The Massachusetts Experiment

The Achilles' heel of the new Massachusetts health care plan could be its failure to address rising costs.

Massachusetts Gov. Mitt Romney's new health care law is attracting close attention all over the country. So it should. As Marilyn Werber Serafini explained in National Journal (6/10/06, p. 22), the plan is a remarkable departure.

It proposes to make health insurance coverage universal (or very nearly so), the Holy Grail of liberal reformers. Massachusetts will be the first state to achieve this. And the law promises to extend coverage without affecting the way health care works for people who already have insurance—for them, nothing will change. That reassures conservatives who want to keep the health care market system. Yet somehow, to complete this miraculous trifecta, the law requires no new taxes. The plan won overwhelming bipartisan support, passing the state House 154-2 and the state Senate 37-0.

Wasn't health reform supposed to be difficult?

The plan's biggest idea is the individual mandate. When the law goes into effect in July 2007, every resident will have to have health insurance. Residents who don't have an employer-provided scheme and who are ineligible for Medicare or Medicaid will have to buy insurance for themselves. People not poor enough to qualify for Medicaid but who cannot afford private insurance unassisted will be subsidized on a sliding scale. People on medium or higher incomes will have to buy a plan on their own.

The mandate, according to Romney, is one of the main things keeping the net cost of the plan down. Currently, the uninsured are not denied health care. In an emergency (that term is flexible), people can turn up at hospitals, and care cannot be withheld. The cost is met by taxpayers and the insured. The state maintains a fund of $1 billion for the purpose. In forcing people to get insurance, the plan will curb the demand for uninsured care. Some of that $1 billion fund can then be set against the cost of the new subsidy.

The next thing is to force down the cost of insurance that the uninsured must buy. The state will let insurance companies offer policies with higher deductibles and co-payments, stricter limits on provider networks, and fewer mandated benefits. The plan also creates a health care "Connector"—a kind of regulated market for insurance. Coverage bought through the Connector will get tax relief.

A third component, which Romney resisted but which the Legislature forced through, is a levy on firms with more than 10 employees that fail to provide health insurance: They will have to pay an annual fee, which a pedant might call a tax, of up to $295 per worker. Later, if the plan's arithmetic fails to add up, this levy could be asked to bear the strain. In principle, it could be set so high that even small employers would be forced to buy insurance. In that case, the plan would be striving for universal coverage by, in effect, mandating all businesses to provide it. Many would argue that there is a good case for doing exactly that—but such a scheme would no longer have the appearance of "costing nothing."

The least that one can say of the Romney plan is that it includes some good new ideas and will be a fascinating experiment. To do something so radical and to align strong bipartisan support behind it is an impressive political feat. The plan, and the governor who pushed it through, are plainly worth watching.

But will it work? If extending coverage were the only aim, the plan would get a good grade. But wider coverage is only one of the tests facing the country's health care system. The other is what it costs, and is going to cost in future.

The Massachusetts plan makes a great stride on access, though it does not solve the problem entirely. Only time will tell just how "universal" coverage becomes under the scheme. About 20 percent of Massachusetts' uninsured residents are already eligible for Medicaid but have not signed up. (The plan aims to increase enrollment of those people.) Further up the income scale, some people will prefer to remain uninsured rather than pay for coverage, even with the subsidy, the tax relief, and the cheaper new policies. The plan requires them to do otherwise, but who knows how effectively the new individual mandate will be enforced? The Romney plan is not going to make the problem of the medically uninsured disappear.

But the greater challenge—in its own right, and because of its implications for access—is the mounting costs across the system as a whole. The Romney plan, by design, does not address that problem. System-wide costs will continue to rise, because nothing new is holding them down. And the cost of Romney's widening of access will rise in proportion. When that happens, how will he and his successors respond? The state can tell people to pay more for their mandatory insurance (thereby increasing noncompliance with the mandate). It can increase the burden on businesses (either through levies or new obligations). It can modify the Connector's rules (for instance, on permitted deductibles and other cost-saving features). Or it can try some mixture of all of the above.

One implication is clear: A system that is already fearsomely complicated even as a blueprint is likely to become more so in execution. More important, none of those three responses actually addresses the underlying cost-control problem. There are three broad approaches to the issue of system-wide costs. One is to overthrow the private market model altogether—still unthinkable in the United States. Another is to move in the direction of more heavily managed competition—which has been tried, in the form of HMOs, and was unpopular. The other is to confront people more directly with the cost of their health care, so that they economize on it, and to pressure providers to compete on price. For this to happen, people, not employers, need to be paying directly for their own health insurance.

Some combination of approaches two and three would be my plan. My guess is that the Romney scheme will be defeated in the end by the rising tide of system-wide costs, which its designers, reasonably enough, chose not to confront. But the scheme includes some ideas that would be useful, maybe indispensable tools if somebody in Washington wants to take on the larger task.

How to do national health reform worthy of the name? First, and most important, create a level playing field tax-wise for individuals and firms, so that nobody has a financial incentive to prefer employer-provided insurance to the individually purchased kind. You could do this by extending Connector-style tax relief to all taxpayers, or by abolishing it for employers. Abolition would be better. It would raise a lot of revenue (which will be needed in my plan) and would jolt people into changing their insurance arrangements.

Second, the free-rider problem makes the case for an individual mandate compelling, in my view. Massachusetts is right about that. And the mandate, in turn, makes health subsidies for the poor, which would be desirable in any case, unavoidable. Massachusetts is right about that, too. But to avoid the enormous problems of enforcing and administering the mandate (all in return for less-than-universal coverage in any case), turn this logic around and give everybody a voucher sufficient to buy stripped-down, Connector-style coverage. Offset the cost of this voucher with a sliding scale of additional income taxes that first kick in at, say, two times poverty-level income. Let people spend this voucher on whatever policy they want (so long as it meets the regulated minimum) from any insurance company they like. The extra that most people would choose to spend on an above-minimum policy would come out of their post-tax income.

Third, impose one other global restriction on insurance companies: If they offer a policy to anyone, they must offer that same policy to everyone, regardless of age, sex, current health, and other risk factors. Again, the Connector has provisions of this kind. This would preserve the risk-pooling feature of private insurance, while still allowing vigorous competition on price and offering. It would greatly ease the regulatory and administrative burden of the current system, which has to achieve risk-pooling piecemeal, never getting it right, and always leaning against the wind of improving technology. Without this simple condition, or an ever more complex and costly regulatory apparatus, more and more people, and not just the poor, will find that medical innovation is making them privately uninsurable.

To curb overall health costs, to put users back in control of a real market, and to build universal access into the basic structure of the system, you have to get employers out of the health insurance decision. Once you do that, Massachusetts has some good ideas about what you do next.