Idiotic Commentary on California’s Single Payer Push

As I noted in an earlier post, California’s single payer plan is turning out to be shockingly cheap, if a recent report estimating its costs is to be believed. Sadly, the coverage of the plan so far is largely full of idiotic commentary that fails to think correctly about the costs associated with the plan, and so we get stuff like this CNBC article from Jake Novak.

When the estimates of the report were first covered by Angela Hart at the Sacramento Bee, she decided to divide the costs in the report by the state budget for reasons that genuinely elude me. The result was a headline and story noting that, after the plan, health care expenditures in CA would be greater than the size of the current state budget. Because the media is mostly just derivative of one another, this became the figure that took off among pundit types like Novak.

Because as the politicians in California just found out, providing government paid-for health care isn’t just expensive, it’s more expensive than everything else… combined.

But here’s the thing with this statistic. It’s already the case that government expenditures on health care in California are larger than the size of the state budget. You don’t have to do any sort of advanced snooping to see this. It’s right in the report Novak and others’ takes are responding to.

The report says that federal, state, and local funding of health care is currently $200 billion. And, as Novak notes in his piece, the total money allocated for the CA state budget is $179.5 billion. So governments in California spend 111% of the state budget on health care right now! Disaster! Panic! Impossible!

Aside from noting that the California health care sector is larger than the California state budget and then becoming apoplectic, the only other thing Novak does in his piece is confusingly pretend like the state of California cannot levy taxes on employers.

Novak notes that almost all of the additional money needed for a single payer system could come from redirecting payments employers already make to private insurers into the single-payer fund, but then has to this to say about how that’s ridiculous:

The study tried to be a bit more optimistic, noting that private employers currently pay between $100 and $150 billion per year to provide health insurance for their workers and hypothesizing that money “could” be made available to the single payer plan. But that assumes those employers and employees would be okay with choosing a government-run option instead of their private insurance.

Yeah, none of that is going to work.

I can’t tell if Novak is actually confused or being deceptive, but to state the obvious: it is not the case that the only way you can access this $100-$150 billion is by asking employers to choose to pay it into the single-payer system. There is another way to access it wherein you levy an employer-side payroll tax that forces employers to send the money into the universal state insurer. You know kind of like how the federal government levies Medicare payroll taxes already?

If the single-payer plan on offer in California costs as little as they say it does, it is so easily achievable as a fiscal policy matter that it’s almost laughable. Whether there are political hurdles to passing it, I can’t say. At present, the only major persuasive hurdle seems to be that those who write about it pollute the discourse with takes that are on par with perpetual deficit-mongering in their wrongness.

Single Payer Payroll Taxes

Presently, three types of actors pump money into the US health care system: the government funds programs like Medicaid and Medicare; employers pay premiums to private insurers; and individuals pay premiums to private insurers and pay deductibles and copayments. Shifting to a single payer system requires capturing these various flows of money and redirecting them into a national health insurance program, which then pays money to providers.

Insofar as this money is already being spent on health care in the status quo, this does not necessarily require imposing any additional financial burdens on the three actors. The government spending will just shift from existing programs to the new one; a perfectly-crafted employer-side payroll tax would not require any extra outlays from them; and perfectly crafted individual taxes along with perfectly-crafted cost-sharing rules would not require any additional payments from individuals.

In practice, the perfectly-crafted taxes and perfect-crafted cost-sharing will not happen. Indeed, this is on purpose. One of the charms of moving to the single-payer system is that it allows us to replace the way we currently fund health care (mostly through flat payments akin to head taxes) with a more progressive way of funding it (generally flat payroll taxes). This shift would significantly alter the distribution of payments away from the bottom and middle and towards the top. This is why single-payer advocates can credibly claim that the majority of people would see their disposable incomes rise if we shifted to a single-payer system.

This all sounds good because it is good. But it also can make some people mad. However it doesn’t have to make them mad because we can fix what they are mad about.

