Financing Single Payer Health Coverage in California
Single payer health care in essence means Medicare for All, but with improvements to eliminate all copays and deductibles and to add long term care benefits. There has been fury about the Assembly Speaker’s decision to take a pause and ask the proponents to figure out the financing. In my opinion, this is totally warranted and in fact overdue. This particular single payer proposal has been around the legislature nearly every year since 1988, and its financing to my best recollection has never cleared a single committee, and when it was put on the ballot in the 90’s got only about a quarter of the vote – a pretty sound rejection by the state’s voters and policy makers.
I helped work on the initial bill, helped analyze it for the Assembly Health Committee and discussed it later in a book I wrote called “California at the Crossroads: Choices for Health Reform” back in the early 90’s. I am hardly an opponent, but in all honesty I have been frequently dismayed about the cavalier attitudes of the bill’s sponsors and proponents about the very real political and policy challenges in financing single payer.
Health care costs in current dollars about $400 billion for California; most of that money is already in the health care system, but to finance a single payer you would need to turn it into taxes and then into revenues to be used for single payer and that’s the rub. To put it in context, all state taxes in California now generate a bit under $180 billion for all of state government. So imagine the political difficulty of asking the state’s voters to double their state taxes to pay for health coverage that over 90% already have in one form or another.
Let’s discuss what needs to be done, then the challenging options about how to do it. Roughly a quarter of the state’s health spending is in Medicare, another quarter is in Medicaid, a third is in employment based insurance, and a sixth is from individuals.
Medicare is financed 50/50 by employer and employee payroll taxes paid to the federal government. It pays hospitals and doctors at cost. There are substantial copays and deductibles in the Medicare program. Many seniors buy Medicare supp policies to reduce their exposure to out of pocket medical costs and over a third are enrolled in managed care plans. Some also buy long term care insurance to pay for nursing home care and in home care while most others pay out of pocket. To fold Medicare into a state-run single payer plan would require either an act of Congress or conceivably a federal §1115 waiver. These are extremely unlikely to occur in the age of President Trump, Senator McConnell and Representative Ryan and would face a wall of opposition even under a putative President Sanders.
In California, Medi-Cal is financed by our taxes paid to federal government, state government, county government, provider taxes and health plan taxes. It does cover all the services that the single payer bill would do; it has no deductibles and minimal co-pays. However nearly the entire program is enrolled in managed care plans, a far cry from the fee for service system envisaged by single payer proponents. Many providers are paid less than cost. To fold Medi-Cal into a single payer would require a federal §1115 waiver or Medicaid block grant; this is possible in the era of Trump, McConnell and Ryan who would prefer to block grant the entire program to the state, but their terms are likely to be onerous for a state who would like to experiment with single payer since they wish to cut the program’s funding by one third over the next two decades.
Now, the financing gets much, much, much harder. Employment-based coverage covers half of all Californians. It pays providers more than their costs, balancing their losses in delivering Medi-Cal services. It is financed by employer and employees’ premiums, and 33% of its costs are subsidized by the federal and state governments through the mechanism of pre-tax purchasing. Most are unaware of the federal and state tax subsidies and even how much their employer pays for their coverage; general awareness is limited to how much do I, the employee, contribute and what are my copays and deductibles. Every employer has a different plan, different copays, different deductibles and different share of employer and employee financing, and some offer multiple plans from which their employees choose. While virtually all large employers offer coverage for full time employees, a far smaller percentage of small low wage businesses do so, and family coverage is very spotty for the employees of small low wage employers. Logically, these employer and employee premiums could be turned into a state payroll tax in a revenue neutral fashion. For example, employers could pay 75% and employees could pay 25% -- the approximate average share in today’s private market. Or it could be recast as a 50/50 payroll tax like the Social Security or the Medicare payroll taxes.
Developing agreement on a payroll tax with business and labor at the table will be like herding cats and dogs, but it would need to be done. Here are a few cautionary thoughts. First, one needs to capture the federal and state funds associated with pre-tax purchasing; this will require Trump, McConnell, Ryan, Schumer and Pelosi – a highly unlikely pairing – and extremely difficult negotiations as there is not a line item in the federal or state budget for this particularly large tax expenditure. This will require federal legislation. Second, the major employer associations, such as the Chamber, Farm Bureau, Small Business Associations and the Business Roundtable need to forge a common ground with the California Labor Federation and SEIU on a payroll tax replacing employer and employee; these are the cats and dogs to be herded and it needs a bi-partisan, bi-cameral, strong executive consensus to do so. Insulting those politicians that you need to convince sometimes helps them get to “yes”, but more frequently it turns them into “hell, no”.
