The Single-Payer Health Care Proposal
A Guide to Initiative 245
September 2000
The study was funded by a grant from the M.J. Murdock Charitable Trust
Ballot Title: “Initiative measure 245 concerns the creation of a health benefits system. This measure would create a state agency to develop and administer a single health benefits package for state residents, funded by mandatory premiums, employer assessments, existing taxes and co-payments. Shall this measure be enacted into law?”[1]
Most people agree that Washington’s standard of medical care is one of the finest in the world. A major initiative proposed to the legislature for consideration in January could fundamentally alter how Washington’s health care system is managed and financed. The proposal, Initiative 245, would replace private insurance with a publicly-funded, single-payer system, in which the government would assume responsibility for paying the cost of basic medical care for all state residents.
Forty pages of tightly written paragraphs encompass sweeping control of the health care industry, set the level of benefits for every citizen and create the bureaucratic structures to carry it all out. The proposal would add 34 new sections to the state law code and would be paid for with a employer payroll tax and four new tax brackets for individuals.
The cost of the single-payer system is estimated at about $10 billion a year. The new spending would occur outside the legislature’s regular oversight and appropriations process, and would not be subject to the annual spending caps required by Initiative 601.
The initiative requires the state to obtain twenty waivers from the federal government to allow Washington to opt-out of national health programs. The initiative calls for the plan to be up and running by May 15, 2003.
While the proposal seeks to establish universal health care for all, it is deeply complex and requires government management of approximately one-seventh of the state economy. Whether the single-payer system called for by Initiative 245 is the best medicine for Washington is something the voters and their representatives in Olympia will have to decide.
Medical care in Washington is among the best in the nation, and therefore the world. The state boasts a number of first-rate hospitals, nursing schools, a world-renown cancer treatment center and a top-flight medical school. Doctors, researchers and scientists travel here from around the globe to study and practice medicine.
While most people agree that our standard of medical care is one of the finest available, a major initiative proposed to the legislature for consideration in January could fundamentally alter how Washington’s health care system is managed and financed. The proposal, Initiative 245, would replace private insurance with a publicly-funded single-payer system, in which the government would assume responsibility for paying the cost of basic medical care for all state residents.
Most working residents currently receive health care coverage as a job benefit through their work. This is because under federal tax rules the cost of health insurance is fully or partly deductible for companies and the self-employed as a business expense, but not for individuals as a personal expense. Insurance coverage is available to individuals and families who pay the costs out of pocket, and poor residents receive free care through existing public health programs. A large number of people in Washington go without health insurance, and the public debate over Initiative 245 is focused on the effort to bring coverage to this uninsured population.
Single-payer advocates seek to provide health coverage for the uninsured by placing all state residents into one, unified health care financing system. The delivery of medical care and the insurance that pays for it are already heavily regulated by the government. The single-payer proposal is founded on the idea that the present level of state regulation is not enough, and that comprehensive government control of medical financing is needed to resolve the ills of the current system.
Single-payer supporters see private insurance companies and HMOs as the source of the problem. They feel that if the financial services provided by these entities were replaced by a government agency -- one that commands independent revenues through mandatory payroll assessments and taxes on individuals -- then affordable medical coverage could be extended to all state residents while maintaining the present high standard of care.
Initiative 245 is complex, and numerous claims and counter-claims are being made about how well it might work. This study, the first in a series, presents a general analysis of the initiative and assesses its impact on the delivery of health care. In particular, the study offers a critical examination of how single-payer health care would be structured, how it would be financed and how it would be enforced.
Future studies will address Initiative 245’s impact on jobs, the private health care market, the overall tax burden, medical privacy and on the quality of health services. They will also examine how similar public programs have fared in other states, like Tennessee and Vermont, and how consumer-based reforms may work as an effective alternative in covering the uninsured.
Central to the debate over Initiative 245 is whether in the effort to completely restructure the medical profession more may be lost than is gained. There is a chance the cure may be worst than the disease, and that innovative policy alternatives may exist that would more effectively extend affordable health coverage to those who need it. Before alternatives can be considered, however, the legislature and the voters must first determine whether single-payer health care really is the best medicine for Washington.
Single-payer advocates initially intended to put their plan before the voters on the November 2000 ballot. Their first proposal, Initiative 725, was filed with the Secretary of State in February, but by the July 7th deadline it had fallen short of the number of valid petition signatures needed to qualify for the ballot.
Backers then sought to strengthen support for the proposal by modifying the financing and other sections of the measure. They refiled the revised version as Initiative 245 to the legislature. State law requires they gather 179,248 valid signatures by the new deadline of 5:00 p.m., December 29.[2] If this is done, the legislature must take up the plan in the session that starts in January 2001.
Once the single-payer plan is under consideration the legislature may take one of three courses of action.
Whichever method is chosen, the people of Washington, either directly or through their representatives, will soon face a major decision on the future of health care in our state.
