New York and California are both advancing single payer plans through their legislatures. I have a lot of questions. They both assume incredible waiver authority will be given to them. These hypothetical waivers would direct federal program funding** to a state operated pass through entity to pay for healthcare. But each of these proposals will rely on some state level general taxation.
How do these programs work in a recession?
Depending on how one does the counting, between forty six and forty nine states have a balanced budget constraint. California and New York have balanced budget constraints. There is wiggle room for a bad year or two on the margins but it is incremental.
State tax revenue tends to be cyclical. Consumption and income taxes tend to go up when the economy is growing and down when the economy is in a recession. California heavily relies on capital gains taxation. New York relies on taxing Wall Street bonuses. Both of those are cyclical revenue sources.
Healthcare demand is responsive to recessions as well. Bad times lead to fewer elective surgeries and for more things to be deferred until they really are needed. The primary channel for that is through the increase in cost-sharing. The California and New York proposals don’t have the cost sharing that could shift demand in time.
So my question is what happens to a state with a reasonably strong balanced budget constraint and state run single payer when there is a significant recession? Demand and costs will stay roughly constant. Revenue crashes. This dynamic opens a big financing gap. That gap must be closed. The methods to close that gap are massive provider payment cuts, increased taxes (which is probably a bad choice on a cyclical basis), increased cost-sharing, eliminating some covered services or borrowing for operational reasons. States have some wiggle room to borrow for operational costs but they don’t have the ability to borrow 20% of their operational budget in a year for several years straight. Is it reasonable to assume that the states can access federal fiscal capacity to borrow as they have already accessed all federal healthcare money in a hypothetical waiver?
How does this work in a recession?
Help me out here, please!
** By the way, does that federal waiver money come with Hyde restrictions?
*** Any state single payer proposal post should always end in a Cato-esque “ERISA delenda est”