Finally, one sixth of the health pie encompasses private individual spending. This is at least $66 billion in individual health care spending in California. It includes the copays and deductibles that insured individuals pay albeit at very different rates; these fall heaviest on the very sick or serious accident victims. It also includes out of pocket spending on very expensive uncovered services like long term care. This uncovered service is most typically used by middle and upper income seniors and their family members who do not qualify for Medi-Cal and have substantial fast eroding assets. It also includes out of pocket expenditures on health care from the uninsured, mostly of low and moderate income, and a respectable share are immigrants. It also includes the individually insured who pay for their own coverage. In other words, out of pocket spending encompasses both everyone and also discrete pockets of people and services left out of the subsidies in the current health care system.
How could you finance these out of pocket expenses through taxes? For example the individually insured and the uninsured could pay income taxes into the new health system in lieu of premiums just as the self-employed do under Medicare and Social Security; this would parallel the contributions of similarly situated employers and employees. The higher income seniors could pay a new Medicare Part E supplemental premium for their long-term care coverage; this would require Congressional action. To pay for eliminating the copays and deductibles for every Californian, one could consider expanding the state sales tax to services, which are not taxed. Services could be taxed equally to the purchase of goods – an important step in tax equity as our society steadily evolves from consuming goods to services.
The University of Massachusetts Research Team hired by the Nurses Association has two other suggestions. The first is a 2.3% sales tax. I think that we already pay significant sales taxes in California, and this is a non-starter with the public. The second is an interesting proposal for a 2.3% gross revenues tax. Insurers already pay this tax in lieu of other taxes. So do businesses in Los Angeles and Santa Monica, albeit at a much lower rate. The advantage of this tax would be to shift the onus from payroll taxes (which could reduce employment) to consumption taxes, which do not impact employment. One difficulty, which the authors do not discuss, is that a gross revenues tax is paid by in-state businesses and not by out of state businesses. So your neighborhood Von’s or Ralph’s would pay the gross revenues tax but their new out of state on line competitor Amazon might not do so – an unfair advantage for online and out of state sellers and merchants as opposed to in-state businesses.
Two other state constitutional impediments that must be overcome are the Gann limit and Proposition 98. The Gann limit circumscribes state spending and a single payer bill would put California far over the Gann limit. Proposition 98 guarantees the public schools a large share of state taxes; single payer tax revenues would need to exempt the new revenues from Prop 98.
There are some significant savings associated with a single payer system. The first and most important is the cost of insurance companies administration and profits. These are about 10% of premiums in the private insurance markets and could be reduced to 2-3% in a Medicare like model. The second is the bedeviling complexity of multiple health insurance plans and programs; some estimate this adds about 20% to the costs of running a hospital or doctor’s office. Are we ready to cut their red tape and their reimbursements by 20%, or is this just a talking point? Consumers are trapped in the same paperwork nightmares and system complexity as providers so this would afford welcome relief. The third is the far higher prescription drug prices paid by Americans than any of the other countries that regulate the costs of prescription drugs. One could add that our doctors, nurses, and hospital personnel are also more generously compensated than their foreign counterparts. Fourth, we could rid ourselves of narrow networks, balance billing, surprise bills, catastrophic only coverage and impenetrably complex private and public bureaucracies.
The bill as currently constructed adds unnecessary and avoidable costs to the by far most expensive health system in the world. It returns to the hyper-inflationary days of fee for service medicine, cost based reimbursement and no out of pocket. It eliminates the important progress that has been made with integrated and capitated delivery systems such as Kaiser Health Plan and with payment reforms that incentivize the right care at the right time in the right place at the right cost. Thoroughgoing reimbursement reforms have to be a part of the bill.
The proponents might want to use the next year to fix the bill’s financing, eliminate the inflationary aspects, and build on the great opportunities for better quality, improved outcomes and higher cost efficiency under a better and less costly health system. This would serve Californians well in the time of Trump.
Pollin et al. Economic Analysis of the Healthy California Single Payer Proposal (SB 562) (University of Massachusetts Amherst Political Economy Research Institute, May 2017) at https://www.peri.umass.edu/publication/item/996-economic-analysis-of-the-healthy-california-single-payer-health-care-proposal-sb-562
California Senate Committee On Appropriations, Fiscal Analysis of SB 562 (Lara) (May 22, 2017) at https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201720180SB562
California State Budget 2017-18 (Enacted June 27, 2017) at http://www.ebudget.ca.gov/budget/2017-18EN/#/Home
Prepared by: Lucien Wulsin