetoed provisions providing dental and eyeglass benefits to poor residents on the Medicaid program, and providing health coverage to senior and disabled legal immigrants not eligible for federal Medicaid. However, the state legislature eventually overrode all eight of the vetoes.  As a result, the law that went into effect was largely a compromise bill--not nearly as offensive as the single-payer nightmare designed by Hillary Clinton back in 1993--but nowhere near the trailblazing trumpeted by Romney and lauded by conservative think-tanks.

That's not to say that the final law passed in Massachusetts doesn't throw a bone or two to conservatives.  The law did salvage some of Romney's free-market ideas and manages to introduce at least some form of competition into the health care arena.  The same cannot be said for Schwarzenegger's patchwork plan.    

Scope and Cost
Before looking at the specifics of the two plans, it is simply impossible to ignore differences between the scope of the problem in the two states. Put bluntly, California has more uninsured residents (approximately 6.7 million people) than Massachusetts has total residents (6.4 million).   In California, nearly one in every five residents is uninsured, as opposed to Massachusetts where the number is one in ten.  The Massachusetts law strives to provide coverage to about 95% of the state's estimated 550,000 uninsured.  And even though Romney eventually had to bump his projections of the annual cost of the program from $125 million up to $276 million, that figure is still peanuts compared to the Schwarzenegger's conservative estimate of $12 billion per year (or approximately 45 times the cost of the Massachusetts plan).
 
In addition, Massachusetts had a massive head start on financing its plan.  Massachusetts had amassed over $1 billion in its uncompensated pool and was able to divert all of this money to jump-start the program.  That amount equates to approximately $1,800 per uninsured per year.  California, on the other hand, will start largely from scratch and will spread the pain out to almost all sectors of the economy.  The biggest contributors, naturally, will be employers who are expected to shell out approximately $1 billion per year, and physicians and hospitals which will face a new tax on revenues expected to raise $3.5 billion per year.

Individual Mandate
Both the Massachusetts law and the Schwarzenegger plans contain an individual mandate component, which requires all residents of each state to purchase health insurance.  Schwarzenegger's plan does not provide any exceptions to this rule.  The plan requires all residents, including children, to obtain "minimum coverage" which is defined as a $5,000 deductible with a maximum of $7,500 per individual or $10,000 per family in out-of-pocket costs.  The requirement will be enforced through wage withholding and tax penalties.

The Massachusetts law applies to all residents whose income bracket exceeds an "affordability level" set by the state.  If residents fall under the threshold, they will be granted a waiver from the coverage requirement.  In 2007, the penalty for non-compliance will be the loss of the personal tax exemption of $3,600.   In 2008 and beyond, the penalty will be half the cost of the lowest available yearly health insurance premium for an acceptable plan.

Advocates of an individual mandate argue that the requirement fosters individual responsibility and argue that the requirement is no different than the obligation to carry automobile insurance.  But opponents claim that the mandates represent an unprecedented expansion of government power and unnecessarily interfere with a person's right to self-insure.  Both sides are probably correct, but if the plans stopped here, conservatives probably would not be protesting so loudly.

Employer Mandate
Both plans also contain an employer mandate which obligates nearly all employers to offer health insurance to their workers.  In California, businesses with 10 or more workers that choose not to offer coverage would be required to pay 4 percent of their total Social Security wages to a state fund that would be created to subsidize the purchase of coverage by the working uninsured. The cost of such coverage would be measured by a sliding scale depending on what an employee earned, and employees would be able to pay for on it using pre-tax dollars.

In Massachusetts, employers with more than ten employees must offer to provide a "fair and reasonable contribution" to the premium of health insurance for employees.  Employers who do not will be assessed an annual fair share contribution that will not exceed $295 per employee per year.  Romney's original plan did not contain this mandate, but it was added by the Legislature.  Romney used his line-item veto power to delete the mandate, but the Legislature overrode the veto.   The newly created Division of Health Care Finance and Policy will define what contribution level meets the "fair and reasonable" test in the statute. There is an additional Free Rider Surcharge that can be assessed to the employer. This surcharge is different from the fair share contribution. The surcharge is applied when an employer does not arrange for health insurance, such as by setting up a payroll deduction system, and has employees who receive care that is paid from the uncompensated care pool.  If an employee receives free care more than three times, or all of an employer's employees use free care a total of five times, then the employer must pay a portion of the health care costs.

