How Much Would It Cost For California To Adopt A Single-Payer Health Care System?

I’m going to get straight to the point. How much would it cost for the state of California to fund a “Medicare-for-All” single-payer healthcare system? Well, the short answer is that in 2019 it would’ve cost approximately $240 billion, or about 7.5% of gross state product. But Please don’t close out just yet! You should be wondering how I got to this figure! For those of you still here… let’s get into it.

First off, in order to measure the impact of health reform, we need to have a baseline established. The most recent numbers I could find for health spending came from 2014, when Californians spent $7,549 each, or 12.8% of their per capita GDP for that year. Health spending has outpaced GDP growth nationwide, though only by a very small amount since 2014. The nation spent 17.3% of its GDP on healthcare in 2014, compared to 17.8% in 2019, so for California I ball parked (extrapolated) a figure of 13.2% (yeah, not the gold standard for data science, but at least we have an idea).

Next we need to establish what a single-payer system would cost in the aggregate. The bulk of studies give conflicting numbers, though when controlling for assumptions, we get a clearer picture. A meta-analysis conducted by PLoS Med estimated the net change in cost associated with various features such as who is covered, reimbursement rates, and whether there are copays. Considering California is a more liberal state, I figured I’d assume the inclusion of the following features (and their average cost reduction):

  1. Coverage of Undocumented Immigrants (-2.7%)
  2. Improved Administrative Efficiency (-4.3%)
  3. Prescription Drugs Savings (-7.0%)
  4. Lower (Medicare-like) Reimbursement Rates (-0.5%)

While according to the study the coverage of undocumented immigrants lowers costs, I’m going to exclude that particular cost reduction estimate simply because I’ve very skeptical of the idea. Covering more people generally costs more, especially with high actuarial value insurance. Hypothetically there could be savings from preventative medicine, but I think that requires much more in depth analysis than a linear regression of studies that did not rigorously study that particular variable.

So altogether we come up with a figure of 11.8% in savings. If we place that against the 9.3% median increased utilization rate among studies in the meta-analysis, we get a small first-year decrease in overall healthcare costs of 2.5%. Virtually every study predicts significantly greater savings over a longer period, say 10 years, but for the purpose of this analysis we’re going to stick to first-year numbers.

At 97.5% the cost of the existing system, California should see its health spending as a share of gross state product fall from about 13.2% to 12.9%, which is a meaningful improvement. Last year, that would’ve been a reduction in spending from about $420.2 billion to $410.6 billion, a not-insignificant amount of ‘ savings.’ Whether or not that can be called savings depends on where exactly you find yourself in the state’s healthcare system. People working in administration and pharmaceuticals are going to get hit.

Now that we have an idea of what this system would cost in aggregate, we need to look at the California state budget. Last year, California spent $172.4 billion on healthcare on the state and local level, including funding from the federal government. There are two ways of looking at this from the perspective of implementing a single-payer system; either California gets permission from Congress to use Medicaid and Medicare funds for their new insurance program, or they simply exclude Medicaid and Medicare recipients from receiving benefits under the program. Of course, such individuals not eligible for benefits might not appreciate being taxed by the state to pay for everyone else.

For the sake of this analysis, California will only cover individuals not eligible for Medicaid and Medicare, and those individuals will not pay for the system. Since Medicare and Medicaid recipients are usually either unemployed or have low taxable incomes, California should be able to levy a smaller payroll tax to finance the system. The net cost of the system will then fall to around $238 billion after deducting federal grant money and diverting other state health spending, or, as I mentioned at the beginning of this article, 7.5% of California’s gross state product.

Approximately 30% of Californian’s are enrolled in Medicaid, and an additional 11.5% receive Medicare. Given these numbers, we can estimate that roughly 58% of Californians are to receive access to the single-payer program, which extrapolates, as it happens, to a reduction from $410.6 billion to $238.2 billion, the same as our previous figure. While the absolute cost is nice to have, what people I think really want to know is what it’s going to cost them (and I’d want to know the same thing). A number like 240 billion is a bit abstract, and so let’s break it down into taxes.

The first thing we need to do is determine more or less the size of the payroll tax base. Since the roughly 42% of ineligible Californians who won’t be contributing to the program’s tax base are either low income or retired, they won’t make as large of an impact to the tax base (if we’re using wages and salaries). Only about 20% of age 65+ Californians are in the labor force, and generally seniors make a roughly average income, we can estimate that about 3% of the payroll tax base comes from seniors (it’s worth noting that many of those seniors who have not yet retired may currently be using employer insurance as opposed to Medicare).

If we look at the Medicaid recipients, who are made up of households with incomes below 138% of the federal poverty line ($35,535 for a family of four in 2020), we know they’ll be contributing less to the tax base. Consider that in 2018, the bottom 20% of American households took in 9% of household income, and California has a considerably higher output per capita than the U.S. broadly. Though lower income households make up a larger share of the state’s population, they are probably a disproportionately lower share of wage and salary income. I don’t have exact figures so this’ll need to be a ballpark. I would say approximately 12% of California’s wage and salary income goes to low income households excluded from coverage under the hypothetical program.

What we’re left with is a tax base equal to give-or-take, 85% of payroll. Last year, 85% of payroll would’ve been $1,157.3 billion. If we remember, the cost of the program should be about $238 billion. Yeah, that’s not a pretty ratio. To fully cover the cost of the program, it seems California would need to levy a 21% payroll tax on everyone below the age of 65 who are above 138% of the poverty line. The only alternative really in distributional-terms would be to combine a lower payroll tax with an increased income tax. California’s top marginal rate of income tax is already the highest in the nation at 12.3%. The numbers don’t look good… I’d say they’re politically and economically unworkable.

I’m sure I made a dozen errors in this post, but I think it’s okay-ish of an analysis, though obviously nothing crazy in-depth. Please feel free to leave your thoughts below, especially those critical of my assumptions and conclusions. For the record, I don’t oppose more progressive and universal system of health coverage in the United States, I just don’t think Medicare for All is the most appropriate or mature way of obtaining it.

‘Til next time.

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