Wage Hikes Won't Fix US Healthcare

California Gov. Gavin Newsom signed a bill into law last month that will gradually raise the minimum wage for healthcare workers to $25 an hour. The measure aims to put "a stop to the hemorrhaging of our care workforce by ensuring health care workers can do the work they love and pay their bills," as the executive director of SEIU California put it.

But this mandated wage hike may lead to fewer healthcare workers being asked to do more — and higher costs throughout the healthcare system. Hospitals that are unable to shoulder the immediate financial burdens created by the new minimum wage will fold — and make care even harder to come by.

It's hard to look at the Golden State's healthcare sector and conclude that a higher minimum wage is warranted. California spends well over $400 billion per year on health care — more than any other state in the nation. Spending per capita is also higher than the U.S. average, as is spending growth.

Spending by the public has surged in the last decade. Between 2010 and 2020, spending on Medi-Cal, the state's version of Medicaid, jumped an average of 7.6% per year. That's a higher rate of average annual spending growth than private health insurance or Medicare posted over that same period.

All this spending has weighed on the state's finances. This year, spending on health and human services accounted for roughly 30% of the state budget, second only to K-12 education.

Yet even as California devotes an ever-growing share of its resources to health care, many hospitals are struggling to stay afloat — in no small part due to paltry reimbursements from Medi-Cal. According to the California Hospital Association, Medi-Cal pays providers just 74 cents for every dollar of care provided.

Not surprisingly, over half of California hospitals are losing money, according to a recent analysis by the consulting firm Kaufman Hall. And one in five hospitals is in danger of closing.

Patients, meanwhile, face daunting financial challenges of their own. A 2022 survey found that roughly half of Californians had skipped or delayed care in the previous year because of cost. Of those, 47% said that their health suffered as a result.

At the same time, premiums and deductibles for employer-sponsored health insurance have risen dramatically in recent years. In 2020, the average deductible plus employee share of premiums was 10.5% of the state's median income.

And now the state proposes to raise health costs further by mandating a $25 an hour minimum wage.

The most immediate consequence will be higher costs for providers around the state once the wage hike begins to kick in next year. Clinics will respond to these cost increases in several ways.

Some will make do with fewer minimum-wage workers — and thus lay off some of the very employees the new minimum wage was supposed to help. Those workers that remain may see their workloads increase. Other clinics will pass their higher labor costs on to patients and insurers in the form of higher prices. Some will adopt a combination of these two responses. And some providers may be forced to close or consolidate.

The wage hike, in other words, is a recipe for more severe worker shortages, higher costs, and reduced access to care.

What California needs more than anything are reforms that make care more affordable by unleashing market forces and stripping away the onerous regulations that inflate healthcare costs. Instead, state lawmakers and Gov. Newsom have further distorted the healthcare market and imposed new costs on a system that is already teetering.

Any state that follows California down this road to ruin will quickly regret it.