Wednesday, January 30, 2008

Ahnold Care Dies

Schwarzenegger rides the health care tiger and gets eaten, apparently. From the WSJ:
The centerpiece of the Schwarzenegger plan was the "individual mandate," which is also the heart of HillaryCare 2.0. Such a law would compel everyone to acquire insurance, with subsidies for those who couldn't afford it. But the individual mandate incited a liberal revolt. Many Democrats and some unions argued the subsidies weren't generous enough to cover lower-income families, and it wasn't fair to penalize them for coverage they couldn't afford. One state Senator called the plan "a knife in the throat of the working poor." So the plan failed because it was too expensive -- and because for some Democrats it wasn't expensive enough.

Opposition also arose because the plan didn't do enough to punish the left's health-care villains. While it greatly expanded regulation of insurers -- requiring them to accept all applicants, and prohibiting premium differences based on health status -- it didn't cap how much they could charge consumers, or regulate their profits. Democrats also complained that the taxes the plan imposed on business, as high as 6.5% of payroll, weren't high enough. Business disagreed.

But I don't see how you can regulate a cap or profits and keep the insurance companies in the game. It's always nice to think that an "appropriate" profit is enough to keep a business healthy. But the name of the game is return on investment and an "appropriate" profit isn't enough to keep the enterprises involved inflated. The same point was made by Megan McCardle over the past few days in her defense of the drug company cost structure, here, here, here, and here.

More from WSJ:
What the California collapse should discredit in particular is the individual mandate as a policy tool for Republican reformers. This was Mr. Romney's enthusiasm for a time, helped along by the Heritage Foundation. But in order to be enforceable, such a mandate inevitably becomes a government mandate, and a very expensive one at that.

Voters are rightly concerned about health care, but they also don't want to pay higher taxes to finance coverage for everyone. Mr. Schwarzenegger's spectacular failure shows that there's an opening for Republicans to make the case for health-care reform based on choice and tax-equity, not mandates and tax hikes.

But tax equity is impossible for the poor, who don't pay taxes. If you'd like to subsidize the poor through tax credits, fine. Let's not kid ourselves that we're solving the problem with tax policy.

I am also reluctantly convinced of the following chain of logic, as well:

  1. You can't have anything approaching a fair system without mandating guaranteed enrollment (i.e., if you apply, the insurance company accepts you and charges you the same premium as everybody else).

  2. Guaranteed enrollment necessarily raises everybody's average premium cost, because people that used to be uninsurable are now covered.

  3. The increase in costs will force healthy people out of the pool, which in turn will raise costs to an unacceptable level. Worse, healthy people will be able to enroll when they get sick, which only raises costs even more.

  4. Therefore, you have to have an individual mandate, so that the healthy people are risk-sharing with the sick people.

But you can still have an innovative system that drives down routine care costs if you only mandate high-deductible catastrophic insurance. Then the policy question becomes simpler: How do you inject market forces into the routine care business so that costs are bearable by the middle/upper class and are subsidizable for the poor? This is a much easier question to answer than biting off the whole cost-containment problem for catastrophic treatment. Not easy, mind you, just easier.

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