Conservatives generally decry the employer mandate because they recognize it for what it is--
a regressive tax on workers and their families because employers will reduce compensation or eliminate jobs as a result of the payments they face.  As such, the Massachusetts law which imposes a more definite and less expensive penalty, is mildly more tolerable than the open-ended and costly tax inherent in the California plan.        

New Requirements on Providers
Under Schwarzenegger's plan, doctors and other medical professionals would be required to pay a two-percent tax and hospitals a four-percent tax on all revenues to help fund the plan.  Furthermore, provider rate increases would be linked to medical professionals' compliance with "performance" measures. Opponents fear that adding more red tape and new taxes to an already overburdened system will merely add to the administrative costs of the system, increasing prices for patients and further demoralizing the medical profession.  And, of course, any system that empowers government bureaucrats to arbitrarily evaluate the performance of the private sector assures incompetence at a minimum, and invites everything from influence-peddling or pure graft.  Finally, the plan requires hospitals to spend 85% of their revenues on patient care.  How expensive and burdensome it will be to measure and enforce these provisions is anybody's guess. 

Although the Massachusetts law imposed no new direct taxes on providers, it does link hospital rate increases to meeting state-designed quality standards and achievement of performance benchmarks, including the reduction of racial and ethnic disparities in the provision of health care.

Purchasing Pool
Both plans feature a centrally run purchasing pool.   Schwarzenegger's plan omits crucial details of how the pool will be run, but promises to provide state financial assistance to persons with individual or employer-sponsored coverage whose incomes are within 100% to 250% of the poverty level.  The Governor estimates that 700,000 people will be immediately eligible for this assistance.  Here, Schwarzenegger would have been much better off mimicking the Massachusetts plan, where Romney created the Commonwealth Health Insurance Connector Authority (the "Connector"), which he designed to serve as a facilitator of transactions between insurers and individuals.  The Connector performs the following functions:

• It runs the Commonwealth Care program for low-income residents (below 300% of the poverty level) who do not qualify for the state's Medicaid programs.
• It offers health insurance plans for individuals who (i) are not working; (ii) are employed by a small business (less than 50 employees) that uses the Connector to offer health insurance. These residents will purchase insurance with pre-tax income; (iii) are not qualified under their large employer plan; (iv) are self-employed, part-time workers, or work for multiple employers.
• It sets premium subsidy levels for subsidized care.
• It defines "affordability" for purposes of the individual mandate.

Romney devised the Connector in hopes that it would allow health insurance to operate on a level playing field with a free and open market for any willing carriers to sell health plans and plan designs in response to consumer demand.  The Legislature watered down the effectiveness of this effort by limiting the choices and setting rates at below-market levels, but the connector idea remains a far superior solution than Schwarzenegger's creation of what figures to be just another bloated and ineffective regulatory body that takes over functions that are currently performed by the private sector.

Coverage for the Uninsured
Both Schwarzenegger's plan and the Massachusetts law provide subsidized coverage for the uninsured.  In California, the Governor's plan would allow 630,000 uninsured legal resident adults with incomes under the federal poverty level to enroll in no-cost Medi-Cal.  Another 1.2 million uninsured legal resident aliens with incomes up to 250% of the poverty level will be eligible for coverage under the purchasing pool.  (This number does not include the 700,000 residents who will receive subsidies through the purchasing pool.)  Families who receive coverage through the pool will be required to make contributions of anywhere from three percent to six percent of their gross income (depending on their income level), although they will not lose their coverage if they fail to make the payments.

The Massachusetts law also provides a subsidized private insurance health plan for individuals without health insurance.  For individuals below the poverty line, no premiums will be charged. For those above the poverty level, a sliding scale premium schedule based on income is used to determine the amount of money a person contributes to their policy.  Applicants must have resided in the state for at least the previous 6 months and be ineligible for the subsidy. To help reduce the potential for employers dropping coverage, applicants will only be eligible if employer coverage was unavailable in the last 6 months (with an employer contribution of at least 33% of an individual policy and 20% of a family policy).  The Massachusetts plan also discourages the use of the emergency room for non-emergency room treatment by requiring enrollees with incomes below the poverty line to make co-payments in such instances. 

