Last week the Massachusetts legislature passed comprehensive health care reform legislation almost a year after Governor Romney first proposed the key elements of a reform strategy. News reports and most commentary have focused on two small but controversial provisions in the final bill: requirements that Massachusetts residents purchase health insurance and that businesses with more than 10 workers who don't offer their employees health insurance pay a per-worker contribution to the state's uncompensated care pool. But in focusing on those items, most reporters and commentators have missed the truly significant and transformative health system changes that the legislation would set in motion.

The Reality

Some commentators, by getting wrong even the most basic facts of what the legislation actually does, have offered wildly inaccurate interpretations of the bill and its likely effects.[1]

In reality, the legislation is designed to restructure and (partially) deregulate Massachusetts's small-group and non-group health insurance markets and to convert subsidies now paid to hospitals for treating the uninsured into subsidies for the low-income uninsured to buy health insurance. The objectives are expanded coverage, greater consumer choice and satisfaction, value-focused competition among insurers and providers, and ultimately a reduced burden on the state's taxpayers. The key to the Massachusetts plan is a new way of organizing the marketplace to enable consumers to compare and purchase health insurance plans.

The first major element of the Massachusetts legislation is the creation of a new, statewide health insurance 'Connector.' The Connector will be a private (state-government chartered) marketplace where individuals and workers in businesses with 50 or fewer employees will be able to purchase personal, portable health insurance coverage.

This concept of organizing a state's insurance markets around a central clearinghouse represents a dramatic departure from recent state health insurance reform proposals. States have spent the past 15 years trying to expand health care coverage to small-business employees, with virtually no positive results. The Massachusetts legislation represents a bipartisan commitment to move away from the policies that have largely failed to make progress in covering the uninsured for the past 15 years.

Abandoning Henry Ford's Market

Over the past 70 years, a combination of industry practices and federal and state regulations have produced a fragmented, balkanized health-insurance market, one with different regulations and practices in the large-group, small-group, and non-group submarkets. Over time, coverage has declined steadily, particularly in the small-group and non-group markets.

In response, a number of states tried to reverse that trend by standardizing health insurance coverage and benefits. For example, Massachusetts reduced coverage offerings in its non-group market down to just two standard products, while allowing somewhat more product variation in its small group market. Maryland did the opposite, allowing different products to be sold in the individual market but establishing a uniform set of minimum benefits, deductibles, and co-pays for all plans sold in its small-group market. Other states have enacted similar schemes.

Essentially, state health insurance reform since the early 1990s has been an exercise in governors and legislators repeatedly trying to design a perfect, one-size-fits-all health insurance benefit package for one or more targeted sub-populations in their state. The most recent examples are the "Healthy New York" plan and Maine's "Dirigo" health plan.

In practice, these approaches all ended up looking a lot like Henry Ford's auto market. Only one or two car models (all painted black) are available, but they can be purchased from many independent dealers.

The CarMax Approach

The significance of the Massachusetts legislation is that Gov. Romney proposed inverting the previous model for health insurance reform-and got his state's legislature to agree. Massachusetts is now committed to restructuring its health insurance system in a way that looks a lot like CarMax's auto market: there are many different kinds of cars to choose from, all obtainable through one giant dealership. That dealership is the new Massachusetts health insurance Connector.

The basic insight behind a state-sponsored health-insurance clearinghouse or exchange (like the Connector) is that markets sometimes work more efficiently and effectively when there is a single place to facilitate diverse economic activity. Like a stock exchange, the health insurance Connector in the Massachusetts legislation will be a clearinghouse to match buyers and sellers efficiently and to facilitate the collection and transmission of payments, often from multiple sources.

The Connector will neither design the insurance products being offered nor regulate the insurers offering the plans. Insurers will continue to be regulated by the state's Division of Insurance and will be free to design and price the plans they offer through the Connector, subject to the provisions of Massachusetts's existing insurance laws.

