We've seen Arnold's health-care movie before

California Governor Arnold Schwarzenegger once extolled "the power of the market" in Milton Friedman's "Free to Choose" PBS series. So it's probably just as well that the late, great economist won't see the regulated mess that his admirer is proposing to make of California's health insurance market. As speaker of the state assembly Fabian Nunes remarked, "This is a plan assembly Democrats could have written."

In fact, they already have--in 2003, when Democrat Gray Davis was Governor. Candidate Schwarzenegger campaigned against that measure, which was less onerous than his own new proposal mandating that business provide health insurance to all employees. Arnold even helped to gather signatures for a 2004 state referendum in which voters overturned that bill. But now he's taking on a new political acting challenge, this time playing Gray Davis as apparently channeled through his chief of staff Susan Kennedy (who used to work for Mr. Davis).

Or perhaps the GOP Governor is trying to replicate the media hosannas that former Massachusetts Governor Mitt Romney garnered last year with his "universal" coverage law. As with the Romney plan, Governor Schwarzenegger builds his proposal around an "individual mandate" that would require people to buy health insurance or face penalties such as garnishment of wages. This compulsion is supposedly justified on grounds that treating "free riders" in emergency rooms is a significant driver of overall health costs. But studies have shown that the cost of this problem is less than 3% of overall health-care spending.

Far worse are Mr. Schwarzenegger's proposals for California's employment and insurance markets. The Governor is proposing that businesses with 10 or more employees be required to provide insurance, or else pay 4% of their taxable Social Security wages into a fund to subsidize insurance for the working uninsured. The likely reaction of many California businesses to this new and costly mandate: outsourcing to Nevada, or India.

Mr. Schwarzenegger goes far beyond the Romney plan in proposing to help pay for his scheme by taxing hospitals 4% and doctors 2% of their gross revenues. That's right, institutions operating at or near a loss would have to pay the tax. So California doctors could soon be spending more time with their accountants than with patients--assuming they can afford to keep their practices running at all.

Yes, we know, the Governor calls it a "fee" or "dividend," rather than a tax. This is no doubt because the California constitution requires that any new "tax" pass both houses of the legislature with two-thirds majorities. So call the elephant in the room a hippo and hope the public buys it. We trust this Hollywood action stunt will be tested in court, if not in another referendum.

Like all such political schemes, Mr. Schwarzenegger's plan also works at cross-purposes. It includes new subsidies to help the uninsured obtain coverage, but at the same time it would impose new coverage mandates that would make insurance a lot more expensive. Two rules in particular have all but ruined the market for individually owned coverage in every other state where they've been tried.

The first is called "guaranteed issue," which means insurers are required to write you a policy even if you wait until you're sick to ask for it. It is precisely this "guarantee" that many people use as an excuse to remain "uninsured." Why not buy a new car rather than health insurance when you're healthy if you know you can always buy insurance if you get cancer?

The second rule is "community rating," which means insurance premiums cannot vary based on age or health status. This is akin to telling auto insurers that they can't charge higher premiums to 18-year-old males with a history of speeding tickets than they do 45-year-old mothers. Both rules raise the cost of insurance for everyone.

This is all especially regrettable because California has had more market-friendly insurance regulations than most other large states. And this has meant lower insurance premiums. According to eHealthinsurance.com, a single 35-year-old man in Beverly Hills can buy decent coverage for as little as $69 a month. But Arnold's plan would move those rates in the direction of community-rated New York, where that same man would pay $416 for any coverage at all.

Like Mr. Romney before him, Mr. Schwarzenegger is playing on the political appeal of allegedly "universal" coverage. Mr. Romney hopes to ride it to the GOP Presidential nomination, and Arnold is basking in new media admiration. About the best we can say for their plans is that these state policy experiments will show other states what not to do. But they are also providing cover for the proponents of greater government control of health care. Right on cue, Hillary Rodham Clinton endorsed "universal" coverage this week too.

The better alternative, as Milton Friedman understood, is to expand tax-advantaged health savings accounts and to improve access and affordability by creating a national market for private health insurance. Consumers in California and Massachusetts, especially, are going to need that safety valve when the bill comes due for their Governors' attention-seeking but poorly considered plans.

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For greatest efficiency, lowest cost and maximum choice, ALL hospitals and health insurance schemes should be privately owned and run -- with government-paid vouchers for the very poor and minimal regulation. Both Australia and Sweden have large private sector health systems with government reimbursement for privately-provided services so can a purely private system with some level of government reimbursement or insurance for the poor be so hard to do?

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