Universal Health Care Proposals Would Add Significant Fiscal Pressure to California’s Finances

David Kersten
Kersten Institute for Governance and Public Policy

After a long hiatus legislative proposals to create a government run health care system in the California are back on the Democrat progressive political agenda.

The key question is can California afford to go it alone on health care by enacting its own single-payer health care system?

Two of the state’s leading progressive lawmakers say that it can be done and are in the process of putting forward proposals to move the state toward a single-payer health care system which would put a state government panel in charge of administering health care in California.

Earlier this month Lt. Gov. Gavin Newsom, a progressive Democrat frontrunner for California Governor in 2018, said he was working with health care experts to craft a plan for a single-payer system. While he was mayor, the city approved a plan to offer universal health care for all of its residents, according to a recent report by the New York Times.

Meanwhile, State Senator Ricardo Lara (D-Bell Gardens) has amended his SB 562, The Healthy California Act, from a spot bill into a full 38-page bill to set up government run health care in California.

SB 562 contains bill language that creates a single-payer health care system for all California residents in California, including undocumented immigrants.

According to a report by the Sacramento Bee, the proposal would “drastically alter the insurance market in the state” by requiring the state to negotiate prices for medical services and prescriptions with hospitals, drug companies and other medical providers.

“Californians would be required to participate in the public program and insurance companies would be barred from offering coverage for services already included in the plan,” according to Lara’s office as cited in the Bee report.

California Governor Jerry Brown has already publicly stated that he doesn’t think the state can afford to provide health care for every Californian. “Where do you get the extra money? This is the whole question,” Brown told reporters on a recent trip to Washington, DC, according to an LA Times report.

Governor Brown will surely not be the only one with great reservations regarding the costs of a single-payer health care system and its impact on the state’s finances and taxpayers.

Both single-payer proposals will inevitably rely on large and growing tax increases on both individuals and businesses to finance the health benefit costs for every California resident.

Sen. Lara’s proposal does not yet spell out how much the proposal will cost and how it will be paid for but does contain language stating that it is the intent of the Legislature to enact legislation that would develop a revenue plan which takes into consideration the anticipated federal revenue available for the program.

An August 2016 study by the UCLA Center for Health Policy Research, found that in California public funds (i.e. local, state and federal) will pay for 71% or $260.9 billion of the projected $367.5 billion spent on health care in the entire state in 2016.

“Medi-Cal/Healthy Families expenses take the biggest bite, 27 percent, followed by Medicare at 20%. Tax subsidies for employer-sponsored insurance (the foregone taxes) account for a significant 12% of public spending,” according to the UCLA report.

Proponents of moving to a single-payer system such as California Insurance Commissioner Dave Jones (D) and the UCLA Center for Health Policy Research argue that moving to a single-payer system makes sense because government run health care is already a reality for a majority of Californians in terms of both coverage and costs paid.

But this line of reasoning ignores some key cost and governance issues.

First, the federal government has been paying for 95% of the costs for Obamacare, and if the U.S. Congress and/or President decide to pull back any of this funding that would create large deficits for any state-run system.

Second, both the Newsom and Lara single-payer proposals will inevitably rely upon large increases in payroll taxes on both employers and employees, and likely an array of additional new taxes. Moreover, health care costs continue to grow at an average of 10-15% per year which is several times what state revenues sources grow at, which will inevitably lead to state health care costs crowding out spending for other government programs and creating continual pressure for more tax increases.

A 2008 analysis by the California Legislative Analyst’s (LAO) office of Sen. Sheila Kuehl’s single-payer bill SB 840 (2008), found that the bill would result in a net shortfall of $42 billion in 2011-12 (the first full year of operations), growing to $46 billion in 2015-16. “These shortfalls result largely from a faster rate of growth for health benefits costs relative to single-payer proposals (SPP) revenues,” stated the analysis.

SB 840 called for $139 billion in increased taxes on individuals and businesses including an employer payroll tax of $70 billion, an employee payroll tax of $35 billion, self-employed income tax of $9 billion, and income tax increases of $24 billion, according to LAO estimates for the 2015-16 fiscal year.

Given that California’s current General Fund spending is about $120 billion, a fully-phased in single-payer proposal could more than double the size of discretionary spending in the state, and lock in increased spending that would grow that several times the average growth rate of its revenue sources.

One last key concern is that state taxpayers and businesses will be on the hook for any cost overruns and the inability of the California Governor and Legislature to address growing budget deficits in the system.

To illustrate, under Lara’s proposal the new government-run health care system would be run by a 9-member panel that would be appointed by the Governor and California Legislature.

This panel is not unlike the appointed board that administers the $300 billion plus trust fund at the California Public Employees Retirement System (CalPERS), which has presided over a more than 50% increase in the unfunded pension liabilities of the state’s retirement system over the last two years. The Calpers system has gone from $100 billion in unfunded liabilities in 2014 to more than $160 billion in unfunded liabilities in 2016, according to official numbers.

A growing number of cohort of independent experts, such as Stanford University Professor Joe Nation and former San Jose Mayor Chuck Reed, believe that the state’s public retirement system will collapse at some point in the not so distant future if corrective action is not taken.

The Calpers case study shows the dangers of putting control of large amounts of public money in the hands of political appointees who may not have the knowledge or willingness to adequately safeguard what is ultimately the public purse.

David Kersten is an adjunct professor of public budgeting at the University of San Francisco. He is also the president of the Bay Area-based Kersten Institute for Governance and Public Policy—a public policy think tank and consulting organization.      

 

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