While simple in concept, the Connector brings with it a complete reorientation of the state's regulation of health insurance. It shifts the focus from designing insurance products to designing the framework within which new products can emerge and compete for customers. Under this framework, the new market will also be one that seeks to meet the needs of patients and consumers, rather than employers.

How it Works

The Connector is designed to work around the limitations of current federal law to achieve, within a state, consumer choice of plans and true coverage portability while also retaining the consumers' ability to benefit from long-standing federal tax-breaks for employer-group health insurance.

Any Massachusetts business with 50 or fewer workers will be able to designate the Connector as its group health insurance plan. After that, each of its workers will be able to choose the health plan that best suits him or her from among those offered by the Connector. Workers will be able to switch plans during an annual open season and will be able to take their coverage with them as they move from job to job. Furthermore, the Connector is designed to ensure that all premium payments made by both employers and workers will be on a pre-tax basis.

This design offers many benefits. For example, a two-income couple will be able to combine contributions from their employers to buy and keep the plan they want, instead of being forced to choose one employer's plan while forgoing the subsidy offered by the others' employer. Similarly, a worker with two part-time jobs will be able to combine both employers' contributions to purchase coverage. And with the Connector in place, the state government will have a single place to send premium subsidies for those who need extra assistance to buy coverage.

Finally, any Massachusetts resident will be able to buy coverage directly through the Connector as an individual. The only disadvantage is that the federal tax-breaks for individually purchased health insurance are not as large as those for employer-group coverage. Still, those who do purchase coverage through the Connector as individuals, such as the self-employed, will gain the right to switch coverage during the annual open season without new underwriting-just like those who work for large employers.

Some Deregulation

As part of the overall package, Governor Romney was able to get the legislature to agree to some deregulation of health insurance. For example, the legislation allows managed care organizations to offer Health Savings Account (HSA) plans, which only traditional insurers can currently offer in Massachusetts. It also allows the use of coinsurance in managed care plans as a way for those plans to help steer patients to providers offering better value. These are important changes for a state whose health care market is dominated by managed care insurance plans and prestigious medical providers with strong brand identities.

In addition, by allowing any resident to buy coverage through the Connector, the bill effectively circumvents much of the standardization of coverage in the Massachusetts non-group insurance market. As well, the legislation will allow carriers to offer less expensive insurance plans, with fewer mandated benefits, to young adults between 19 and 26 who do not have access to employer-group coverage.

Overall, the bill does not go far enough in deregulating insurance. For example, the legislation leaves untouched the state's modified community-rating system. Other states following the same model of reform would likely have greater success in deregulation.

Subsidizing People, Not Providers

The second major element of the Massachusetts legislation builds on the Connector concept to reform the state's current system for subsidizing uncompensated care costs. The Romney administration seized the opportunity presented by the impending expiration of the state's Medicaid waiver to tackle covering uninsured individuals who are ineligible for Medicaid. That waiver currently pumps $385 million a year in federal Medicaid money into the state's $1 billion per year uncompensated care pool, which in turn pays it out to health systems that treat the uninsured. Federal Medicaid officials told Massachusetts that they would not approve a waiver extension absent a state plan to achieve better results with the money.

Romney's solution was to convert what is really a safety net for hospitals into premium assistance for the low-income (but not Medicaid-eligible) uninsured. Having a one-stop-shop in the form of the new Connector in place makes for an administratively simpler and cheaper way to match people, plans, and payments. The legislation gives the health systems currently receiving funding from the state's uncompensated care pool two years to enroll the uninsured patients they serve into their own health insurance plans, with the funding they now receive converted into premium subsidies. At the end of the two-year period, those individuals could use the Connector to choose a different health plan. At that point, health insurers and providers will have to compete for that money by offering good value health coverage and services.

Employer Mandate

It was in connection with the proposed reform of Massachusetts uncompensated care pool that the biggest sticking point arose in the progress of the legislation. For almost four months, the legislation stalled in conference committee, largely over a "play-or-pay" employer-mandate provision added to the House version whereby a payroll tax would have been imposed on employers that do not provide their workers with insurance. The impasse was finally resolved by an agreement to replace that provision with an expansion of the existing employer contribution to the Massachusetts uncompensated care pool to include employers that do not offer health insurance.

