The analysis was done by a team led by Robert Pollin, the co-director of the Political Economy Research Institute at the University of Massachusetts and a former UC Riverside faculty member. At a Sacramento press conference, he explained how a single-payer system would enable all Californians to be completely covered. That includes 3.7 million currently uninsured residents and another 12 million who are underinsured, meaning they cannot afford their policy’s co-pays and deductibles.
The universal coverage would be paid for by combining all government healthcare subsidies, which accounts for about 70 percent of California’s current spending, and by two proposed tax increases: a 2.3 percent gross receipt taxes on businesses (which kicks in after the first $2 million in earnings and which exempts small businesses); and a 2.3 percent increase in the sales tax, with exemptions for necessities such as food, housing, utilities, and other services.
Those combined revenue streams would raise an estimated $400 billion annually to pay for universal coverage under a single-payer system. Today, Californians spend about $370 billion annually in an insurance-dominated system that leaves 40 percent of the state's population underinsured or without any insurance at all.
“The good news is that California can get a lot more for our money,” said state Sen. Ricardo Lara, D-Bell Gardens, the bill’s co-sponsor. “When the legislature passes the Healthy California Act, we will actually spend less than we do on health care. Families will pay less for health care. The average middle-class family will see their out-of-pocket costs fall by 9 percent.”
Most businesses will also save money, Pollin explained, because they will no longer be paying for their employees' health care. Even with the proposed gross receipts tax exempting the first $2 million, typical California businesses employing 10 to 19 people would see costs fall by 13.8 percent, he said. Businesses employing 20 to 99 people would see costs fall by 6.8 percent, he said. Businesses employing up to 500 would see costs fall by 5.7 percent, and the 500-plus businesses would see costs fall by 0.6 percent.
Indeed, the financing framework Pollin laid out would be a major shift from today's system, in which employers include health insurance as part of an employee's compensation. Until this press conference Wednesday, the only other analysis of how universal coverage would be paid for was in a Senate staff analysis that envisioned raising the state's payroll tax by 15 percent.
“This measure is good for businesses. It is also good for households,” Pollin said.
How It All Works
The basic approach of SB-562, which must be passed by the state senate by Friday to meet a legislative deadline, is to replace the billing and price-setting bureaucracies at the core of the health care industry with a state rate-setting panel. It would pay hospitals and providers based on the prices paid under the federal Medicare program, which is about 22 percent less than what private insurers pay, and also negotiate for bulk purchases of drugs, and wresting other administrative efficiencies from a streamlined system.
Pollin’s presentation had four sections: what the state’s current health care costs and the cost of “bringing full coverage to everyone in California under the existing system;” where savings in a state single-payer approach would emerge and why; how the program could be financed; and the impact on the “financial situation of individuals and businesses at all levels.”
“Right now, the health care system in California, the total number of expenditures is $368.5 billion—roughly $370 billion,” he began. “I know you heard these reports, this study that came out last week by the [Senate Appropriations Committee] staff saying that this would cost $400 billion. Well, keep in mind that we are already spending $370 billion. We are not going from zero to $400 billion.”
The next step is asking what it would take to bring the uninsured and the underinsured up to full insurance.
“The answer is it would add about 9.6 percent to total costs,” Pollin said. “So the system that now costs roughly $370 billion would cost $400 billion or actually slightly more—if everybody was fully insured under the existing system… Our analysis is basically on track with the [Senate] staff report, in saying that if we were going to operate our present system, giving everybody full coverage, it would cost $400 billion. That would represent an increase from $370 billion to $400 billion, not zero to $400 billion—a critical point.”
But the single-payer system will not be the same as the current system, in which private insurers, hospital finance operations and pharmaceutical firms stand between the public and the health care they need. It has built-in features that will save tens of billions annually, which fall under two categories, he said: structural changes and what service providers are paid. Pollin said his team at the University of Massachusetts used numbers from reams of industry data and widely accepted government and scientific research.
“We are talking about reducing administrative costs across the board. By having a single-payer system, you will save on administration for hospitals, for physicians, for clinics and in insurance itself,” Pollin said. “Secondly, we’re talking about lowering pharmaceutical prices. And by that we are looking at both the VA [Veterans Administration] type model for setting pharmaceutical prices and the Canadian model [a country with a population akin to California's]. And so we think, through some combination of something like that, we can reduce pharmaceutical costs in the range of 30 percent.”
“Third, we suggest setting all service provision at Medicare rates,” he said, which pays 22 percent below what insurers now pay hospitals and doctors. “So, right now, we have three tiers. We have Medicare rates; we have private insurance rates; and we have MediCal [the state’s Medicaid program] rates. MediCal rates are lower than Medicare rates. Private insurers are higher. We are saying move everything to Medicare rates.”
“If you combine those three things, conservatively we estimate that you can get 13 percent savings out of what we do with our present system… through administrative efficiency, pharmaceutical prices and setting [payment] rates through the Medicare rates,” Pollin said. “Now on top of that, we also look at inefficiency or waste in service provision [unnecessary services, inefficiently delivered services, missed prevention opportunities and fraud]… the [federal] Institute of Medicine said we are wasting about 19 percent of all expenditures. Now what we are assuming, quite conservatively, is that we can only get 5 percent.”
