The California Senate Appropriations Committee has vastly overstated the new costs of creating a single-payer health system for the Golden State, according to a national authority on healthcare spending.
Last week, the Committee released its analysis of SB 562, The Healthy California Act. It said the total cost of providing health care to all 37 million Californians was $400 billion a year. Half of that comes from an array of government programs — Medicaid, Medicare, Obamacare, etc. That means Californians would have to raise the payroll tax by 15 percent to pay for the difference, it reported.
“About $200 billion in additional tax revenues would be needed to pay for the remainder of the total program cost. Assuming that this cost was raised through a new payroll tax (with no cap on wages subject to the tax), the additional payroll tax rate would be about 15% of earned income,” the Appropriations analysis said. “It is important to note that the overall cost of those new tax revenues would be offset to a large degree by reduced spending on health care coverage by employers and employees. Therefore, total new spending required under the bill would be between $50 and $100 billion per year.”
That assessment filled a void in the political debate surrounding SB 562, because the bill does not specify a revenue stream and its sponsors have not released their analysis of how Californians would pay for it and gain health security under a single-payer system. But according to Gerald Friedman, a University of Massachusetts economist who conducted that very analysis for a single-payer system in New York and has studied health costs in other large states, California's analysts erred by understating health care cost savings and failing to subtract current health care spending from their projected payroll tax increase.
“I read the legislature's analysis and was disappointed,” he said. “First, it has a high number for total costs because it assumes no savings from bulk purchasing of drugs and medical devices even though the rest of the world buys these at barely 70 percent what Americans pay, and the VA [Veterans Administration] buys drugs at 59 percent. Second, it assumes very small savings from lower administration (among both providers and insurers). Finally, it assumes a very large increase in utilization, which is a cost but also a benefit since going to the doctor saves lives, and barriers to access are associated with about 200,000 extra deaths in the U.S. each year. (This figure is from a county-level analysis of mortality versus the proportion reporting they could not go to a doctor because of costs.)”
But the analysts’ bigger mistake was on the spending side — by omitting any mention that Californians would subtract current health spending from any tax increase. For example, the average Californian earned $64,500 in 2015. At first glance, a 15 percent payroll tax increase appears to add an additional tax of $9,675 a year or $806.25 monthly. However, if one is already paying $650 or so monthly for a health plan and several thousands more on deductibles and co-pays, then one can see how that current figure is actually more expensive than what would need to be raised under a single payer system. Friedman said this omission was crucial.
“The analysis does not discuss the different burden of health care with a payroll tax (or an income tax) compared with the current system which works like a lump-sum tax: everyone pays the same amount regardless of income,” he said. “In California in 2015, family insurance premiums (employer and employee) cost $18,045. For a worker earning $64,500, that is 28 percent of earnings, plus the cost of co-pays and deductibles. Indeed, at $18,000, workers would do better even with a 15 percent payroll tax up to earnings of $120,000. And, if we assume the employer plan had an actuarial value of 90 percent, and out-of-pocket costs are $2,000, workers are better off with a 15 percent payroll tax up to $133,333.”
Friedman said single-payer would save the public and businesses money via cutting bureaucratic costs and negotiating for drugs.
“The major criticism of these single payer plans is that we won’t get the savings that we anticipate from reducing administration—and I think that’s just crazy,” he said. “Because why would people employ all these people in billing and insurance processing if all you have to do is swipe a card in the right type of reader and it all goes to Sacramento where somebody will type in the diagnostic code and cut a check. In Toronto General Hospital, they have about 400 beds. It’s the size of Massachusetts General Hospital. And they have two people who do billing. Massachusetts General has about 400 people doing billing. That’s about one person per bed . . . I don’t see why we wouldn’t get large savings. Maybe not as large as I am anticipating. But much larger than they’re talking about.”
“And the other thing is the drug purchasing,” Friedman said. “California is the world’s seventh largest economy. If you guys just broke off, you would be as large as Italy. And Italy negotiates drug prices and drugs in Italy cost about half of what they cost in the United States. I don’t see why California wouldn’t get savings.”
What the legislative analysts should have done was compared what people now pay for their healthcare costs to the figure that would be needed to supplement the government's subsidies for the poor, elderly, children, people with disabilities and veterans, he said. If they did that, they would have found that paying 15 percent of one's income for health care is a very good deal.
“Fifteen percent [for a payroll tax increase] — I think that number’s too high, but 15 percent is less than what employer-provided coverage now costs in most states,” he said. “When you add in co-pays and deductibles, I would rather pay 15 percent than what I and my employer are now paying, because most people will be saving money. And people will have more security because they'll get the care they need.”