By Andrew B. Bindman, Marian R. Mulkey, and Richard Kronick
Health Affairs, September 2018
California has long sought to achieve universal health insurance coverage for its residents. The state’s uninsured population was dramatically reduced as a result of the Affordable Care Act (ACA). However, faced with federal threats to the ACA, California is exploring how it might take greater control over the financing of health care. In 2017 the state Senate passed the Healthy California Act, SB-562, calling for California to adopt a single-payer health care system. The state Assembly did not vote on the bill but held hearings on a range of options to expand coverage. These hearings highlighted the many benefits of unified public financing, whether a single- or multipayer system (which would retain health plans as intermediaries). The hearings also identified significant challenges to pooling financial resources, including the need for federal cooperation and for new state taxes to replace employer and employee payments. For now, California’s single-payer legislation is stalled, but the state will establish a task force to pursue unified public financing to achieve universal health insurance. California’s 2018 gubernatorial and legislative elections will provide a forum for further health policy debate and, depending on election outcomes, may establish momentum for more sweeping change.
Barriers to Unified Public Financing
California would need to overcome daunting technical and political challenges if it were to transition to a system of unified public financing, whether single- or multipayer. It would be doubly challenging to accomplish this transition at the state level, in part because political agreement would be needed from two levels of government—state and federal. Concerns about providers fleeing the state or sick people being drawn to the state complicate the technical challenges of establishing a unified publicly financed health care system at the state level. These concerns would be minimized if unified public financing were enacted at the federal level.
Accomplishing such a sweeping transition would require substantial and unprecedented changes in federal and state law as well as decisions regarding many design parameters. To implement such a system, Congress would need to pass legislation to redirect payments away from individual Medicare beneficiaries and providers to whatever state agency was operating California’s unified public financing program.
Current federal law might allow federal waivers to redirect federal funds for Medi-Cal and subsidies for individuals in Covered California into a unified state pool, but such waiver requests would be unprecedented. In addition to establishing an initial set of assurances about payments, determining the rate at which the federal payment to California would grow over time would require political agreement. It is hard to imagine that the current Congress or administration would approve such requests. Even with a hypothetical Democratic Congress and president, such approvals would be far from certain.
At the state level, a move to unified public financing of health care would also face significant political challenges. Very large new state taxes would be required to generate program revenue to replace employer-sponsored insurance funding, support those who are currently uninsured, and cover the administrative costs of operating the program. Given anticipated savings from reduced billing and insurance-related costs and potentially (at least eventually) some reduction in low-value care and in the rate of growth of prices, it seems likely that total spending would be less over time than under the status quo. But even if total health spending declined (or at least did not increase), transforming employer-sponsored funding into public funding would be a massive undertaking.
Other challenges include developing processes to match the rate of spending growth to the rate of revenue growth and to determine the “right” revenue growth rate. Physicians, other providers, and some patients would be concerned that a system of unified public financing would overly constrain spending growth, denying Californians the benefits of outcome-improving technology. On the other side, some would be concerned that as a result of regulatory capture, health spending would increase more quickly than justified by the rate of improvement in outcomes, leading to tax increases that did not produce commensurate increases in value or to squeezing out other government spending.
The Select Committee hearings convened to explore these and other issues did not delve into the details of how new taxes might be constructed to support unified public financing; however, the California Legislative Analyst’s Office provided broad tax alternatives with ballpark estimates. Assuming that the current amounts being spent by Medicare and Medicaid could be contributed to a unified public financing approach, new taxes would be needed mainly to substitute for the current employer and employee contributions. Because employer and most employee contributions are made with pretax dollars, purchasers of employer-sponsored coverage benefit today from a discount in the form of a federal tax subsidy. Other methods of financing might increase Californians’ federal income tax burden. Based on the Legislative Analyst’s Office estimates, a 3 percent gross receipts tax levied on all sales and services at all stages of production would generate approximately $120 billion—an amount similar to that spent in California for employer-sponsored insurance. Alternatively, a similar amount could be generated with a 9 percent payroll tax.
A payroll tax could be applied uniformly to all employers, or the state could consider a firm-specific payroll tax in which the tax rate for each firm approximated the percentage of the payroll that the firm pays for health benefits under the status quo—with a plan to narrow the gap between high- and low-rate firms over time. A firm-specific payroll tax would have the political advantage of creating fewer winners and losers, compared to most other financing approaches, and would also minimize any effect on federal income tax liabilities.
Amendments to the California constitution would be required to implement unified public financing in the state. Proposition 98 requires that a portion of any new taxes, regardless of the stated rationale for them, must be directed to K–14 education. The Gann limit, passed by voters via a 1979 statewide ballot initiative, sets appropriation limits on state budget categories supported by taxes. A new tax to support unified public financing would almost certainly exceed the limit. Therefore, adequate funding for unified public financing would require a majority vote of the state’s population to modify the limit.
Even if an amendment to the California constitution were not required by Proposition 98 and the Gann limit, support from California voters for a system of unified public financing would be important for at least two reasons. First, as we have seen with the Affordable Care Act, opponents of change will likely not concede after a legislative loss and will continue to litigate, both in court and in the court of public opinion. A statewide vote in support of change would not prevent that activity but would reduce its effectiveness. Second, and more important, obtaining the federal legislative changes and administrative approvals needed to implement unified public financing would be challenging, and a statewide expression of support could increase the chances of success.
By Don McCanne, M.D.
The September, 2018 issue of Health Affairs is on “California: Leading The Way?” Of importance to not only California, but the entire nation, is California’s effort to enact a single payer program of health care financing. The article by Bindman, Mulkey, and Kronick describes the process that has been taking place. In the excerpt above they describe the barriers to unified public financing, whether single payer or multipayer. The policy community in other states and in the nation at large may find this information useful in their own work.
If California were an independent nation it would be the world’s fifth-largest economy. Yet, as described in another report by Zelman and Wulsin, California has had a very long history of attempting to achieve universal health insurance, but the goal has remained elusive. Even though the state has been very successful in implementing the Affordable Care Act, it still falls far short on most important goals of reform. There is even an article by Enthoven and Baker, still touting managed competition in spite of its obvious shortfalls. The state seems to be mired in health policy innovations that somehow seem to be adding to the muck that we’re trying to wade through.
The full article by Bindman, et al certainly acknowledges the benefits and virtues of a single payer system, but it is discouraging since it seems to default to the misguided direction in which we are headed in health care reform. The barriers, though clearly surmountable with the cooperation of state and federal legislators and their administrations, seem to be distracting the policy community as they redirect to approaches that perpetuate the fragmented, multipayer infrastructure we have, while adding yet more costly administrative complexity that leaves patients exposed to financial hardship and loss of choices in health care.
Bindman and his colleagues conclude, “Implementation of unified public financing in California is technically feasible, but leadership, vision, and persistent public and private commitment—both in California and in Washington, D.C.—are needed to make it happen. Recent deliberations within the California legislature demonstrated both the compelling logic of and the growing emotion associated with movement away from today’s unequal, complex, and fragmented health insurance arrangements. It remains to be seen whether the proponents of change can overcome status-quo interests, renegotiate state and federal responsibilities, and set a new course toward universal coverage.”
That will not happen unless the people lead.
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