While the idea of government-financed health care has its roots in nineteenth century European socialism, more recent single-payer plans at both the state and national level derive their inspiration from the Clinton Administration’s proposed Health Security Act of 1993, a major policy effort spearheaded by First Lady Hillary Rodham Clinton.
Congress rejected the Clinton plan in 1994, but it remains a model for many similar efforts undertaken in the states. While it was being debated in Congress, the Washington legislature adopted a number of elements of the Clinton plan by imposing new regulations on private insurance carriers. By 2000, the collapse of the individual insurance market, along with increasing cost pressures on the small-group market, induced the legislature to roll back many of the earlier regulations. The individual insurance market in Washington has since begun to revive.
Initiative 245 picks up where that effort left off, but it attempts to remedy previous shortcomings by taking a more comprehensive approach. Instead of advancing the goals of social policy by placing new regulations on private carriers, Initiative 245, like the Clinton plan, seeks to replace the free market altogether with one government-managed system.
To gain a clearer understanding of Initiative 245’s policy origins, it is helpful to review the program elements it shares with the Clinton plan. At 1,342 pages, the First Lady’s Health Security Act was astonishingly complicated. As Initiative 245 does, it sought to create a unified health care system managed by an unelected health board, to cover all citizens with a single standard benefits package, to control costs with annual global budgets, and was financed by mandatory premiums paid to the government.
Although national in scope, the Clinton plan was to be implemented at the state level. One analyst noted that under the Clinton plan, “States are encouraged to run every element of health care through state monopolies known as ‘single payer’ systems.”[4]
As with the Clinton plan, the full scope of the social and economic changes proposed by Initiative 245 is difficult to appreciate. Initiative 245 would impact every aspect of the delivery of health care in Washington. Forty pages of tightly written paragraphs encompass sweeping control of the health care industry, set the level of benefits for every citizen and create the bureaucratic structures to carry it all out.
These include financing requirements, reserve accounts, a quality management program, doctor training, new central information systems, more than a dozen federal waiver requests, price controls on drugs and medical equipment, new assessments and taxes, a new long-term care program and millions of dollars in tax subsidies. Not since the early days of the Clinton Administration has a single legislative proposal sought to bring such a large segment of the state’s economy under government control.
As was said about the Clinton plan, “The American people can be forgiven for feeling overwhelmed by the enormity and complexity of this reform -- a reform which officials claim will certainly work and save money because every aspect has been thought through by experts.”[5]
The single-payer system envisioned by Initiative 245 would extend the government’s accounting function to almost all medical financial transactions made at anytime, anywhere in the state. To operate this far-reaching network Initiative 245 would create a new and independent state agency, the Washington Health Security Trust. The initiative charges the Trust with the mission to “provide coverage for a set of health care services for all residents.”[6]
Inherent in that short phrase is a host of broad new policy-making powers, pervasive regulatory control and a level of tax and spending authority that is unique to any entity in state government outside the legislature itself.
The Health Security Trust Board
The keystone of Initiative 245 is the creation of a Board of Trustees to govern the new system. It is made up of seven members appointed by the governor and confirmed by the senate. Board members serve staggered six years terms, with three members appointed initially to two-year terms, two to four-year terms and two to full six-year terms. Six years is a longer term than any elected official except Supreme Court and Court of Appeals judges and the state’s two U.S. Senators.
Board members occupy full-time paid positions. The initiative does not specify the annual compensation for each Board member, but current law provides that their pay “shall be fixed by the governor” based on limits set by the committee on agency officials’ salaries.[7] Comparable salaries for state officials at this level of government run from $90,000 to $120,000, plus expenses. The governor appoints one member as chairman. The Board would hold its first meeting no later than May 15th, 2002.[8]
Powers of the Board
Under the initiative Health Security Trust Board members wield unprecedented power for a single state agency. Once appointed, and throughout their terms, Board members are accountable to no one. Even the governor can only dismiss a Board member for failure to perform required duties or for a conflict of interest. Neither the governor nor the legislature have any recourse against the Board in a policy dispute, or any ability to challenge the Board for failing to provide necessary, high-quality health care to the people of Washington.
Nor would the voters have a direct voice in the Board’s work. Board members would never have to stand for re-election or publicly defend their record in office. Once in place and operating, the Health Security Trust Board becomes the sole arbiter, interpreter and enforcer of medical finance policy for every state and local public agency, private business and individual in the single-payer system. The Board would operate entirely outside the normal system of checks and balances that work to prevent abuses of power in government.
Determining Health Benefits
The Board would exercise complete control over what services will and will not be paid for by the state’s health care financing system. The initiative lays out the broad instruction for the Board to “establish a single benefits package covering health services that are effective and necessary for the good health of residents and that emphasize preventive primary health care.”[9] The initiative fails to provide a remedy, or even a course of appeal, if the Board’s plans miscarry and it proves unable to carry out this task.
