Would California’s proposed single payer system bankrupt businesses?

California Senate Committee on Appropriations: SB 562 (Lara) - The Healthy California Act

By Brendan McCarthy (Consultant)
May 22, 2017

Bill Summary: SB 562 would create a universal, single-payer health care system in California.

Fiscal Impact: The fiscal estimates below are subject to enormous uncertainty. Completely rebuilding the California health care system from a multi-payer system into a single payer, fee-for-service system would be an unprecedented change in a large health care market.

The projected costs and revenue needs for the proposed Program are as follows. For a discussion of the underlying assumptions, see Staff Comments (link below).

* Total annual costs of about $400 billion per year, including all covered health care services and administrative costs, at full enrollment.

* Existing federal, state, and local funding of about $200 billion could be available to offset a portion of the total program cost.

* About $200 billion in additional tax revenues would be needed to pay for the remainder of the total program cost. Assuming this tax was raised through a new payroll tax (with no cap on the wages subject to the tax), the additional payroll tax rate would be about 15% of earned income.

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. Although precise estimates of total spending for employer sponsored health insurance are not available, the best available information indicates that existing spending is between $50 and $100 billion per year. Therefore, total new spending required under the bill would be between $50 and $100 billion per year.

Administrative cost savings would be real, but limited

Under a single payer system, the overall administrative cost of the system would likely be lower than it is in the current multi-payer system. In the United States, the cost of the health insurance industry is about 7% of total costs. In addition, providers, such as hospitals and physicians, incur significant administrative costs to negotiate contracts and comply with health insurer billing requirements. If we assume that the costs on the provider side are equal to the costs of the insurance industry, then current administrative costs are likely to be about 15% of total spending. Administrative costs in the Medi-Cal fee-for-service system and Medicare are about 6% of spending. Assuming that dealing with a single payer system reduced provider administrative costs by half, total administrative costs of the system in the bill would likely be about 9-10% of total spending. This does represent a significant savings in a $400 billion health care system. However, administrative savings are not likely to substantially lower the overall cost of providing health care to the state, compared to costs associated with expanding coverage to the uninsured and increased utilization of services under the bill.



By Don McCanne, M.D.

With the release of this fiscal analysis of SB 562 - The Healthy California Act - the expected loud protests to the high costs of a single payer system have been forthcoming, especially that the costs would exceed the California state budget and that raising the additional funds required through a 15% payroll tax would bankrupt businesses. The opponents conveniently ignore the opening caution that “the fiscal estimates below are subject to enormous uncertainty.”

In fact, this 8 page analysis is loaded with assumptions and uncertainties based on the lack of detail specified in the proposed legislation, as the author indicates. Health care is almost one-fifth of our gross domestic product, and, by any accounting, that is very expensive. But this does not change fundamental single payer principles. All of the health care funds are moved into a single, publicly-administered system which is administered much more efficiently and which is funded on an equitable basis (which requires progressive taxes because of the decades-long shift of income and wealth to the top).

The opponents have already declared that this legislation is a failure based on the high global costs and the assumption that a payroll tax would replace current private spending. Reading the full report would provide a more objective perspective, in spite of the multitude of uncertainties.

At any rate, those who dismiss this legislation based on spending greater than the California state budget and a 15% payroll tax must be challenged. Our response? This bill would provide each Californian with all essential health care services at a price that each can afford.