Coverage for Illegal Aliens
Perhaps the most controversial element of Schwarzenegger's plan is his proposal to extend coverage to illegal aliens.  Under the Governor's plan, counties would continue to be required to foot the bill for illegal health care.  The UCLA Center for Health Policy Research estimates that there are currently 1.6 million illegal aliens who do not have coverage and would be affected by the Governor's plan.   The Governor estimates the cost at $400 million per year, but various immigration groups claim dispute this estimate.

"Gov. Schwarzenegger's proposal, if enacted, would create yet another magnet attracting still more illegal aliens to California," commented Dan Stein, President of Federation for American Immigration Reform.   "Illegal aliens themselves will be attracted by this very generous benefit the Governor wants to make available, and the knowledge that the taxpayers will pick up the tab for health insurance will convince still more California employers to shift that cost burden to the public."

Rhetoric aside, it is simply inconceivable to think that California will not become even more attractive to illegal aliens once the state begins providing free health insurance to everyone regardless of their citizenship status.  As such, Schwarzenegger's plan, which fails to take increased immigration into account when estimating future costs, undoubtedly will be far costlier than the $12 billion annually that he projects.   How and where the state will make up the shortfall is anybody's guess.

In contrast, the Massachusetts law allows the state's comparatively small number of illegal aliens to obtain medical care only in case of emergency. 

Expansion of Medicaid
Schwarzenegger's plan proposes a whopping $4 billion Medi-Cal rate increase, while the Massachusetts law increased MassHealth rates by $180 million for 2007, largely to fund dental, denture and eyeglass benefits that were cut in 2002 and restored as part of the 2006 law.  Romney's initial proposal contained no increase in MassHealth rates and he vetoed the restoration of the dental and eye benefits, but the Legislature overrode that veto.  Naturally, an expansion of Medicaid in both states will crowd out other portions of each state's budget and could lead to tax increases to make up the shortfalls elsewhere.
 
Insurance Market Reforms
Both plans contain various insurance market reforms.  Schwarzenegger's reforms largely place additional restrictions and mandates on insurers.  For example, his plan requires insurers to offer health plans to all Californians and strictly limits insurers' ability to vary premiums based on health status or condition of the insured.  In addition, his plan obligates health care plans to spend 85% of their revenues on patient care. 

Massachusetts already had significant market regulations in place before the law was passed and the new law actually loosens the strings on insurers and allows insurers to offer products through the "Connector" that they were not previously permitted to allow.  For example, the law now allows insurers to offer less expensive insurance plans to young adults, aged 19-26, who do not otherwise have access to employer-sponsored health insurance.  In addition, it increases product choice by encouraging insurers to create plans with lower premiums that still provide comprehensive benefits.  Schwarzenegger's plan offers no similar perks.  

Tax and Regulatory Incentives
Both the Massachusetts law and Schwarzenegger's plan allow residents to make pre-tax contributions to individual health care insurance accounts and requires employers to establish Section 125 plans so that employees can make tax-sheltered contributions for health insurance. 
 
Deregulation
In Massachusetts, though he was unsuccessful in getting the legislature to adopt most of his plan to deregulate the industry, Romney was able to pass limited deregulation of health insurance. For example, the law allows managed care organizations to offer the  Health Savings Account plans, which only traditional insurers can currently offer in Massachusetts. It also allows the use of coinsurance in managed care plans as a way for those plans to help steer patients to providers offering better value. Romney argued that these were important changes for a state whose health care market is dominated by managed care insurance plans and prestigious medical providers with strong brand identities.  Moreover, by permitting residents to buy coverage through the Connector, he argued that the law effectively circumvents much of the standardization of coverage in the Massachusetts non-group insurance market. 
Schwarzenegger's plan offers very little in the form of deregulation.  In fact, one can make the case that his plan would introduce the largest and most burdensome set of regulations and bureaucracy the state has ever seen.

Summary
Though Romney's goals of expanding coverage, providing greater consumer choice and satisfaction, and introducing competition among insurers and providers thereby ultimately reducing the burden on the state's taxpayers, they were largely thwarted by the legislature. His Connector program does still facilitate the buying and selling among health care participants (even though the insurers are forced to offer limited, state-mandated products and buyers will pay a price below the cost of services).    

Schwarzenegger's solution, meanwhile, is to apply a large number of very expensive band-aids to the problem, cross his fingers and hope for the best.  At the very least, though, the Schwarzenegger plan rejects most aspects of the disastrous single-payer bill offered by ultra-liberal Sen. Sheila Kuhl, which was passed by the Legislature and vetoed by the Governor last year.