The same section of the initiative lists some of the medical services the benefits package must include. These are: inpatient and outpatient hospital care, twenty-four-hour emergency services, home-based and office-based care, rehabilitation services, speech, occupational and physical therapy, mental health counseling, substance abuse treatment, hospice care, prescription drugs and prescribed medical nutrition, vision and hearing coverage, diagnostic tests, medical equipment and preventive care.
While ordaining the minimum medical coverage that must be included, the initiative places no limits on how far publicly-funded health services can extend. The Board may at any future date offer additional services as it chooses, but it cannot reduce the level of coverage mandated by law.
Conflict in Controlling Costs
The mandate to offer broad medical coverage conflicts sharply with the Board’s legal duty to “control excessive health care costs.”[10] Cost control is to be achieved through a direct limitation on the Health Security Trust itself -- administrative expenses may not exceed 11% of the annual budget -- and through the use of “scientifically based utilization standards.”[11] The Board is allowed to adopt other cost-containment measures as it sees fit, but such measures may not “limit access to clinically necessary care, nor infringe upon legitimate clinical decision making by practitioners.”[12]
Initiative 245 thus runs the risk of creating a system that is inherently overstretched. To gain broad-based public support, single-payer supporters have included more generous coverage than is generally provided by the private insurance policies it seeks to replace.
The passages quoted above illustrate the irreconcilable tension that is built into the initiative. The Board must assume full liability for a wide range of covered services, all while straining to contain costs. The Board lacks the administrative tools or the policy guidance to resolve this tension. The initiative deprives the Board of management flexibility to either prioritize its own budget or to adjust as needed the level of services for which it must pay.
For example, the Board must assume equal responsibility to pay for “medical nutrition” and “vision care” along with open heart surgery and cancer treatment. Having no ability to adjust the level of coverage, the Board will find that any initial financial burden placed on its annual budget will only grow worse over time.
The problem of cost containment will also increase as people demand ever-greater access to “free” medical services, such as eye tests or grief counseling, that they could have obtained in other ways or perhaps have avoided altogether. The popular pressure to receive abundant medical services at little or no direct cost to consumers is likely to swamp even the best-planned efforts of the Board to, as the initiative requires, “enforce appropriate [medical] utilization standards.”[13]
Long-Term Care
The duty of the Board to control costs is made more difficult by a provision requiring it to add long-term care to the basic benefits package on May 15, 2004, conditional on a “financial analysis demonstrating ongoing sufficient funds in the trust.”[14] Beyond imposing a new cost burden on the system, Initiative 245 fails to address the question of the fairness to responsible citizens who have already been paying for their own private long-term insurance.
As a solution, the initiative offers only “possible remedies for residents who have made previous payments for long-term care insurance,” but it does not specify what those remedies might be.[15] Would a hard-pressed public health agency reimburse citizens for the full cost of their private insurance? How will that be reconciled with its mandate to keep its own costs low? Residents with existing long-term care insurance will face the stark alternatives of keeping their current policies and paying twice for the same coverage, or dropping their private policies when the public coverage comes on line, and then receive no benefit for the thousands of dollars they had already paid in insurance premiums.
Price Controls
A similar weakness is revealed in another provision that is designed to help the Board control costs. Section 12 of the initiative provides that, “the board shall require pharmaceutical and durable medical equipment manufacturers to provide their products in Washington state at the lowest rate offered to federal and state entities.” This is an overt effort to impose government price controls on private, out-of-state businesses.
The history of economics amply demonstrates that government-imposed price controls never work. If the price offered by the Board for prescription drugs and medical equipment is too low, suppliers will simply take their products elsewhere and an artificial scarcity in these goods will be created in Washington, as recently happened in the individual insurance market. A government policy intended to make prescription drugs and medical products cheap and plentiful may instead result in their disappearance from the state.
The Board’s Additional Responsibilities
Managing a state-wide single-payer system involves much more than defining a basic benefits package. Based on the text of the initiative, the Board would face at least fourteen other responsibilities that would have to be drafted, reviewed and completed before the system could be put into operation. Initiative 245 requires the Board to:
These are sweeping powers. Given its heavy responsibilities, there is some question whether the initiative allows enough time for the newly-appointed Board to complete it’s organizing work. The system must be up and running on May 15, 2003, barely 14 months after the Health Security Trust board is nominated.
In addition, Initiative 245 insures that with respect to other parts of the executive branch, the dictates and decisions of the Health Security Trust Board are absolute. The initiative provides that if any action by the Board is “inconsistent with the powers and duties of other state agencies, offices or commissions, the authority of the Board supersedes that of such other state agency, office, or commission.”[16]
Operating Outside the Legislature
Board members would have as much power over their area of responsibility as any elected official in state government. They would have more power than any other official, not only over public health policy, but over the entire health care sector of the economy as well.
