The Massachusetts health plan was implemented to ensure that every resident has health insurance. This objective is more modest than it appears and the plan cannot address the Nation’s major health care ills.
Introduction
Citizens in the cradle of liberty long ago revolted against King George’s tax stamp. In 1980 they revolted against property taxes, and more recently nearly abolished their state income tax. But a health tax is different.
Enacted in April 2006, the Massachusetts Health Plan (“the Plan”) is essentially a government mandate that all citizens purchase health insurance. We have come a long way since President Pierce in 1854 vetoed a mental health bill on grounds that health beyond the proper domain of government. The current political question no longer seems to be whether or not Americans will get national health reform during the next presidency, but rather what form it will take. Former Massachusetts governor and Plan architect, Mitt Romney, is a leading candidate for the job. Similar plans are being proposed in many states and by most candidates. It is therefore important to understand why the Plan was introduced and what it might accomplish.
The Health Care Crisis
By now readers are familiar with the national crisis in health care. Americans spend 16 percent of GDP on health care. Despite this record spending, nearly 47 million individuals remain uninsured (16 percent of the population); and raw health outcomes are no better than those in countries which spend less. Individuals outside of the employer-based system face higher insurance costs and tax disadvantages.
Massachusetts faces smaller problems. Though per capita health spending is among the nation’s highest at $6,000 annually, total spending makes up less than 12 percent of state output. In 2006, only 372,000 residents were uninsured (roughly six percent). Among the uninsured, the majority are single men, over a quarter are eligible for Medicaid (MassHealth) and over one-half forego insurance despite estimates that they can afford it. Eighty-three percent of the insured buy it through their employers. The remaining 17 percent purchase insurance on their own.
The root of the problem in Massachusetts is not that the uninsured forego care, but that they typically receive it in emergency rooms. By federal law, emergency rooms must treat all patients regardless of ability to pay. Treating patients in emergency rooms for routine care is costly, particularly since it imperils service for serious cases. And collecting fees from individuals is more costly than collecting from third-parties.
Before reform, these costs were retreived from insurance companies (and their customers) who were assessed an annual $62 per enrollee fee to fund a $600 million “Uncompensated Care Pool.” $385 million more came from a waiver allowing Massachusetts to use federal Medicaid dollars. Caring for the uninsured in Massachusetts cost roughly $1 billion, or 2.5 percent of total health spending. According to several academic studies, hospitals also recouped costs by charging insured patients a three percent premium for services rendered (~ $250 per policy).
The Plan
The remedy is to move all (watered down to “most”) of the uninsured out of the Uncompensated Care Pool and into traditional insurance without spending more than $1 billion. The Plan attempts this by legislating a mandate that all “non-exempt” residents must have health insurance by July 1, 2007 or face financial penalties.
Compared to private insurance costs the penalties are not severe. Noncompliance in 2007 will cost taxpayers their state personal income tax exemption – $219 for singles and $438 for couples. Noncompliance in future years will result in a penalty costing half the premium of the lowest priced available health plan – roughly $100 per month.
To accommodate the mandate, the law requires all employers with more than ten workers to offer “fair and reasonable” premium contributions toward health insurance or face a “fair share” assement capped at $295 per worker per year. They must also maintain a Section 125 “Cafeteria Plan” which meets state regulations for “adequate” coverage. Section 125 refers to the portion of the federal tax code allowing employers to offer nontaxable benefits to its workers. Firms delinquent in offering an adequate Cafeteria Plan face a “free rider surcharge” based on how much uncompensated care their workers consume. This compliance burden will particularly hurt smaller businesses. Both charges will be used to pay for the care of remaining uninsured citizens and to subsidize newly created insurance plans.
Individuals without employer health coverage will be segmented into one of three populations based on income. First, households earning less than 100 percent of the federal poverty level (FPL) will continue to be eligible for MassHealth. Second, adults in households earning between one and three times the FPL can enroll in the subsidized Commonwealth Care program. Subsidies come from the Medicaid waiver, the “fair share” and “free-rider” penalties and existing charges on insurance companies. Premiums range from $0 for families earning 1.5 times the FPL to $105 per month for those earning three times the FPL. These are large subsidies when average monthly health expenditures are $500.
Third, for those households earning in excess of three times the FPL, the state merged the small-group and individual insurance pools and encouraged six insurance companies to offer affordable policies via the Commonwealth Choice program. These unsubsidized plans have a wide range of premium / deductible / copay options which vary with age and location. Small businesses (50 employees or less) will have the option of designating Commonwealth Choice as their group insurance provider. Only individuals who purchase Commonwealth Choice plans through their employers are eligible to pay their premiums with pre-tax dollars; individuals who purchase a plan on their own must do so with after-tax dollars.
These latter two programs are offered through a newly created independent state agency known as the Commonwealth Health Insurance Connector Authority. Connector policies are portable and multiple employers can contribute to them. While individual purchasers still do not enjoy the favored tax treatment employees do, those switching jobs or considering early retirement can now purchase more affordable health insurance than was previously available, partially addressing the “job-lock” problem.
