$400 billion California single-payer system offers providers 'little incentive' to control costs

The proposed single-payer healthcare system being debated in California would come with a $400 billion annual price tag—more than double the state’s annual budget—according to a review released by the California Senate Appropriations Committee.

The legislation, called the Healthy California Act, would establish a single-payer system run by an appointed state board. Almost all medical expenses, including inpatient, outpatient, emergency and nursing home care, would be offered to all California residents with no copays, deductibles or premiums. Provider payments would be based on fee-for-service, except for integrated systems, which could choose compensation based on a capitated or non-capitated system budget.

Private insurance companies would be largely cut out of the system. Insurers would be prohibited from providing coverage for any service covered by the Healthy California Program, and physicians and hospitals would no longer have to negotiate rates with them for those services.

Unsurprisingly, the California Association of Health Plans is lobbying against the legislation, with vice president of legislative Nick Louizos calling it “massively, if not prohibitively expensive” in a May 22 hearing.

The California Nurses Association is supporting the bill, arguing it eliminates administrative overhead and profits from insurers acting as middlemen and the $100 billion to $150 billion employers and employees currently spend every year on healthcare in the state. It also noted 71 percent of healthcare spending in California is already covered by public funding. 

Even after factoring in what employers currently spend on health insurance, the system would still need between $50 to $100 billion in new revenue to function.

“A single-payer plan would likely be more efficient, but it also offers better benefits and covers more people, and that costs money that has to come from somewhere,” Larry Levitt, senior vice president at the Kaiser Family Foundation, said to the San Francisco Chronicle. “These numbers point to what is probably the most controversial part of a single-payer plan, which is the financing.”

Supporters of the plan admitted there’s no set proposal for generating that new revenue, though a 15 percent payroll tax on earned income has been floated.

Besides the financing issues, the legislative analysis spotlighted other issues which could greatly affect doctors and hospitals, like increased utilization. Since the bill would provide universal coverage to all state residents, including the 7.4 percent who were uninsured in 2016. Modeling the single-payer system was based on Medicaid (Medi-Cal in California) fee-for-service, but the analysis predicted at least a 10 percent increase in utilization of service compared to Medi-Cal FFS.

“The ability for enrollees to see any willing provider, to receive any service deemed medically appropriate by a licensed provider, and the lack of cost sharing, in combination, would make it difficult for the Program to make use of utilization management tools such as drug formularies, prior authorization requirements, or other utilization management tools,” the analysis said.

Provider reimbursement and how it affects costs would also be a major issue under this bill. Payments to doctors and hospitals would be based on Medicare rates, not lower Medi-Cal payments, which the analysis said would be needed to “ensure continued access to services.”

By tying those payments to fee-for-service, however, the state has little ability to use the stronger negotiating position of a single-payer system to lower prices. Instead, providers would have “little incentive to control costs through increased efficiency,” as is the goal of many value-based care initiatives, and would settle for being paid based on the cost of providing care, in turn leading to increased inflation in costs.  

One consequence of the single-payer plan wasn’t addressed in the report: job losses in healthcare. With commercial insurance companies cut out of the system, the analysis said essentially all their employees, along with many administrative workers at physician practices and hospitals, would be out of work. Exactly how many, and what kind of impact that would have on the state, was deemed “beyond the scope” of the analysis.