Financing Health Care Reform in California
All reform proposals but an employer mandate are difficult to finance in California without major federal financial assistance. Single payer would cost more than the entire budget of the state of California; this is not because it is so much more expensive than the current system but rather due to the need to replace most private sector premiums and cost sharing with new state taxes.[1] Identifying and persuading the voting public and state policy makers to accept the new revenues necessary to finance single payer is formidably difficult. Single payer necessitates Medicare, ACA and Medicaid waivers from the federal government, which may not be readily forthcoming.[2] While single payer is proposed to be cost neutral or as a savings measure, it requires persuading the public to give up their existing insurance plans for which most individuals with employer coverage pay comparatively little (at least directly), and then instead to pay a large increase in their state taxes for a new untested plan.[3]
Single payer/managed competition is somewhat less costly because it does not cover long-term care and does not cover those over 65.[4] Thus it does not replace or supplant existing financing for Medicare supplemental policies, Medicare cost sharing and Medicare premium sharing, nor does it cover long-term care. Financing still would require a doubling of state General Fund taxes to replace the employer, employee and individual private contributions – politically this financing would be a non-starter for similar reasons.[5]
The public/private hybrid measures can cost state taxpayers less than 1/10th of the costs of single payer because all existing private financing structures for employment-based and individual coverage, Medicaid and Medicare stay in place, and the proposals seek to fill in the coverage and affordability gaps.[6] Even those more modest new costs are equal to 1/10th of the state General Fund and absent the Affordable Care Act cannot be financed without new state taxes.[7]
Under California law, a tax increase requires a 2/3rds vote of both chambers of the state legislature; this is difficult to achieve even in a state with a deep blue electorate and legislature. The state’s voters can approve a tax increase with a 50% plus one majority; this is challenging as well. State voters recently increased taxes on cigarettes to finance medical care,[8] and in the 2004, they increased taxes on millionaires to fund mental health services.[9] They rejected by more than 3/1 the tax financing for a single payer in 1994; they rejected by 2/1 the proposed initiative for employer mandate in 1992, and by a very narrow margin they repealed the state’s statutorily enacted employer mandate in a 2004 voter referendum.[10] Modest, well targeted tax increases, whether approved by the California legislature or the state’s voters, are possible in California, but they require both very careful crafting and a very broad based consensus of powerful and committed stakeholders with a weak or unpopular opposition, like cigarette companies.
The ACA financed the Medicaid coverage expansions federally with only a relatively small contribution required from the states. MediCal is now covering 13.5 million Californians – about one third of the state’s population, of whom about 4 million are ACA expansion eligible individuals with a 90/10 match in 2020.[11] California’s state share in 2020 for the Medicaid expansion would be about $2 billion out of this year’s $100 billion MediCal budget – or about 1% of the state’s total General and Special Fund taxes.[12] The ACA financed the premium assistance and cost sharing reductions for individuals with private individual insurance without any state contributions. For the state’s policy makers and finance officials, the ACA expansion is a huge financial bargain as compared to the other proposals under consideration by the state legislature, and an opportunity that simply could not be missed. Repeal and replacement of the ACA with state only funding would cost California’s state taxpayers in excess of $20 billion.[13] Furthermore, the ACA’s financing plan accessed savings and trade-offs in Medicare and employment-based coverage to which a state would have no access.[14]
Prepared by: Lucien Wulsin Jr.
Dated: 4/23/18
[1] See Legislative Analyst’s Office, Financing Considerations for Potential State Health Policy Changes (February 5, 2018) at http://healthcare.assembly.ca.gov/content/2017-2018-hearings which projects that there is roughly $200 billion in private spending (mostly employment-based insurance) in California that would need to be replaced by new taxes.
[2] See Cubanski, Federal Law Considerations and Medicare (Kaiser Family Foundation, Feb. 5, 2018) at http://healthcare.assembly.ca.gov/content/2017-2018-hearings; Brooks-LaSure, Medicaid (1115) and Marketplace (1332) Waiver Authority (Manatt Health, Feb. 5, 2018); Maricarille, ERISA Considerations for Universal Coverage (Univ. of Mo. School of Law, Feb. 5, 2018)
[3] See Legislative Analyst’s Office, Financing Considerations for Potential State Health Policy Changes, which finds that the state’s income taxes would need to be tripled or the state’s sales taxes would need to be quadrupled to finance a single payer in California, assuming that all necessary Medicare, Medicaid, ACA and ERISA waivers could be secured.
[4] Garamendi, California Health Care in the 21st Century: a Vision for Reform. Financing in 1992 would have been through a 6.75% payroll tax on employers and a 1% income tax on individuals. The LAO recently reported that employment based coverage in California costs $150 billion, which is offset by $50 billion in the tax advantages of pre-tax purchasing. Legislative Analyst’s Office, Financing Considerations for Potential State Health Policy Changes
[5] Legislative Analyst’s Office, Financing Considerations for Potential State Health Policy Changes. The state’s income tax raised $89 billion in 2017-18. Governor’s Budget Summary 2018-19
[6] Legislative Analyst’s Office, Fiscal Analysis of AB x 11 (Nunez) at http://www.lao.ca.gov/2008/hlth/health_reform/health_reform_012208.aspx and Legislative Analyst’s Office, Fiscal Analysis of SB 840 (Kuehl) http://www.lao.ca.gov/2008/hlth/sb840/SB840_analysis.pdf The LAO found that the Nunez bill would cost roughly $12 billion in its first full year while the Kuehl bill would cost $210 billion in its first full year.
[7] Ibid. The Governor’s Proposed 2018-9 State Budget reports that the Medicaid expansion cost $18 billion in 2017-18 of which the state paid $1.4 billion.
[8] Proposition 56. https://ballotpedia.org/California_Proposition_56,_Tobacco_Tax_Increase_(2016)
[9] Proposition 63. https://en.wikipedia.org/wiki/California_Proposition_63_(2004)
[10] Proposition 166 of 1992; Proposition 186 of 1994 and Proposition 72 of 2004
[11] Research and Analytic Studies Division. March 2017. Medi-Cal’s Optional Adult ACA Expansion Population – October 2016. Medi-Cal Statistical Brief. California Department of Health Care Services at http://www.dhcs.ca.gov/dataandstats/statistics/Documents/Expansion_Adults_201610_ADA.pdf, and California Governor’s Budget Summary 2018-19
[12] Ibid
[13] Ibid.
[14] For example, the ACA’s Cadillac benefits tax and Medicare cost savings and reimbursement reform measures helped finance the Affordable Care Act; these types of savings are only available at the national level.