So by combining their two sources of savings, structural savings of 13 percent and service provisions savings of 5 percent, that takes the current estimated cost of covering all Californians under today’s system, which is $400 billion, and lowers it to roughly $330 billion—the 18 percent savings. When you subtract the $225 billion now spent by the federal and what the state government spend on all of their health care programs, that means that Californians will have to find another $105 billion to pay for universal coverage—because nobody would be buying health insurance plans.
“Again, we’re not going from zero to $330 billion,” Pollin said. “We are going from what it is costing now, $370 billion, and going to go down to $330 billion, plus everybody gets covered. That’s it. Now, how do we pay for that $330 billion? Obviously it's a completely restructured system.”
The bill’s sponsors suggested that two tax increases could completely pay for the $105 billion gap and eliminate every Californian and state business having to buy health insurance and then pay deductibles. They have looked at the fine print of federal laws like Obamacare, Medicaid and Medicare and said they allow states to pursue options like single payer “and we assume that funding will still be there… and that amounts to $225 billion.”
“Where do we get the $106 billion extra? As Sen. Lara said, there are various ways to think about it,” Pollin said. “We propose… two new taxes. A gross receipts tax, at 2.3 percent of gross receipts, and a sales tax increase, also at 2.3 percent of sales. Now both of those have exemptions and a tax credit to maintain equity in the system… The first $2 million of gross receipts for all businesses are exempt from the tax. The effect of that is small businesses will pay no gross receipts tax.”
Pollin said poor households on Medicaid would also get a 2 percent tax credit “so that the people who are getting Medicaid now will effectively not have to pay the sales tax; their costs will be zero.” The 2.3 percent gross receipts tax raises $92.6 billion and the sales tax raises $14.3 billion. “I think it works really well. It’s tight,” he said.
The impacts on businesses and individuals vary with income. The poorest Californians, on MediCal, would see costs go down 5.5 percent, because they would no longer be making out-of-pocket payments anymore. Families who earn $35,800—putting them at 40 percent or the top of the second tier of five for all Californians by income—will see health care costs go down by an average of 1.2 percent.
“We’re looking at how much they are paying now in healthcare and we are matching that against a family that will have to pay sales tax for non-necessities,” Pollin said. “This is a windfall for middle-income families because they’re paying a lot for health care now. The range is for families that are underinsured now, the net gain is 8.7 percent of their income. For individually insured families, the gain is 9.1 percent. And for those middle-income families that are getting health care from their employer, it’s more modest, but still a gain of 2.6 percent.”
The wealthy will pay more, he explained. “Right now, wealthy families [in the top 20 percent of earners, which is $227,000 a year, or top 10 percent, which is $340,000] are getting a net subsidy—because of the tax benefits they are able to write off their health care costs,” Pollin said. “One percent of their income is being paid to them by the health care system. Under Healthy California, yes, they will pay. But look, they will only have to pay 0.6 percent of their net income.”
“Businesses will have to pay the gross receipts tax after the first $2 million of expenditure—so what do we see,” he continued. “The small businesses that are not covering their workers, they will still not pay anything… The businesses that are small and are paying for health care for employees—also a huge windfall. Their health care expenditures will go down by 22 percent as a share of their payroll. This is a huge benefit for these businesses."
Middle-sized businesses will also see payroll net savings, he said, from 13.8 percent for businesses between 10 and 19 employees, to 5.7 percent for businesses between 100 and 500 employees. Only the largest businesses, with more than 500 employees, would see slight savings, less than 1 percent. “They will, of course, have to pay a large chunk of gross receipts, because they will have a large chunk of gross receipts, but nevertheless their [payroll] costs will also go down, we estimate, by an average of 0.6 percent.”
“So businesses at all levels come out at least as well,” Pollin said. “Most of them in the middle come out much better. This measure is good for business. First and foremost, it’s really good for business.”
Sen. Lara, the bill’s sponsor, said the goal was to pass the measure in the Senate by Friday, and then begin discussions with “stakeholders” on the revenue and taxation elements. While the state’s health insurers, hospital chains, drug companies and some physicians' groups are all opposed to a single-payer system, this analysis is likely to take the political fight to a new orbit. Even if it contains spending, savings and revenue estimates that are slightly off, it brings new specificity to the debate.
The University of Massachusetts analysis portrays a system where the vast majority of residents and businesses could do better than the status quo. As Republicans in Washington seek to destroy Obamacare and underfund Medicaid in their 2018 budget, the pressure on California to protect and insulate its citizens will only grow.
Steven Rosenfeld covers national political issues for AlterNet, including America's democracy and voting rights. He is the author of several books on elections and the co-author of Who Controls Our Schools: How Billionaire-Sponsored Privatization Is Destroying Democracy and the Charter School Industry (AlterNet eBook, 2016).