The unintended consequences of California’s new minimum wage for healthcare workers

Senate Bill 525, aimed at raising the minimum wage for healthcare workers, is undoubtedly well-intentioned. The goal of ensuring fair compensation for those working tirelessly in the public and private healthcare sector is commendable. However, it’s essential to consider the potential longer-term negative effects this new law may have on public and private employers in the healthcare industry. 

This wage increase places an immense cost on healthcare providers while hospitals across the state are dealing with significant financial losses. The original version of this bill, which would have immediately moved the healthcare worker minimum wage to $25 an hour, would have cost private sector hospitals an estimated $8 billion. It was only after tense, late night negotiations several days before adjournment that an agreement was made by unions and hospitals to gradually raise pay, with most workers increasing to $25 in 2027 or 2028. There are serious concerns on the effects this will have on the fiscal health of our healthcare system in California. 

In fact, when Gov. Gavin Newsom signed this bill into law, the bill’s analysis had a warning about its cost to California taxpayers as well as the private health care industry and its customers: “Fiscal impact unknown.” Now, five weeks after the Governor signed the bill, his administration has projected a cost for this wage hike for public health care employees: $4 billion in the 2024-25 fiscal year alone. SB 525 is one of the most costly laws the state has seen in decades. This is during a time where the state is facing a projected $14 billion budget deficit, which could grow even larger if revenue projections continue to fall short. 

First and foremost, it’s crucial to recognize that private hospitals and healthcare industry businesses lack unlimited financial resources. 

Like any other sector, they operate within budgets and must balance their expenditures with their revenues. The effects of taxes, state regulations and inflation are already straining these businesses’ ability to maintain their operations. SB 525, with its mandate to increase wages, could further exacerbate these challenges, leading to adverse consequences such as layoffs, downsizing and even bankruptcy. 

Many hospitals have ended up like the MLK Community Hospital in Los Angeles, which is hanging by a thread financially, or Madera Community Hospital in Madera which shuttered its doors in January. This wage increase would only further jeopardize hospitals’ ability to keep their doors open. 

Ironically, SB 525 may inadvertently create a situation where good intentions result in negative outcomes. Here’s why:

1. Cost burden:  Wage increases, mandated by state law, place a considerable financial burden on healthcare employers. Most of these businesses already operate on slim profit margins due to the high costs of healthcare delivery. This law will affect an estimated 469,000 private health care workers, which means that managers and their supervisors will also demand pay increases as well.   Hospital workers may face layoffs if hospitals seek out-of-state solutions to reduce costs. 
2. Limited flexibility: Wage hikes mandated by legislation do not account for the variability and complexity of the healthcare industry. Healthcare providers may have to divert resources from essential services or investments in technology and infrastructure, compromising patient care and innovation.  The increased cost of labor forces spending cuts across operations.  This not only threatens the livelihoods of their employees but also compromises access to essential healthcare services for local communities.
3. Impact on Public Healthcare Agencies: While the intent of SB 525 is focused on private healthcare providers, State-funded institutions are covered under this new law. They are responsible for delivering crucial public health services and often operate with constrained budgets. Mandating higher wages without offsets by additional funding sources could strain these agencies, leading to a ripple effect on public health programs and the overall efficiency of state healthcare services.

Those hit the hardest will sadly be seniors on fixed incomes, which will result in a significant cost increase for their care, and for many will be unaffordable. 

These important impacts are relevant yet lacking in the overall fiscal analysis of the proposed legislation, now law.

To ensure a balanced approach to wage increases and quality health care, my fellow policymakers in Sacramento must carefully consider the broader economic implications of these proposals and seek ways to support healthcare providers and patients, without compromising their financial stability. 

Costly laws remind us of the law of unintended consequences.

Diane Dixon represents the 72nd State Assembly District.