Because its revenues are collected, authorized and paid out directly under the Board’s authority, the Health Security Trust would not be subject to the legislature’s normal oversight and appropriations process.
The funding mechanism of Initiative 245, discussed in detail in a later section, represents a significant shift in power within the state government. A fundamental tenet of modern democracy is that the popularly-elected legislature allocates public spending and then is accountable to the people for the results. Initiative 245 breaks the tie between the power to spend public funds and accountability to the people. All new spending created under Initiative 245 would be placed under the aegis of the Board and would not be subject to the General Fund spending caps required by Initiative 601.
The single-payer system would thus operate entirely outside the normal functions of government. The actions of the Board would not be subject to review or oversight from the Senate Health and Long-Term Care Committee or from the House Health Care Committee. Similarly, the way the Board handles public money would not be open to review from the House or Senate Committees on Appropriations. Neither would it require the governor’s signature in order to spend public money.
No existing state agency has as large an area of responsibility as the Health Security Trust would have, and none have direct, unappropriated control over billions of dollars in state spending. Its unique and unregulated access to this level of public funding means that at a stroke the Health Security Trust Board would become the largest and most independent part of the executive branch of government.[17]
Standing Committees
To assist the Board in its work the initiative creates two permanent standing committees comprising an unspecified number of members. Committee members are appointed by the chairman with the approval of the Board, serve without compensation and receive reimbursement for their expenses.[18]
A Citizens’ Advisory Committee is to have “balanced” membership to represent the interests of health experts, businesses, organized labor and consumers. The Committee is to hold public hearings, gauge public opinion, investigate complaints and generally channel and monitor the public’s participation in the new system.
A Technical Advisory Committee is to be made up of “members with broad experience in and knowledge of health care delivery, research, and policy,” including the public and private funding of health care. The Committee’s function is to present the Board with recommendations on what medical procedures the system should cover, measure quality and use of health services by the people of Washington, and look into “other issues as requested by the Board.”
The Board is empowered to appoint other committees and task forces as it sees fit. These may be of any size and include or exclude whomever the Board chooses. No restrictions, qualifications or limits are placed on committee membership, who serve entirely at the pleasure of the Board.
The Board must consult with the Citizens’ Advisory Committee at least quarterly and submit an annual report on any actions taken, but it is not required to follow any advice it receives from either committee, or from any task force it may decide to create.
A New Bureaucracy
The Board, with its staff, committees, expert advisors, consultants, managers and rule-makers, will require the time and talents of thousands of civil service employees. Initiative 245 supporters expect that many of these new positions will be filled by current state workers from the public health programs that will be absorbed into the single-payer system. But the Health Security Trust would need many more people than that if it is to perform its mission properly.[19]
Neither the initiative or its supporting material provide any estimate of how large the new health care bureaucracy may eventually become. One new state employee costs taxpayers an average of $48,000 a year in salary and benefits,[20] so managing single-payer health care in Washington could become quite expensive. Supporters expect these costs to be covered by the 11% of Trust revenues that are reserved for administrative expenses. But the initiative provides no revenues for the costs other state agencies would incur in making the transition to a single-payer system, nor is any provision made to reimburse the Department of Revenue for the additional personnel and resources it will need to collect new taxes for the Trust.
The Need for Federal Waivers:
The intent of Initiative 245 is to create a true universal health care system in Washington state and thus eliminate the problem of uninsured residents and end disputes between citizens and HMOs and insurance companies. The initiative title refers to a single set of health benefits that would be available to all “state residents.”
Initially at least, universal coverage would not be possible because large groups within the state’s population would not be included in the state system. For full implementation Initiative 245 relies on the state obtaining as many as twenty waivers from the federal government.
At a minimum twelve waivers will be needed to exempt Washington residents from existing federal health programs. These programs are:
At least five additional federal waivers would be needed to apply the single-payer tax on individuals to the following populations within the state who would otherwise be exempt:
At least three further waivers will be needed before the single-payer payroll tax could be levied against the following employers:
In the case of Taft-Hartley workers the initiative suggests that “the employer may pay [the tax] voluntarily” until a federal waiver is obtained.[22]
The Board is assigned the task of negotiating with the federal government for the necessary waivers. A fundamental condition of these negotiations is that as Washington residents leave national programs, the same level of federal funding should continue to flow into the state. The goal is that these funds would instead be paid directly into the Health Security Trust.
There is of course no guarantee that Congress will authorize any of the waivers the Health Security Trust Board requests. Federal health programs are already managed and funded by extensive national bureaucracies of their own. It is unclear whether federal agencies would wish to give up power and control over these programs and the funding that goes with them. They may recommend to Congress that, in their expert opinion, individual states should not be granted discretionary control over federal health funds.
These agencies may also fear that Washington’s single-payer program will establish a precedent for other states. Indeed, that is what Initiative 245 supporters themselves hope for, as they note with approval nascent single-payer efforts in Massachusetts, Maryland and Oregon. Federal policymakers, however, may not share this enthusiasm for state-based, single-payer systems. It is likely they will view it for what it is; a shift in federal health funding into state-based block grants.
