Fed up with waiting for Washington to address the growing national healthcare crisis, states have been leading the charge on reform, beginning with Massachusetts, where last spring Republican Gov. Mitt Romney signed a law extending coverage to uninsured citizens. Now, with the unveiling of California Gov. Arnold Schwarzenegger's proposal calling for universal coverage, the states' effort is getting some additional muscle. The main points of the Schwarzenegger proposal include a mandate requiring all individuals to have a minimum level of coverage; a play-or-pay option for employers with 10 or more employees to provide coverage; a limit on how much insurers can charge based on age or health status; and incentives designed to promote preventive care, wellness, and healthy lifestyles.

While Schwarzenegger's initiative has been likened to that of Massachusetts, the California proposal goes a step further: Along with legal California residents, Schwarzenegger proposes to insure illegals, too. Another bold aspect of the plan: its funding. Unlike Massachusetts, where employers who don't offer coverage pay $300 per employee per year, the California proposal calls for those employers to pay the equivalent of 4% of their entire payroll. Additionally, Schwarzenegger has proposed taxes of 4% on hospitals and 2% on doctors to help pay for universal coverage. "Very often with proposals, especially ones that cost a lot of money, there's a tendency to try to get them passed without really answering who's going to pay for it," says Helen Darling, president of the National Business Group on Health. That's not the case here, she notes, given the proposed tax on providers. Darling is cautiously optimistic about the individual mandate approach, but adds: "A key [question], both in California and Massachusetts, is how serious are they about making it affordable?"

Beyond the question of affordability, there remains a potential legal controversy over whether the state is allowed to compel employers to provide the coverage and penalize them if they don't, notes J.D. Piro, a principal at Hewitt Associates Inc. "This pay-or-play model–or one similar to it–was struck down in Maryland in 2006 as being violative of federal law," says Piro. By creating the model, "you're setting up an incentive for employers to drop their coverage," he warns. "There will be employers who will look at this as an exit strategy."