January 2007
Is the Massachusetts Health Plan America’s Next Top Model?
Last April, the Massachusetts health-care reform bill was signed into law by Governor Mitt Romney. This legislation is intended to substantially reduce the number of uninsured in the state. The plan primarily relies on three policy tools. It requires that all state adult residents purchase health insurance. It offers income-related subsidies to help make insurance premiums more affordable. Finally, it launches an innovative insurance-purchasing mechanism called the Connector that is supposed to improve the variety of insurance choices available for small businesses and for individuals without access to employer-sponsored coverage.
As implementation of this new health-care law continues to unfold, Mark V. Pauly, the Bendheim Professor at the Wharton School and an AEI adjunct scholar, outlined which features of the plan should travel beyond the Massachusetts border and which ones need to be reconsidered or discarded before similar reforms are implemented in other states. At AEI on January 11, 2007, a panel of health-care policymakers and professionals discussed the lessons learned from the Massachusetts legislation for covering the uninsured.
Mark V. Pauly
AEI
Wharton School, University of Pennsylvania
Two main features unique to Massachusetts will make the exportability of its plan to other states less likely. First of all, Massachusetts had an approximately $380 million pool of use-it-or-lose-it federal Medicaid waiver funds that provided a substantial first-year discount on the $1 billion program. Secondly, Massachusetts already had in place a substantial amount of state funding for charity care through the taxation of private insurance premiums and hospitals.
Several praiseworthy features of the Massachusetts plan include means-tested or need-conditioned subsidies, voucher-like funding to provide a potentially large choice of private plans, recognition that health insurance coverage is not an entitlement, and the understanding that universal coverage is not the goal.
Due to the danger of excessive regulation and specification stemming from interest groups, legislators should offer flexible requirements for a state-run insurance mandate. Mandating a minimum actuarial value of insurance is more effective in maximizing participation than mandating plan types and structures and covered treatments.
Because the lion’s share of the cost of employer-sponsored health insurance is taken out of wages rather than company profits, state plans mandating employer-provided coverage (such as California’s proposed plan) should be avoided. Providing a subsidy or voucher to citizens and having each person figure out the best way to spend it is a preferable method. Maintaining this neutrality of subsidies will aid in avoiding crowd-out.
The Connector may increase the portability of plans--to the delight of employees. On the other hand, administrative costs may not be lowered drastically, and the program should not attempt to average risk substantially. Basing premiums on age will prove an adequate adjustment.
Mandates, means-testing, and markets, along with light-handed regulation in the beginning, are the necessary elements of a successful state-sponsored health-insurance plan.
John Holahan
Urban Institute
Although other states will face the budgetary dilemma Massachusetts was temporarily able to avoid, dealing with the powerful interest groups was the most impressive accomplishment of the Massachusetts plan. Negotiations nearly fell apart during the plan’s formulation. Compromise emerged because policymakers and legislators increasingly agreed on the superiority of an individual mandate and because universal coverage was largely supported by business leaders and advocacy groups.
The Massachusetts plan offers a variety of choices in both the subsidized and unsubsidized markets, so people will have the opportunity to make well-informed choices about their health insurance coverage. However, the Connector subsidy is not available to low-income individuals in firms with over fifty employees. Furthermore, employers can avoid larger financial penalties for not providing employer-sponsored health insurance by offering workers the option of paying explicit insurance premiums with pretax dollars. In light of these limitations, the dropping of health insurance coverage by employers of low-income workers could be an undesirable consequence of the Massachusetts plan’s structure.
A final consideration of the Massachusetts plan regards risk pooling and cost sharing. Massachusetts chose to raise the cost for low-risk people at the expense of the high-risk people, rather than shifting the excess cost to the tax base. Similarly, the increased cost of the individual market has been shifted to the small business market by pooling these two groups together. The practice has avoided the need for increasing revenue streams through taxation, but the inequity is undesirable.
John McClaughry
Ethan Allen Institute
The Massachusetts plan incorporates several positive features. It is a market-based plan that reinforces the idea of personal responsibility, it focuses on the ability of consumers to make informed decisions about their own health, and it extends the ability of employees to pay insurance premiums with pretax dollars to the efficient small-business insurance market.
However, the plan has disadvantages. First of all, it is susceptible to the ideological dismissal of certain types of plans, such as high-deductible plans, health savings accounts, and other consumer-driven plans. Second, the employer penalty for non-compliance is too much like an employer mandate. The plan is designed to fit into a complex set of preexisting rules, regulations, and deals that, if eliminated, would offer a truly superior health-insurance market.
The Honorable Holly Benson
Florida Secretary of Business and Professional Regulation
The viability of subsidies is threatened by the political wrangling among interest groups over who most deserves those funds. The Massachusetts plan’s brilliance was its extension of the health-insurance tax break to small businesses and the reconfiguration of its funds to return money to patients to choose an appropriate insurance plan. These incentives accomplish much more than a traditional subsidy can.
There are two main problems with individual health insurance mandates that markets can overcome. First, mandates guarantee neither that citizens will actually take up insurance products nor that they will properly use health-care services. Meanwhile, the insurance sector is targeting the uninsured population to develop appealing products suited to them. Second, mandates force people to purchase health insurance rather than other commodities that might be more beneficial to them. The market has responded to the uninsured population, as we can see through Wal-Mart’s program for $4 generic medications and the increase in walk-in clinics around the country.
While the Connector does allow for portability of insurance plans across employers, there is still no justification to believe the public sector can run a Massachusetts-style model better than the market can provide insurance. The idea for the Connector to act as the hub for people looking for insurance plans is a good one, but there are private companies that do the same thing more effectively.
States trying health insurance reform should always begin with deregulation: streamlining the process for getting new products approved, allowing the cross-state purchase of plans, and the like. Transparency of prices, outcomes, and satisfaction empowers consumers to make more informed choices about their own health.
AEI research assistant Jonathan Stricks prepared this summary.