The need to obtain federal waivers creates uncertainty about how Initiative 245 would operate in practice. Unless all requested waivers are granted, Washington state would be left with a confusing patchwork of health insurance programs.
The Mandatory Nature of Initiative 245
It should also be noted that while Washington’s request to opt-out of federal health programs would be voluntary, the same is not true for individuals. When and if the federal government grants the state a waiver from a federal health program, all Washington residents must leave that program, even if they were satisfied with the service they had been receiving.
Initiative 245 supporters point out that the same level of medical care will continue for federal beneficiaries under the state program, with only a change in who pays the bills. Supposing this to be true, however, the forced transition emphasizes the mandatory nature Initiative 245’s policy approach. Under single-payer, the Health Security Trust will decide how and when former federal beneficiaries will receive public health care services, not the beneficiaries themselves.
Another group that will not have coverage under the Initiative 245 plan are Washington residents who choose to maintain their own insurance. As stated in the initiative, “If a resident has health insurance coverage for any health services provided in the state, the benefits provided in this act are secondary to that insurance.”[23] Notably, this provision would appear to rule out any supplementary private insurance intended only to provide for uncovered medical claims. This clause underscores the dual nature of Initiative 245: paying into the system is mandatory; receiving the benefits is discretionary.
Exemptions From Anti-Trust Laws
Ordinarily a system like that envisioned by Initiative 245 would face an immediate court challenge on the grounds that it establishes an illegal monopoly in health care financing. To shield the system against such a challenge, the initiative includes a provision exempting the Health Security Trust from state anti-trust laws and purports to grant immunity, “through the state action doctrine,” against similar federal laws.
The anti-trust exemption allows “containing the aggregate cost of health care services and promoting cooperative activities among health care providers to develop cost-effective health care delivery systems.”[24] It also exempts “any other lawful actions taken under this act by any person or entity created or regulated by this act.”[25] This all-embracing clause makes the delivery of health care in Washington an explicitly anti-competitive activity as a matter of policy. It sanctions, and in fact requires, the kind of collusion and price-fixing among health care providers that would be illegal if practiced by private businesses.
The initiative leaves unchanged existing state and federal anti-trust laws barring private health care providers or insurance companies from engaging in similar economic cooperation, thus placing them at a serious disadvantage in competing against the government system.
Along with the extensive governmental structure needed to set up and operate single-payer health care, Initiative 245 includes new revenue-raising mechanisms to pay for it all. The initiative takes two approaches to procure the money needed to run the system. It channels existing public health spending into the Health Security Trust, and it creates two new tax structures to raise additional revenue. A full financial analysis of Initiative 245 will be the subject of a future study. Here it is sufficient to give a general description of how the single-payer system would be funded.
New Tax Structures
The two new tax structures established by Initiative 245 are a payroll tax paid by employers and a monthly tax paid by individuals.
The word “tax” does not actually appear in the text of the initiative, except to refer to existing levies. The new tax on employers is called a “health security assessment,” while the tax on individuals is called a “health security premium.” The Attorney General recently stated in her analysis of Initiative 695 that a tax is “a compulsory charge to raise revenue for the support of government.”[27] Whatever labels are affixed to Initiative 245’s revenue raisers, they are taxes in a legal sense. And, no doubt, they will seem like taxes to the people who have to pay them.
The New Tax on Employers
The tax on employers is paid quarterly and is based on gross payroll. The earlier version of the initiative (Initiative 725) levied a flat 9.75% of payroll on all employers regardless of company size. The revised version (Initiative 245) bases the charge per employee on the size of the firm, as shown in the table here.
|
Quarterly Tax on Employer Payroll Proposed by Initiative 245 |
|
|
Number of Employees: |
Percent of Payroll Paid in Health Care Tax |
0-20 |
6% |
20-50 |
7.5% |
50-500 |
9.75% |
500-1000 |
11.5% |
1000 or more |
12% |
The progressive nature of the health care payroll tax is intended to lighten the burden on small firms. The same structure imposes a correspondingly heavier cost on larger businesses, and in fact penalizes them as they grow over time. For example, in 1978 Microsoft Corporation had 11 employees. Today it provides 20,000 jobs to Washington residents. Would the company have remained in Washington if its payroll tax burden had made major jumps as it grew to 20, 50, 500 and 1000 employees? At what point would the increased payroll taxes have caused Microsoft to shift some or all of its workforce elsewhere?
An unusual feature of the new tax structure is that the tax on employers begins three months before the benefits of the program are available. Starting January 1, 2003 and ending April 30, all employers must pay 3.2% of their gross payroll into the Health Security Trust. Twenty percent of these payments are for a reserve account. The remaining 80% are to pay for health benefits, although the benefits themselves are not available until May 15.
