Single-payer bill could bankrupt California

By Marc Joffe
June 5, 2017

The state Senate’s vote to pass Ricardo Lara’s single-payer healthcare bill last week was a singular act of fiscal malpractice. By failing to control costs and access to the program – and by leaving unanswered how or whether federal funds could be leveraged – Lara’s Healthy California Act amounts to a blank check for hospitals, doctors and pharmaceutical companies on the state Treasury, a blank check that could well bounce once it’s presented to Sacramento.

While there are many reasons to dislike the concept of single-payer health coverage generally, the fact is that it can be made to work on some level. The United Kingdom and Canadian provinces have implemented forms of single-payer coverage, without causing a fiscal meltdown and while achieving acceptable life expectancies (although both systems suffer from long waits for certain medical services).

But the UK and Canada accomplish this outcome through cost controls missing from Lara’s bill. For example, these systems do not normally provide free healthcare to undocumented residents. To qualify for Ontario’s Health Insurance Plan one must not only live in Ontario but must also be a Canadian citizen or legal resident. The province recommends that visitors purchase private medical insurance. The UK National Health Service also has provisions to charge individuals who are not legal permanent residents.

By contrast, Lara’s bill provides free healthcare to any “individual whose primary place of abode is in the state, without regard to the individual’s immigration status.” With healthcare costs now averaging about $10,000 per capita, the state’s free healthcare will create a strong incentive for people to come to California illegally or overstay their visas.

And this incentive is not limited to foreigners; individuals from other states diagnosed with expensive medical conditions could legally move to California, establish residency and start obtaining free medical care. Although the bill does not define what would be required to establish residency, the published criteria for getting a California driver’s license – a potential model – are quite lenient. If that is the standard, one would merely need to produce a lease and a voter registration postcard to qualify.

The UK and Canadian systems also limit the types of care eligible for coverage. As I discussed in a March 2017 article for The Fiscal Times, the UK National Health Service generally does not provide mammograms for women under 50, does not offer routine colonoscopies and does not cover circumcisions for newborn boys. In Ontario, the government dropped coverage for eye exams, chiropractic treatments and physiotherapy in 2004.

By contrast, the Healthy California Act proposes to cover “all medical care determined to be medically appropriate by the member’s healthcare provider.” Further, plan members “shall not be required to pay any premium, copayment, coinsurance, deductible, and any other form of cost sharing for all covered benefits.”

Although the bill claims to create “a healthcare cost-control system,” it does not contain any specific cost control provisions. There is no gatekeeper charged with saying “no,  this test, procedure or medication should not be covered.” With patients paying nothing out of pocket and health providers getting reimbursed for whatever they recommend, the incentives for overtreatment are strong.

Indeed, the bill shreds privately implemented cost controls that have proven themselves over decades. Kaiser Permanente, operating since 1945, covers 8.5 million Californians through a system of managed care. Kaiser generally provides all healthcare services to its members, charging them a flat annual insurance fee and copays for physician visits. This gives Kaiser both the ability and incentive to restrict unnecessary or redundant treatment. As a result, Kaiser provides high-quality care at low cost: that’s what makes it a national model.

Lara’s bill tosses out this model. With the state taking over all medical payments, Kaiser would be obliged to become a “fee for service” provider if it wanted to continue operating in California. The legislation would thus force more than 20% of Californians out of a system that effectively controls cost to the mainstream U.S. approach that has led to the world’s highest healthcare expenditures.

Single-payer advocates often emphasize the opportunity to save money by eliminating insurance company profits. But Kaiser is not-for-profit, as is Blue Shield, which covers another four million California residents.

Also, insurance company profits don’t necessarily increase health costs – if these profits are offset by cost savings. For example, the Mexican health insurance company SIMNSA offers California health insurance plans that use providers across the border in Tijuana and Mexicali. Because healthcare in Mexico is so much less expensive than it is in the U.S., the carrier can save customers money while making a profit. Cross-border insurance arrangements like the one offered by SIMNSA would also be wiped out by Lara’s bill.

While other insurance providers may not be able to offer the unique product SIMNSA provides, all have an incentive to control costs, by, for example, limiting fraudulent claims. By contrast, the nation’s main single-payer system, Medicare, is racked by fraudulent and other improper payments.

By removing cost-control incentives and providing first-dollar coverage to all comers, the Healthy California Act is likely to cost well above the $400 billion mentioned in a Senate Appropriation Committee report.

There’s another risk – that California would not be able to fully leverage the $200 billion in federal funds now devoted to California healthcare. Most federal healthcare spending in California is related to the Medicare and Medicaid programs. Medicaid, known as Medi-Cal in California, is administered by states with federal matching funds under federal guidelines. States can request waivers from the federal Medicaid guidelines under Section 1115 of the Social Security Act. Any program waivers must not increase federal spending and are issued at the discretion of the Secretary of Health and Human Services. The odds of obtaining a Medicaid waiver appear low as long as Republicans control the White House. Since Medicare is solely administered by the federal government, there’s no such thing as a state Medicare waiver.

If California Democrats were serious about implementing a cost-effective single-payer system, they would work with Congressional Republicans to make federal funding more flexible. The American Health Care Act (AHCA) passed by the House gives states the option of receiving a block grant in lieu of Medicaid matching funds and provides each state with new funding to stabilize their insurance markets. If these state subsidies were further expanded and made less restrictive, it would be easier to integrate the federal funds into a state single-payer system.

But Nancy Pelosi and other congressional Democrats have expressed no interest in working with the GOP. Indeed, they made an especially ironic criticism of the AHCA process – excoriating House Republicans for passing the bill before the Congressional Budget Office had an opportunity to update its budgetary score.  In the end, CBO found that AHCA would reduce the federal deficit by $119 billion over 10 years, somewhat less than the previously scored revision of the bill.

By contrast, Ricardo Lara did not ask the California Legislative Analyst’s Office to score his bill, even though an initial guestimate suggests that it would balloon state spending by $200 billion per year, or more than $2 trillion over the normal 10-year budget window used by CBO.

The state Senate has passed a bill that, if it becomes law, will have the largest fiscal impact in the history of California, and it will do so without having an objective body of budget experts review the legislation. Given this lack of oversight and the aforementioned risk of serious cost overruns, the Senate’s ratification of Healthy California is the greatest case of fiscal malpractice in the state’s history – and one that threatens to flatline our state’s budget and economy.

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