In particular, employers complain that shifting from a flat premium payment to a flat payroll tax would be too disruptive to their labor costs. Employers overall dedicate 8.3 percent of their labor costs to health care payments, but there is considerable variation from employer to employer. Because premiums are done on a flat payment basis, lower-paying employers currently dedicate more of their labor costs to health care than higher-paying employers. Subjecting them all to a tax equivalent to 8.3 percent of their labor costs would thus shift the burden off of lower-paying employers and on to higher-paying employers. As Kliff notes:

“An 11.5 percent tax would look great if I’m a low-wage employer,” said Schoen. “But I’m a high-wage employer, 11.5 percent is going to be way higher than what I used to pay to buy insurance.”

This is actually very good, but you can see why employers of rich people get mad. In theory they could just pass the cost down to their highly-paid workers through lower pay, but a significant nominal cut in pay could cause the workers to become disgruntled. This means the employer has to either cut highly-paid workers wages in order to keep labor costs steady and deal with disgruntlement or keep the wages where they are and deal with a big labor cost bump. Neither is a very appetizing option to the employers.

But this problem should, in theory, be manageable. Instead of only imposing a flat employer-side payroll tax, a single-payer system could begin with two employer-side payroll taxes. One is a head tax equal to a certain dollar amount per full-time equivalent employee. The other is a flat employer-side payroll tax. By dialing in the two taxes at the right levels, you should be able to achieve whatever distributive result is necessary to make the employers minimally happy. And, over time, all you have to do is gradually dial down the head tax while dialing up the flat tax in order to achieve the distributive results single-payer advocates want while also avoiding a big one-time nominal wage cut to highly-paid workers.

If the prior discussion has caused your head to swim, consider the following explanation with hypothetical numbers.

Suppose we determine that employers currently contribute around $4,000 per full time equivalent employee to the health care system. Suppose we further determine that this is equal to 10 percent of employers’ payroll.

We could just impose a 10 percent employer-side payroll tax and indeed that’s what people typically propose. But if you are a high-wage employer, you may currently pay just 2 percent of your payroll to health benefits, meaning the tax would be quite a jump up from your current expenditures. And this makes you mad.

To please this mad person, what I’m saying we can do is impose two taxes: 1) a $3,000 per employee tax, and 2) a 2.5 percent payroll tax. Now instead of the high-wage employer’s health bill jumping to 10 percent of payroll, it only jumps to 4 percent, which is more manageable.

This would still be more progressive than the current system. And, over time, it would be possible to dial up the payroll tax to 5 percent and then 7.5 percent and then 10 percent, while dialing down the per-employee tax to $2,000 and then $1,000 and then $0. In this way, the switch from head taxes to flat taxes is phased in gradually, which solves the problem the employers gripe about, assuming that problem is what actually motivates them.

California’s Surprisingly Cheap Single Payer Plan

There is coverage today of a new report from the California Senate Appropriations committee estimating the budgetary implications of a proposed single payer health plan for the state (Sacramento Bee, LA Times, Vox). I’ve not yet been able to access the report directly, but the coverage of it is pretty encouraging.

After the implementation of single payer, the report says, health expenditures in the state of California would total $400 billion per year, or 15 percent of the state’s GDP. This is 3 percentage points lower than the share of GDP the US overall spends on health care.

The reports indicate that, currently, government spending on health care in California is around $200 billion and employer spending on health care is between $100 billion and $150 billion. There is no indication of how much individuals currently spend on top of employers and governments on individual premiums and out-of-pocket expenses. Nonetheless, net of current government spending ($200 billion) and employer spending ($100-$150 billion), the single-payer plan requires an additional $50 to $100 billion of spending, or 1.9% to 3.8% of CA GDP.

For that extra 1.9% to 3.8% of GDP:

The state would pay for almost all of its residents’ medical expenses — inpatient, outpatient, emergency services, dental, vision, mental health, and nursing home care — under the plan, and Californians would not have any premiums, copays, or deductibles.

That’s an incredible deal for just 15% of GDP, which again is lower than the US as a whole already spends on health care.

Of course, there are challenges to implementing single payer on the state level. States have to deal with all sorts of federal laws like ERISA that could disrupt their plans. States have to hope the federal government will chip in the share they currently contribute to the state’s health care sector. States have to worry about rich people leaving to avoid tax to some degree. And states have to worry about what will happen during a recession when the state’s budget contracts in ways the federal government’s budget does not.

But if the plan would work like this report says it does and at the cost this report says it does, it is a no-brainer.