Part of the funding for Massachusetts's uncompensated care pool comes from a long-standing surcharge on private insurance plans, but it is effectively paid by businesses and workers that do buy coverage. In the past, that surcharge has averaged about $62 per worker, per year. The final version of the legislation would impose an equivalent assessment on businesses with more than 10 employees that do not offer health insurance coverage. The amount of that assessment would be based on an annual calculation of the amount of uncompensated care used by workers employed in firms that don't offer health insurance, up to a statutory maximum of $295 per worker.

Because the legislation is designed to significantly reduce uncompensated care in the state, any assessments are likely to be much less than the statutory maximum. As well, with the Connector in place, employers that are not currently offering coverage can easily avoid the new assessment by signing up to offer coverage to their workers through the Connector. Thus, the provision is likely to have a negligible, or even no, effect.

However, despite its practical irrelevance, the issue carries considerable political symbolism: Does the new assessment constitutes a 'tax' or a 'fee,' and should businesses be required to pay for their worker's health insurance? Governor Romney will likely use his line-item veto authority to excise that provision from the bill. Should he do so, the Massachusetts legislature may try to reinstate it. Regardless, the practical effect of the provision, if enacted, will be negligible.

Personal Responsibility

Finally, the element of the Massachusetts bill that has attracted the most attention and dispute is the "personal responsibility" provision, also known as the "individual mandate."

From the outset, Governor Romney stated that requiring individuals to buy health insurance in the currently fragmented and overly expensive insurance market would be wrong and counterproductive. But he also argued that if the market could be reorganized to make coverage universally available and portable, deregulated at least enough to make it affordable for the middle class, and subsidized enough to make it affordable for the low-income, then there would be no reasonable excuse for anyone to forgo health insurance.

Romney also pointed out that to allow people to go without health insurance when they can expect someone else to pay the tab for their treatment is a de facto mandate on providers and taxpayers. Romney's plan was to take that option off the table, leaving only two choices: either buy insurance or pay for your own care. He proposed that those who want to go without coverage could place $10,000 in an interest-bearing escrow account, which providers could claim against if the individual did not pay medical bills.

Unfortunately, the state legislature changed that idea into a mandate: either buy coverage or pay a fine. This provision is more onerous and philosophically objectionable, but it is unlikely to prove onerous in practice. That is because the legislation includes three avenues through which Massachusetts residents can meet the individual coverage requirement by purchasing an inexpensive health plan. First, the bill allows more carriers to offer HSA products with high-deductibles. Second, it also circumvents Massachusetts' overly regulated non-group market by allowing any resident to buy coverage as an individual through the Connector, where a wide choice of plans and premiums will be available. And third, it allows insurers to offer inexpensive "mandate-light" policies to young adults between the ages of 19 and 26, those most likely to go without coverage.

Looking Ahead

Politics is the art of the possible, and Governor Romney had to temper his ambitions and make compromises to get his plan through the state's legislature. At the same time, many Democrats in the legislature set aside their misgivings about some of the elements of the Governor's proposal, such as its steps toward deregulating insurance, out of a desire not to lose a big piece of Massachusetts's federal Medicaid funding. With time and experience, revisions can and should be made to this initial legislation.

But that should not overshadow the significance of Massachusetts' achievement in enacting a bipartisan health care reform bill that fundamentally shifts the state's health care system in the direction of greater patient and consumer empowerment and control. The Governor and legislature have provided their citizens with the tools to achieve what the public really wants: a health system with all the familiar comforts of existing employer group coverage but with the added benefits of portability, choice, and control.

Other governors and legislators would be well advised to consider this basic model as a framework for health care reform in their own states.

Edmund F. Haislmaier is a Research Fellow in the Center for Health Policy Studies at The Heritage Foundation.