California Single-payer: A Dream for Expanded Coverage, a Nightmare to Fund

June 6, 2017

On June 1, the California Senate voted to advance SB 562, which would establish a single-payer healthcare system in the state. Under the Healthy California Act, the state government would directly pay hospitals and doctors, effectively replacing private insurance companies. While this “Medicare-for-all” system might sound promising, funding it could be nearly impossible.

he California Office of Senate Floor Analyses estimated that the single-payer system would cost approximately $400 billion annually. Approximately $200 billion of this cost could be offset by repurposing federal, state, and local healthcare funds, primarily through redirecting Medicare and Medicaid funding. The remaining $200 billion would have to be raised through new tax revenues.

The bill itself is vague on a funding structure, other than the federal funds mentioned above, but the Office provided one funding option to generate the $200 billion necessary, a 15 percent payroll tax, with no cap on the amount of wages subject to taxation. The analysis argues that the real cost of the tax increase would be lower, as current employer and employee healthcare expenses would be lifted. Employers and employees in California already spend $100 billion to $150 billion on healthcare coverage a year, meaning the tax would really increase the cost burden on these groups by only $50 billion to $100 billion a year. Even if employers and employees redirected all their current spending to the payroll tax, a $50 billion to $100 billion tax increase is astronomical. Last year’s Proposition 55 raised taxes by $4 billion to $9 billion a year.

Analysts at UMass Amherst also studied the economic effects of Healthy California, and proposed a tax mechanism to finance the plan. Their analysis found that the proposal could reduce healthcare expenses by 18 percent in the state, meaning that only $331 billion in funding would be required. The UMass analysts would reallocate $225 billion in federal, state, and local funds towards Healthy California, and would raise the remaining $106 billion through two taxes:

  • A 2.3 percent gross receipts tax applied to all businesses in California, with an exemption for the first $2 million in receipts for all businesses.
  • A 2.3 percent sales tax that exempts spending on housing, utilities, and food, as well as other spending specified under existing California tax code. An additional 2 percent tax credit will be provided to families currently insured through the MediCal system.

The gross receipts tax would essentially be a multilayered sales tax. That is, each business-to-business transaction would be taxed in addition to the final sale of the product to a consumer, leading to tax pyramiding. Generally speaking, this type of tax is inefficient and its effects often befall onto consumers. History demonstrates that implementing such a tax would be economically damaging.

Only five states use gross receipts taxes, largely because of the noted economic effects.  But what is even more striking in this proposal is the rate of 2.3 percent. This would be the highest gross receipts tax in the country, except for radioactive waste in Washington State.  Traditionally, gross receipts taxes have rates below 1 percent.

The proposed sales tax could also have negative impacts on the California economy. Currently, California has the highest state-level sales tax in the U.S. at 7.25 percent. Adding a new sales tax of 2.3 percent would bring the state rate to 9.55 percent, before adding local-level sales taxes that average 1 percent. California would vault past Louisiana for the highest average state and local sales tax in the country at 10.55 percent.

The authors note that increasing the sales tax would likely place an undue burden on low-income Californians, who pay a larger share of their income towards sales taxes than high-income consumers. They include two provisions to ameliorate that, a credit for individuals currently on Medicaid and exemptions for many types of purchases, such as utilities and food prepared at home. Exempting a variety of items from the sales tax does address the regressive nature of the sales tax, but moves away from ideal tax policy.

Besides the issues surrounding the proposed tax mechanisms, there are several other practical objections. First is the ability of the state to successfully redirect approximately $200 billion in funding towards healthcare. This funding option, which is integral to both proposed funding plans, would be very difficult to achieve. In particular, federal approval would be needed to redirect certain Medicare and Medicaid funding towards the state program, a formidable prospect. The general state budget in California is set at $122.5 billion, leaving little room for repurposing other funds if federal support is not approved.

Funding issues were central to the rejection of single-payer movements in other states. In Vermont, cost issues led the governor to yank his proposed single-payer plan from legislative consideration. Similarly, Colorado voters rejected a single-payer proposal that derived funding from a substantial payroll tax. History doesn’t suggest a good result for Healthy California.

Besides funding issues, there are several practical ramifications to passing a single-payer healthcare plan in a single state. For example, a Californian injured in Oregon would no longer have insurance to cover his or her care. Does the state of California now haggle with Oregon over the costs? Conversely, what will California do if a nonresident requires immediate medical care? It is unclear from the language of the bill whether the nonresident will have to negotiate with the state and insurers or if the state will cover the costs in such an event.

This type of issue makes the cost savings of a single-payer system dubious. The UMass Amherst researchers assert that their 18 percent reduction in healthcare costs comes, in part, from a reduction in bureaucratic overhead. Yet, with the lack of clarity surrounding cross-state issues, that overhead may still exist under Healthy California.

As the bill makes its way to the California State Assembly, no funding mechanism has been officially designated. That means any bill the Assembly passes with provisions for funding would require supermajority votes in both houses, approval by the governor, a vote by citizens to exempt the proposal from spending limits, and federal repurposing approval for the bill to be implemented. California could become the first state with a single-payer healthcare system if the proposal moves forward, but with the lack of a coherent funding mechanism and many legislative obstacles, that seems like more of a dream than a reality.

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