Analyzing Health Care Financing–Part 2

David Kersten
David Kersten is president of the Kersten Institute for Governance and Public Policy (www.kersteninstitute.org). Kersten is also an adjunct professor of public finance and economics at the University of San Francisco.

In short, I believe there are a few red flags regarding the State of California in particular that lead me to question whether the State of California could in fact afford to move to a fiscally sustainable health care system.

First, the political system in the State of California (i.e. State Legislature, Administration) has not demonstrated that it has the ability and proven track record to both create and sustain a new government program of this cost and magnitude.  The state’s public school system receives roughly $80 billion in public funding from the State of California, which is less than half the size of what the $200 billion plus single-payer system would be. But most school districts in California have having great trouble paying for all their public employee health and pension costs and meeting their educational attainment goals despite massive funding increases over the past 10 years.

The State of California’s total budget is about $200 billion annually, but a new report by the California Policy Center pegs total California state and local debt at $1.5 trillion in 2017, which is $200 billion higher than one-year earlier.

I believe that a more realistic calculation of total pension liabilities likely puts this figure of total state and local debt closer to $3 trillion or more than double official estimates. Such a market-rate calculation of pension liabilities, as opposed to official “government math,” has been developed up by independent studies as Stanford University’s http://www.pensiontracker.org/.

The State of California should try to get its own fiscal house in order before it attempts to more than double the size of its spending and future fiscal obligations—from about $200 billion currently to in excess of $400 billion plus under a hypothetical single-payer system.

Secondly, I believe there exists a serious question of whether the State of California can afford to “go it alone” on health care. One key consideration here is that California already has among the highest, if not the highest, state and local tax rates in the country according to analyses by Calmatters.org and other credible organizations.

So if our tax base is already maxed out, how does the state find a way to effectively double its tax rates without encouraging a mass exodus of individuals, businesses, jobs, and investment out of California?

Another issue regarding “going it alone” on universal health care, is that California will encourage a massive migration of individuals from other states and nations which are likely to be disproportionately low-income and dependent on government benefits. In short, the state will become a “Mecca” for immigrants from around the globe in search of free health care for them and their families, which will create significant new cost pressures on state safety net programs.

These two factors, working in tandem will dramatically increase costs over both the short and long-term and place dramatically increased fiscal pressures on what is likely to be a declining tax base. Put simply, this is a proven recipe for financial disaster.

Thirdly, I believe there is a real question of whether the state’s political system, or any system of government for that matter, has the ability to effectively manage such a massive government program that will be in continual need of both reform, oversight, and cost containment.

Furthermore, the nation’s experience with Obamacare demonstrated that it is very challenging to develop and pass such a large and complex program, which can be done initially, but then becomes completely impossible to reform in a meaningful and sustainable fashion in the outyears.

Put differently, the political coalition that is capable of passing such a program breaks down after a few years it becomes impossible to reform the program to return it to long-term financial sustainability.

To illustrate, a few years after the full implementation of Obamacare a series of major issues emerged across the nation such as premium increases, affordability, declining competition and market failure, but the U.S. Congress appeared to be completely incapable of taking meaningful action to remedy these issues.

A similar parallel can be drawn in California with the state’s pension and public employee health care system which has costs and mounting public debt spiraling out of control but the California Legislature and Governor do not appear to be willing to do anything about it.

Lastly, I have serious reservations about the ability of government to control both the initial and ongoing costs of a $200 billion plus government-run health care enterprise. Perhaps the biggest weakness of government, particularly California government, is its ability to control the cost of government over both the short and long-term.

The private health care sector is fraught with its own problems of cost control which are likely to be greatly exacerbated, as opposed to mitigated, by increased and/or complete government control.

Health care inflation routinely runs in the 10-15% range, which is more than double what government revenue sources grow at—a trend which will create greatly increased pressures for further tax increases that have not abated despite massive increases in government revenues from the strong economy of recent years.

Another major cost consideration is public employee salaries for the single-payer system which will presumably be 100% government-funded.

The State of California’s current practices with regard to public employee compensation appear to lock in above market salaries and compensation issues that are disconnected from the ability of public agencies to pay—as clearly demonstrated by the recent UTLA standoff in Los Angeles and the impending Oakland Unified School District standoff.

Reports by the California Policy Center and other independent groups have indicated that public employee compensation in California can exceed market rates by 100%—double that of the private sector for comparable positions.

Furthermore, as pointed out by the LA Times and other media outlets public employees in California commonly receive retroactive salary increases dating back several years, early and large balloon retirement payments, and other major pay and benefit increases that are almost unheard of in the private sector, particularly for rank-and-file workers.

One wonders how the State of California will produce a cost-effective health care system when state government is likely to follow continue its existing policies of paying its employees, which as Jerry Brown stated would represent about 18% of the state’s current economy, salary and benefits that are in excess of what is paid in the private sector for comparable work?

In conclusion, the potential move to a universal or single-payer health care system in California presents a series of major policy challenges and considerations for California policymakers in 2019 and beyond.

While universal health care coverage is commonly seen as a noble goal, even a “moral imperative” in the words of some, the devil really is in the details when it comes to both constructing and sustaining such a large and complex system.

Perhaps one of the most underappreciated strengths of former California Gov. Jerry Brown and his legacy is what he chose not to do—and that’s a common characteristic of a true wise man.

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