The Ten Billion Dollar Entitlement
Assessing the Cost of Single-Payer Health Care
2000-15
Several proposals have been made in recent years to improve the affordability and availability of health care for all people in Washington. One such plan is single-payer health care, proposed as Initiative 245, to make the government the primary financer in one, all-inclusive health care system. The proposal will likely be introduced in the next session of the legislature, and may be put before voters on the 2001 ballot.
The first two questions people generally ask about government-run health care are, “How much will it cost?” and “Who will pay for it?” The Washington Institute has just published a study, the second in a series, that presents an in-depth analysis of Initiative 245 and assesses its financial impact on employers and on individuals.
The single-payer plan is complex, involving a new entitlement, a significant growth in bureaucracy and regulation, and the addition of 34 new sections to the state law code. In all, the program is conservatively estimated to cost at least $10 billion annually, an amount close to this year’s entire General Fund budget.
An intricate network of new taxes and subsidies is proposed to fund the program. These would fall heaviest on large employers and workers who already have full, employer-paid coverage.
Washington has more than 165,000 businesses that employ over 2.5 million people. They range in size from a single entrepreneur with a helper to international companies mustering workers in the tens of thousands. Under the single-payer proposal the tax charged per employee would be based on the size of the firm, as shown in the table below.
Number of Employees |
% of Payroll Paid in Tax |
0-20 |
6.00% |
20-50 |
7.50% |
50-500 |
9.75% |
500-1000 |
11.50% |
1000 or more |
12.00% |
The heavier burden placed on larger businesses is founded on the mistaken reasoning that they have a greater ability to pay. The flaw in this assumption is that a larger company may actually have no more ability to pay per employee than a smaller firm.
The result of unequal payroll tax treatment is that government policy would favor small firms as economic units over large ones, a policy choice that may drive large employers operating on slim profit margins out of the state or out of business.
For companies with 19, 49, 499 or 999 workers the marginal cost of adding one more employee would be severe. Consider a firm with 19 workers, each earning the average manufacturing wage of about $31,000. Adding just one worker would push the tax this firm pays for all workers up from 6% to 7.5%, increasing its health care tax by $11,160. This amounts to a whopping 36% tax on the salary of the 20th employee, creating a strong reason for not hiring that person in the first place.
Initiative 245 would provide “start-up” funding for the single-payer system by levying an extra payroll tax of 3.2% between January 1 and April 30, 2003.
But health benefits under the program would not be available until May 15, 2003. For 134 days employers would be paying into the government’s Health Security Trust while receiving no coverage for their employees in return. During this time employers would have to continue to pay for private health insurance so their workers could be covered. The policy thus acts like a double tax on employers.
The plan seeks to replace private insurance with a publicly-funded, government-managed system, in which the state would assume the responsibility of paying for a basic package of benefits for all Washington residents. Private coverage would not be outlawed, but very few companies or individuals would be willing to pay for both, and paying for the government plan is mandatory. As single-payer supporters put it, once their plan is enacted “there won’t be much of a market for private insurance in Washington.”
Single-payer health care means more than just putting insurance companies out of business. About half of all large companies self-insure, and about one-third of all employees in Washington get their health coverage this way. A prime example of such a company is Boeing, which covers 86,000 employees plus dependents.
Enactment of a single-payer plan would mean the end of these company-financed plans because no firm, even the largest, could afford to pay 12% of payroll to the state while at the same time maintaining a company-based plan for its own workers.
Non-business employers would be entirely exempt from the health care payroll tax. The initiative says the tax applies to “any...entity operating a business in Washington state.” This definition excludes thousands of entities that are not businesses, like non-profit charities and public agencies. These workers would be fully eligible for benefits and the cost of their health care coverage would be carried by private employers and by individuals who do not work for the government.
For many Washington residents and businesses, then, a single-payer system would not offer more cost-effective coverage than what they are receiving under the current, privately-run system.
This study is funded by a grant from the M.J. Murdock Charitable Trust.