California Governor-elect Schwarzenegger’s predecessor has left him a poison pill that he has no alternative but to swallow.

The Health Insurance Act, signed by Gov. Gray Davis in the twilight hours of his administration, mandates every California company with more than 20 employees to provide employee health insurance. The cost, according to Aaron Yelowitz, a health and labor economist at the University of Kentucky and
the National Bureau of Economic Research, is $11.4 billion a year.

Despite the high-minded utopian feel of this idea, getting it to work in practice is what has kept this disaster off the front burner for years.
Consider Russ Clark, who owns three Carl’s Jr. restaurants in Northern California. His firm offers health insurance to the 20 managers and assistants who oversee another 100 employees at his three franchises. He does not provide insurance to those 100 workers. The monthly cost for insuring his 20 managers is $6,100. “If I added another 100, that’s an additional $30,000 a month,” Clark says, adding that he can’t imagine how he’d pay for it. He says he’ll probably reduce all but his management employees to 20 hours a week to get under the law’s threshold.

The AFL-CIO is seeking to make this legislation a national model. The union is already devoting resources to a concerted campaign for similar legislation in 25 other states. The policy also has its champions on Capitol Hill, where Sen. Edward Kennedy (D-Mass.) has called it “a model for the nation.”

In California, the legislation’s supporters issued grossly underestimated analyses of HIA’s costs. One study, by Arindrajit Dube at the University of California’s Institute for Labor and Employment, characterized the 650,000 Medicaid recipients poised to receive employer care as “savings” generated by the new law—when employers are now required to pay $675 million to insure these employees.

Besides fuzzy math, supporters of HIA are using a classic ploy to try to demonstrate momentum by suggesting the new California employer mandate has precedence in other states already, namely Oregon and Washington. In fact, neither state mandates employers to pay any type of employee health insurance.

Yet another dishonest strategy tried in California involved claiming support for HIA among the business community. HIA advocates publicized a survey by the University of California’s Berkeley Survey Research Center for ILE which claimed 64 percent of “business respondents” support employer mandated coverage. But a mere 9 percent of respondents actually owned companies and so would have to pay the bill.

Pledging not to raise taxes for fear of worsening the Golden State’s deteriorating economy, California’s new governor has cause to be worried. As the Yelowitz study points out, this proposal is effectively an $11.4 billion off-the-books tax increase. Even in a $1.4 trillion economy, $11.4 billion is enough to kill any statewide recovery stone dead.

Yelowitz says California’s least skilled employees will pay the highest price as employers downsize or seek more qualified employees to justify these dramatically increased labor costs. And unlike Governor Davis’ hugely unpopular $4 billion tripling of the state car tax, this controversial piece of last-minute law making cannot easily be repealed.

In the wake of Governor-elect Schwarzenegger’s victory, much has been made of California’s longtime reputation as a trendsetter for the nation. Plainly, that is the plan of the advocates of employer-mandated health coverage in the state capitals and Congress. Governors struggling to balance the books while trying to avoid further damaging flagging state economies should take note. Costly employer health insurance mandates will be arriving on their desks shortly. Beware campaigners bearing false data.