During this time employers have to continue paying for private health insurance if their workers are to have coverage. In two years employers may receive some or all of these early tax payments back, but such action is at the discretion of the Board and is allowed only “if there are sufficient surpluses in the trust.”[28] This provision allows the state, at a minimum, to get a forced, interest-free loan from employers. If the funds are never paid back it is, in effect, a double tax.
A waiver or reduction of the payroll tax is offered to firms that “face financial hardship in paying the health security assessment.” The “business assistance program” is created and managed by the Health Security Trust Board and companies may only take advantage of the program with the prior permission of the Board. The tax break is available for the first five years of the single-payer system, until May 15, 2008, after which all firms in Washington, regardless of size, must pay the full payroll tax as it applies to them.
Residents of Oregon and Idaho who work in Washington will pay into the system through their employers’ payroll taxes, but they will not be eligible to receive benefits.
The New Tax on Individuals
The second new tax is on individuals. The rate starts at $75 per month for all Washington residents age 18 or older who do not receive Medicare and have incomes over 150% of the federal poverty level. Residents on Medicare with incomes over 150% of the poverty level initially pay $50 per month.
All tax rates for individuals are indexed to inflation, so they will go up automatically each year with the rise in the Washington consumer price index. Residents with incomes below 150% of the poverty level pay no tax. A subsidy is available for residents with incomes of less than 250% of the poverty level. Unlike true insurance premiums, the amount a person pays into the plan is not based on risk or an estimate of future cost, but on pre-set policy factors determined by the government.
The tax on individuals creates four new tax brackets based on age and income, as shown below. Residents who fall into the $75-per-month bracket will be subsidizing residents who are in the other three.
|
Four New Tax Brackets for Individuals Proposed by Initiative 245 |
|
|
Age and Income Status: |
Tax Rate: |
Under 150% of poverty level |
0 |
Between 150% and 250% of poverty level |
less than $75/ month |
Over 250% of poverty level and between ages 18 and 65 |
$75/ month |
Over 150% of poverty level, over age 65 and on Medicare |
$50/ month |
Slightly over one million, or about 18.6%, of Washington’s 5.7 million people have incomes under 150% of the federal poverty level. About 655,000 (11.4%) people are over age 65. A further 1.5 million (26.6%) are under age 18. The tax on individuals will therefore fall most heavily on the remaining 2.5 million people, representing about 43.4% of the total population. Nationally, the federal poverty level is an income of $16,660 a year for a family of four. A family at 250% of the poverty level has an income of $41,650 a year.[29]
Federal employees and federal retirees are exempt from the tax unless and until a waiver is obtained from the federal government.
State and Local Government Employees
State and local government employees would benefit from having their tax paid by their employer. The initiative requires the employer of all state, county, municipal, university, school district and other public workers to pay the monthly premium on behalf of their employees and employees’ non-working spouses. The effect of these tax provisions is that Washington residents who are not public employees would be required to pay the individual premium for themselves and for their neighbors who work for the government.
In addition, taxpayers must pay the health security assessment levied against state and local government payrolls. Since the state and many county and municipal governments have well over 1,000 employees, this assessment will be levied in many cases at 12%, the highest rate required by Initiative 245.
Required Co-Payments
Initiative 245 also requires residents to pay a co-payment to receive certain medical services. Co-payments will apply to outpatient doctor visits, emergency room visits, long-term care (when and if it is added to the plan) and prescription drugs. The level of co-payment will be determined by the Board, but total co-payments may not exceed $500 per family per year. Residents with incomes below 150% of the poverty level pay no co-payments.[30]
What If Revenues Fall Short?
Initiative 245 makes no provision for a situation in which the Health Security Trust cannot meet its financial obligations. If dedicated tax revenues turn out to be insufficient, the Board faces two stark choices: raise taxes or cut benefits. The Board cannot raise the employer payroll or individual taxes beyond inflation without the approval of the legislature and the governor. Alternatively, the legislature and the governor could begin allocating General Fund revenues to support the program, which would require cuts in other areas of the budget.
Should a funding shortfall occur, a cut in benefits is more likely than a tax increase. This is because Initiative 245 grants the Board sole control over the level of benefits above a set minimum. Future benefit cuts could take several forms. The Board could reduce the number and kind of medical procedures that are covered. It could increase the co-payments required of those who receive certain medical services. The Board could also limit or reduce payments to doctors, clinics and hospitals. Another option is to delay care, by placing patients on waiting lists until medical resources are available to treat them.
The law is by its nature coercive, and all laws need enforcement. The sheer size and complexity of the system mandated by Initiative 245 would require a massive expansion of government power to put its provisions into effect.
Every expansion of state power inexorably increases the number of occasions on which the average citizen may knowingly or unwittingly violate the law. The administrative reach of single-payer health care would create many more ways in which health professionals and ordinary people might run afoul of the law in the course of their daily lives.
