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California's governor need not look far to identify the cause of the health care affordability crisis: He works every day at its center.

Diana M. Ernst, John R. Graham
Medical Progress Today
February 16, 2007

As Governor Arnold Schwarzenegger begins his second term, his chief priority is health reform. We had hoped that he would open the path to consumer choice in health care by breaking the insurance status quo—inflexible, expensive, and out of reach for too many Californians—and repudiating the ideology of even more government control of health care markets.

Since his re–election, however, the governor has pushed the tired notion of "covering the uninsured," or at least half of them and showed zero recognition that state regulations, not market failure, has helped make insurance unaffordable. In our current environment, politicians' schemes to "cover the uninsured" are like making it impossible to get a car and then guaranteeing you bus fare.

The governor's record on health care is admittedly mixed. In 2006, he rejected "socialized" health care, vetoing Sheila Kuehl's 5B–840, a bill to impose a government monopoly health care system in California. The governor's pre–re–election platform, however, consisted largely of promising to spend more money to expand government programs—especially the popular, but relatively unimportant notion of "covering all kids" (the people who cost money are at the other end of the age spectrum).

He also collaborated with the Democrat majority to introduce a plan for state control over prescription drug prices for uninsured Californians—a plan likely to be found in violation of federal Medicaid laws—and ignored a proposal made by our organization, The Pacific Research Institute, to create incentives for drug makers to reduce prices voluntarily, at little or no cost to taxpayers.

It is not too late for the governor to return to his free market roots. In early January, the Pacific Research Institute published a briefing paper focusing on the ill–advised government policies at the root of California's uninsured "crisis" and detailing reforms designed to increase consumer choice and lower health care costs. We summarize those reforms here.

We propose five steps that would have an immediate positive impact on California's health care markets: Tax deductibility of Health Savings Accounts; Health Opportunity Accounts in Medi–Cal; freeing Nurse Practitioners to compete in urgent and primary care; deregulating private insurance; and designing a "Connector" that would break down the wall between employer-sponsored health insurance and the individual market.

First, the Golden State must increase the adoption of Health Savings Accounts (HSAs) by giving Californians the same tax break the federal government does. HSAs are a kind of 401 (k) for health. Contributions and earnings are non-taxable federally, and your HSA is your property for life. Preliminary evidence shows that HSAs foster personal autonomy in a crippled system that leaves Americans far too dependent on employers and restrained by government regulations to take responsibility for their own health.

HSAs are not the definitive solution to all our healthcare problems, but they are a smart way to cover people underserved by our current insurance system. About half of HSA purchasers in the individual market are more than 40 years old, and 23 percent are less then 20. Surveys suggest that 31 to 45 percent of Americans with HSA–qualified health plans earn less than $50,000 a year, and 25 percent have incomes of $35,000 or less. Between one third and one half were previously uninsured.

California has the second–highest income taxes in the country after Vermont, but Democrat legislators have blocked efforts to make HSAs tax deductible. Governor Schwarzenegger has continued to push for repeal of this unfair taxation of HSAs, a reform that is long overdue.

Second, give Medi–Cal recipients more personal autonomy in their health spending. Some states, like Florida, are developing "consumer–directed Medicaid," which the federal government has just made even easier through Health Opportunity Accounts (HOA)—HSAs for Medicaid. Established under the federal Deficit Reduction Act of 2005, HOAs will put money under beneficiaries' control, enabling them to engage the health services they need while bypassing government bureaucracy.

Similar programs in Colorado have shown success for disabled, housebound beneficiaries who have stopped being passive recipients of government handouts and have taken more control of their lives. They also report more satisfaction with their health care services. States offering HOAs in their Medicaid plans will encourage and empower individuals to choose physicians and insurers that best serve their needs. The governor should promote Medi–Cal reforms such as these, which will wean beneficiaries away from dependence on government, rather than expanding eligibility for Medicaid enrollment—which only crowds out private insurance.

Third, these newly empowered Californians will want to spend their health dollars more effectively. They deserve the freedom to choose physician–owned or even "retail" clinics rather than acute–care hospitals for a variety of procedures. Retail clinics employ nurse practitioners (NPs), a good alternative for certain types of primary care as more physicians specialize. Both physicians and NPs, a recent study shows, believe that increasing the autonomy of nurse practitioners will improve care for the chronically ill.

We recommended that the governor reform the current law requiring a supervising physician to look after no more than four NPs at any given time. This harmful rule limits NPs' autonomy and has effectively prevented the growth of these retail clinics in our state. If deregulated, the clinics would advance care for patients who currently flood the emergency rooms to the detriment of hospitals and patients.

Fourth, we should deregulate the California insurance market so that insurers can compete, offering a more cost-conscious population the insurance plans that best suit their health–care needs. Newly elected Insurance Commissioner Steve Poizner appears to understand the need for competitive, flexible private health care. Poizner opposes mandated benefits, which limit choice and increase the cost of health insurance. California ranks in the bottom 10 states when it comes to unnecessary mandates, according to the Council for Affordable Health Insurance. The governor should work closely with Poizner to reduce unnecessary regulation and increase competition in health insurance markets.

Finally, we think that the much discussed Massachusetts health-care plan is not a model for California to emulate. Mandates on individuals or businesses to purchase health insurance are tax increases by another name. The only advantage of the Massachusetts plan is the "Connector," which matches all buyers and sellers of health insurance on a tax-advantaged basis, thereby eliminating the bias in favor of employer–sponsored health care that reduces individuals' freedom to buy insurance that best suits their needs. California should create a Connector program but without the mandates employed in the Bay State.

California must strive in 2007 to make health care more patient-focused and less bureaucratic. We must continue to reduce dependency on ever–growing government programs. We must continue to promote competition among providers, and empower Californians with tax deductible savings accounts, more health care choice, and higher quality health care.

Californians are ready for choice in health care. We can only hope that our governor is as well.

Diana M. Ernst is a public policy fellow in health care studies at the Pacific Research Institute. She contributes opinion editorials to print media, and routinely writes the monthly PRI Health Policy Prescriptions. She has written for various publications including: the San Francisco Examiner, San Francisco Business Times, Chicago Tribune, and the New York Sun.

John R. Graham is director of Health Care Studies at the Pacific Research Institute. He received his B.A. (Hons) in Economics and Commerce from the Royal Military College of Canada and his M.B.A. from the London Business School in England. He directs the Institute’s monthly Health Policy Prescription series of short papers on timely issues of health policy, and has written many papers and short articles on health–care reform, especially prescription drug regulation, for The Fraser Institute. He has also written on health policy for a number of newspapers, including the Wall Street Journal. Mr. Graham's latest book is What States Can Do to Reform Health Care: A Free–Market Primer.

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