Current Events Medicaid/Medicare Public Policy

Schwarzenegger’s Health Reform Proposal

What exactly is Governor Arnold Schwarzenegger proposing in his health care initiative unveiled early this year? Below I briefly summarize his press release, as to what the reforms will entail and then follow with some of my comments.

Individual Mandate

  • All individuals must have a minimum level of insurance.


  • Children of families whose income falls below 300% of the Federal Poverty Line (the FPL was $19,350 for a family of 4) are eligible for public health insurance. Those living with families below 100% of the FPL will receive Medi-Cal insurance while those living in families with income between 101-300% of the FPL will receive Healthy Families coverage. All people living in California are eligible regardless of their residency status.
  • Parents will be responsible for providing health insurance for children in families with income over 300% of the FPL.


  • Adults with incomes below 100% FPL are eligible for Medi-Cal. Adults with incomes between 100% and 250% FPL are eligible for coverage through a state purchasing pool operated by the Managed Risk Medical Insurance Board. Individual insurance premiums increase as follows:
    • 100-150%: 3% of gross income
    • 151-200%: 4% of gross income
    • 201-250%: 6% of gross income
  • Adults above 250% FPL will be responsible for purchasing their own health insurance, either on the private market or through work.
  • Poor undocumented immigrants will receive care at the county level, through county clinics, UC hospitals, and safety net clinics.

What do I think of the plan? Expanding care to the poor is a desirable social goal. Giving the poor no choice as to what type of care they will receive, however, is undesirable. If Medi-Cal health insurance is of poor quality, the individual will experience a serious income shock if they attempt to leave Medi-Cal and enroll in private insurance and thus their choice of insurance plans is limited to one. Offering individuals the choice of having Medi-Cal/Healthy Families or receiving an equivalent contribution towards another private/employer-provided insurance plan would go a long ways towards increasing competition in this market.

Also, the plan gives a strong disincentive to work for those families which make near the 300% threshold. If a family of 4 were to earn $55,000, they would be eligible for the Healthy Families program with some premium. If they were to earn $60,000 (which is just above the 2005 FPL for a family of 4) then they would lose the Healthy Families coverage and have to find insurance on their own. The gradually increasing price of the Healthy Families program is a wise policy move, but is not sufficient to eliminate distortions due to non-linearities in the Income-Insurance benefit function.

The individual mandate is an interesting case. Is it right to dictate to families where they should be spending their limited resources? On the other hand, families could elect to go without health insurance and if they did fall ill they would be able to fall back on the government safety net. Thus, I do not hold a strong opinion on individual mandates at this time.