It is difficult to measure how much single-payer enforcement will expand the state’s policing power. The Initiative would add 34 new sections and over 8,000 words to the Revised Code of Washington. In addition, thousands of new regulations would be added to the Washington Administrative Code to fill out the details of how the single-payer system would operate. All these new rules would vastly extend the state’s enforcement reach.
Enforcing New Tax Collections
Amid the array of new rules and regulations, the ones that would require the strictest enforcement are those that administer new taxes. The funding mechanism is the only part of the initiative that would be mandatory on all citizens over 18 with incomes above 150% of the poverty level. The other provisions of Initiative 245 are voluntary.
The initiative assigns the work of collecting taxes for the Health Security Trust to the Department of Revenue. The Department currently spends more than $150 million each biennium to collect taxes.[31] Since all health care payroll taxes and the premiums paid by individuals can only be spent to support the single-payer system itself, additional tax-collection resources will have to come from the General Fund. The same is true for additional money needed for tax enforcement and to fight increased fraud.
What happens if you don’t pay your taxes? Most people would prefer not to find out. While most people are not exactly sure what happens, they have a general idea that it is not good. They are right. The state has a wide array of legal steps, each of increasing severity, at its disposal to induce reluctant citizens to pay their taxes. These range from a simple reminder letter, to impounding wages and assets, to jail time of up to ninety days.[32]
Expanded Efforts to Fight Fraud and Abuse
Enforcing Initiative 245 would add significantly to the cost and scope of the state’s effort to fight fraud and abuse. For example, the Department of Labor and Industries manages the state’s workers’ compensation system, which is funded by a payroll tax similar to that proposed by Initiative 245.
In fiscal 1999 the Department spent $3.9 million detecting, investigating and preventing fraud and abuse in the system. The Economic Crime Unit conducted field audits, provider reviews, employer fraud program, worker fraud investigations and retrieval of overpayments. It also conducted 1,284 “activity checks” in 1999 of people who claimed to have serious injuries, to determine if they were in fact unable to perform useful work.[33]
The expanded enforcement system required by single-payer health care will put doctors, nurses and hospitals at greater risk of violating these new regulations, and of incurring the resulting penalties. In effect, the state will control the job of every health care professional in the state. The state could always choose not to do business with a doctor for reasons of its own. It is unlikely any doctor could stay in practice long if he or she were barred from doing business with the state’s largest financer of health care services, especially once the private insurance market has largely disappeared.
The complexity of the single-payer system would itself invite fraud. The federal Medicare program provides an example of how sheer size makes a single-payer system difficult to run. The Health Care Financing Administration devotes tremendous resources each year to enforcing Medicare regulations and frequently prosecutes doctors and patients for trying to cheat the system. As the United Seniors Association points out, “No matter the amount, fraud and abuse in Medicare should not surprise anyone. It is directly related to the way the program is designed. Medicare is so big, complex and bureaucratic as to be almost ungovernable.”[34] Initiative 245 shares the same single-payer structure as Medicare and would face the same problems.
Supporters of Initiative 245 say their proposal does not involve a complete take-over of the medical profession, as exists in Canada and Britain. In this way they hope to avoid the failings of these national plans. In a fully socialized medical system, the government owns, finances and operates the entire health care system. Initiative 245 supporters envision a narrower system in which the delivery of care would remain entirely private, while the costs of covered medical services for all residents are paid by the government.
Initiative 245 thus relies on increased government regulation rather than market competition as the chief instrument to contain costs and deliver medical services. Experience with similar systems in other states and nations shows this expectation to be unrealistic. Imposition of a single, standardized health benefits package that replaces a choice of benefits would make it more difficult for Washingtonians to gain access to the type of medical coverage that is best for them. Today, if consumers or employers are unhappy with any one of the 264 insurance carriers now offering health insurance, they can always go to another carrier. This range of options would be closed under Initiative 245, when there would be only one carrier; one with all the power of the state behind it.
For these reasons the concept that vital medical services can be entirely financed by the government and still maintain the competitive vibrancy that has given this state one of the best health care systems in the world deserves to be carefully weighed by Washington citizens.
Note:
To contribute to public discussion over the merits of Initiative 245, look for further Washington Institute studies over the next several months. The series will include an examination of the different policy elements of single-payer health care, including finances, quality of service, consumer-based reforms and free-market alternatives, and a comparison with similar programs in other states.
Single-Payer Health Care in Washington
Implementation Dates for Initiative 245
March 15, 2002 The governor nominates a seven-member Health Security Trust Board of Trustees. Nominees must be confirmed by the senate.
May 15, 2002 The Board of Trustees convenes its first meeting.
October 1, 2002 The Board reports on what federal laws need to be repealed, amended or waived to implement fully single-payer health care in Washington. Congress and federal regulators must agree to the waivers.