The Connector administers much of the law, including regulating via an array of Orwellian committees (such as an “Affordability Committee”) which determine what qualifies as “adequate” insurance coverage, who may be exempted from the mandate, what employer contributions are “fair and reasonable”, what appropriate rates are, and so on. To be fair, these subjective decisions need to be made, but they leave the Plan vulnerable to heavy influence by interest groups. Political pressure has already forced a redefinition of affordable coverage and acceptable premiums in both Commonwealth Care and Commonwealth Choice – a problem likely to continue since subsides extend into the middle class (e.g. for a family of four earning up to $61,958).
Already, service usage in the Plan has exceeded expectations. One reason is that no plan can exclude or penalize on the basis of pre-existing conditions; all must offer 40 mandated areas of coverage including hair prostheses, free eyeglasses, and abortion services. There is little room for existing providers to compete, for example single men must purchase policies which cover in-vitro fertilization. The Connector has further cartelized the insurance industry by exclusively contracting with existing managed care organizations for a several year period. Not only will existing insurers be brought a stream of healthy new policyholders, they will also have their plans marketed and sold through the Connector.
The Department of Revenue, in concert with the Connector, will monitor and enforce the Plan. All income tax filers must fill out yet another form confirming when and where they acquired health insurance. However, the current mechanism is virtually powerless to detect the myriad schemes people will come up with to avoid the mandate, to drop their employer coverage for less costly Plan coverage, or who work in neighboring states.
A Road Worth Walking Down?
If the economics of health care were like Jeopardy, the answer to “Universal Health Insurance” would not be “What is the best way to improve the health of our citizens” or “How can we help those who need care, but cannot get it?” The best answer is, “What is the simplest way to get everyone insured?” The virtue of the Plan is that it will be useful to examine as an experiment. 50 different state experiments are preferable to a one-size-fits-all national program. The problems in Massachusetts are different than those in Alabama, however, and bureaucrats in Washington are in no position to assess the needs of the individual states. Even if they were, insurance mandates will not address the nation’s most pressing problems.
Massachusetts being a wealthy state with good coverage still requires a large federal subsidy in order to expand health insurance to all. Where will the subsidies come from if replicated on a national scale? But even this problem is overwhelmed by two major failings.
First it is fallacious to insist that having insurance is the same as having health care. Well-intentioned politicians cannot miraculously create resources where previously none existed. The Plan does little to expand the supply of medical services to accommodate new patients. Since it is a political no-no to propose care rationing, payment rates to providers in MassHealth and Commonwealth Care are set below prevailing market rates. The Plan thus forces doctors to ration care by refusing treatment of certain insured individuals. Medicaid recipients nationwide are already facing this challenge.
If health insurance were the key problem, then Medicaid and Medicare recipients should enjoy better outcomes than people with no insurance at all. Empirical studies indicate that in many cases Medicaid recipients have worse outcomes than people with no insurance at all. In other studies, Medicare enrollees with low incomes are twice as likely to be in poor health as those with higher incomes. Income seems to be a better predictor of health status than insurance.
Second, the program is powerless to control cost escalation. This is because the mandatory insurance prescription is treating a misdiagnosed “adverse selection” illness. Adverse selection is a fancy way of saying that unregulated insurance markets unravel. Healthy people drop insurance because they consume fewer services than they contribute in premiums, leaving behind a slightly sicker insurance pool. The healthiest remaining consumers find that they are now paying too much, causing them to drop coverage – the unraveling continues until only sick and unhealthy individuals remain insured, at necessarily high costs. A mandate is supposed to prevent this unraveling.
Given that 94 percent of Massachusetts residents have insurance, the mandate is difficult to justify on these grounds. Nonetheless, enrolling a few healthy people will do very little to combat the major cost drivers in health care – the extraordinary sums spent on end-of-life care; on expensive diagnostic procedures of uncertain benefit; and on costly regulations. Forcing lots of healthy, young males into the insurance pool is a euphemistic way of slapping them with a tax to pay for dad’s colonoscopy. If the goal of the Plan were simply to drive routine medical care out of emergency rooms and into standard treatment centers, a mandate could have been placed on all doctors’ offices to provide free basic care to anyone without insurance.
Ironically, the standard argument in defense of a single-payer health care system cuts in the other direction. National health care advocates claim that insurance companies cherry pick the healthiest cases to cover, then dump, deny and ignore the unhealthiest citizens. Both arguments cannot be correct.
We leave for a future article a discussion of the moral and ethical implications of legislation such as insurance mandates. The Plan will surely enable some people to purchase insurance that were otherwise unable to, it will also alleviate some crowding in emergency rooms. But no health reform proposal, Massachusetts included, can avoid the inevitable conflict between insulating consumers from health costs, providing them with unfettered access to health care resources, and being collectively affordable. The Plan may achieve the first two goals, but supporters should not pretend that doing so will be cheap.
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