Medi-Cal is a trap, not a safety net

Source: The Orange County Register

Most California politicians appear to believe that enrolling 12 million people, about one third of the population, in Medi-Cal is a great achievement. The resulting $2.3 billion budget shortfall is something they figure they can solve with a few more tax hikes. But the cost Medi-Cal imposes on taxpayers is a significant problem.

However, there is another problem – imposed directly on Medi-Cal dependents – which is seldom discussed. Although less obvious than Medi-Cal’s fiscal burden, it is likely more harmful to society. This is Medi-Cal’s extremely high effective marginal income tax, which is caused by cutting it off once a recipient’s income reaches about $16,000 for a single person. It creates a poverty trap from which low-income people struggle to escape.

Clint Eastwood’s 2004 film, “Million Dollar Baby,” illustrates this with brutal frankness. Hillary Swank’s character, a successful Los Angeles boxer, has bought her mother a house. However, she kept the title. After having been critically injured in a match, she wants to give it to her mother. Her mother rejects the gift, because owning the house would render her ineligible for this medical welfare program.

Sure, the mother was an unsympathetic character, but there are even worse stories in real life. Take the heart-breaking story at of Marcella Wagner, who was paralyzed in a driving accident:

“As a family of three with one disabled member, they are allowed to keep $2,100 of [her husband] Dave’s $3,250 monthly earnings to live on. The rest of Dave’s earnings, $1,150, would go to Medi-Cal as the family’s share of cost. That is, any month in which Marcella incurred medical expenses, she and Dave must pay the first $1,150. To our surprise, if Dave earned more money, the extra amount would also go to Medi-Cal: The cost sharing is a 100 percent tax on Dave’s earnings.

“And this is how things will be indefinitely. In order to get poor people’s health insurance, Dave and Marcella must stay poor, forever.”

This is an extreme case. Nevertheless, every low-income Medi-Cal dependent faces this dilemma. Obamacare is responsible for adding about 3.3 million more people to Medi-Cal, because it increased the income cut-offs. That does not solve the problem, it just catches more people, at higher incomes, in the trap. Once a Medi-Cal dependent earns too much money to stay on welfare, he is eligible for tax credits to subsidize an Obamacare policy through Covered California. However, these tax credits also phase out with income. This means the perversely high marginal income tax rates hit single Californians all the way up to incomes of about $47,000.

This unfairness demoralizes and disempowers people who would otherwise work more and earn more. Despite a booming information technology market, the state’s job situation is grim: With an unemployment rate of 6.3 percent in June, California ranks 43rd of 50 states. And that only includes people who are looking for work. With only 62.5 percent of the civilian, non-institutionalized population in the labor force, California is in the bottom 20 states with respect to people having given up looking for work.

The solution is to replace Medi-Cal’s (and Obamacare’s) flawed funding formula with a fixed dollar federal tax credit that every household can claim to help pay for health care. For those Californians who will not or cannot buy their own health care with that help, the federal government would aggregate their tax credits and transfer the sum as a block grant to fund Medi-Cal. As these dependents increase their incomes to the point where they can pay for health care on their own, they would be rewarded by claiming the tax credit to help.

Californians and their legislators who want to make access to health care and jobs more fair should take it seriously.

John R. Graham is a Senior Fellow at the Pacific Research Institute and a Senior Fellow at the National Center for Policy Analysis