December 1, 2002 The Board determines what medical services the state will cover and how much it will pay for them. (On December 1st of each year the Board will determine the total budget it will devote to health care in the following year.)
January 1, 2003 to All employers in Washington must pay a 3.2% quarterly payroll
April 30, 2003 tax into single-payer reserve and benefits accounts. Businesses must also continue to pay for private health insurance for their workers because benefits from the state plan are not yet available.
May 15, 2003 State coverage of health benefits for all residents begins. The Board adopts a Health Security Trust budget and issues rules, regulations and policies needed to manage single-payer health care.
The tax on employers is increased to 6% to 12% of payroll, depending on the size of the business. A hardship subsidy is available under a Business Assistance Program to help some employers for the first five years.
The tax on individuals begins. The tax rate starts at $75 per month for residents aged 18 or older. Medicare recipients pay a tax starting at $50 per month. The tax automatically goes up each year with inflation. Families with incomes below 250% of poverty level (about $41,000 a year for a family of four) receive a subsidy. Families with incomes below 150% of poverty level (about $16,600 a year for a family of four) are exempt.
May 15, 2003 to 3% of all health care payroll taxes go to a newly-created worker training program.
January 1, 2004
May 15, 2004 Long-term care can be added to the single-payer benefits package. The Board may consider “remedies” for residents who have already been paying for private long-term care coverage.
July 1, 2004 The Board develops a plan to add dental coverage to the benefits package, and to provide public funding for medical research and training.
January 1, 2005 Dental coverage may be added to the benefits package.
May 15, 2008 The Business Assistance Program expires.
Click here to read more about the author Paul Guppy.
Kai Hirabayashi and Shelby Johnson served as the research assistants for this study as part of the Washington Institute’s Internship Program. Their professional work and overall contribution is greatly appreciated.
[1] For more on the official ballot title and text of Initiative 245 see Office of the Secretary of State at www.secstate.wa.gov/intits/.
[2] “Health-care backers to petition Legislature,” by Carol M. Ostrom, The Seattle Times, July 11, 2000, p. B-2 and Office of the Washington Secretary of State, Initiatives to the Legislature, 2000, www.secstate.wa.gov/inits/leg2000/htm.
[3] Revised Code of Washington, Chapter 29.79, “Initiative and Referendum.” If two versions appear on the ballot together, each voter will face the question: “Should Initiative 245 become law?” If the voter chooses “yes,” the next question on the ballot asks, “Should Version A (as drafted by single-payer proponents) or Version B (as drafted by the legislature) be the law?”
[4] Robert E. Moffit, “A Guide to the Clinton Health Care Plan,” The Heritage Foundation, Washington, D.C., November 19, 1993, p. 3.
[6] Initiative 245, Section 3.
[7] Revised Code of Washington 43.03.040, “Salaries of certain directors and chief executive officers.”
[8] Initiative 245, Section 4.
[11] Ibid, Section 15. Administrative costs are estimated to be about $1.1 billion at the outset of the program.
[16] Ibid, Section 7 (2). Granting the Board authority over the actions of other state agencies and commissions raises serious constitutional questions which are beyond the scope of this paper.
[17] As a comparison, the state’s entire General Fund equals a little over $20 billion in the 1999-01 biennium, while the Health Security Trust alone is estimated to cost $10.4 to $10.9 billion a year.
[18] This and all following references to standing committees come from Section 5 of the initiative.
[19] Again as a comparison, the Department of Social and Health Service currently has 18,833 public employees. As proposed, the Health Security Trust would be much larger.
[20] See cost analysis in “25 Commonsense Ways to Implement Initiative 695,” by Paul Guppy, Washington Institute Foundation, December 1999, p. 24.
[21] Taft-Hartley trusts are health care and pension funds set up under union collective bargaining agreements and regulated by the government.
[22] Initiative 245, Sections 10 and 16.
[26] All references and quotes in this section are taken from Sections 16 and 17 of Initiative 245.
[27] “Scope of the Term ‘Tax’ Under Initiative 695,” Office of the Attorney General, Olympia, Washington, December 22, 1999.
[28] Initiative 245, Section 20.
[29] “Poverty 1998: Poverty Thresholds by Size of Family and Number of Related Children Under 18,” United State Census Bureau, Washington, D.C., updated September 30, 1999.
[30] Initiative 245, Section 11 (4).
[31] Washington State Yearbook 2000, A Guide to Government in Washington State, Richard Yates and Charity Yates, editors, page 111, “State Finances, Governmental Operations, Department of Revenue.”
[32] The details of the state’s tax-enforcement powers can be found in the three-inch-thick Field Compliance Manual used by the staff of the Compliance Division, Department of Revenue, Olympia, Washington, printed December, 1991.
[33] Annual Fraud Report, Department of Labor and Industries, Olympia, Washington, 1999.
[34] United Seniors Association, USA, Inc. Washington, D.C., Policy Agenda, 1999.