Massachusetts's experiment in health market reform is already
showing progress. The average Massachusetts resident without health
insurance will soon be able to obtain coverage for $175 per month
through the state's Connector, a health insurance exchange for
individuals and small businesses. Because the Connector can
accept pre-tax defined contributions, many will secure even lower
premiums. A middle-class individual, for example, whose employer
designates the Connector as its employer plan, could purchase that
same health coverage for just $109 per month. In addition, that
individual would be able to choose from a variety of carriers and
plans and maintain coverage from job to job--aspects of control
that few Americans have today. These early results
demonstrate the dividends of state-level experimentation. Other
states would do well to learn from Massachusetts's example,
observing what works and what does not, and craft reform plans to
meet the needs of their citizens, adjusted for their political
culture and legal arrangements.
Massachusetts's latest premium estimates are dramatically lower
than projected in a widely reported January 2007 memorandum that
foresaw $380 per month individual premiums. The current
estimates are in line with the original projection of approximately
$200 per month targeted by former Massachusetts Governor Mitt
Romney in 2006, when he first advanced his health care reform
proposal. In 2005, the average monthly premium for a single person
in the Massachusetts small group market was $350.
Seven insurance carriers thus far are set to compete for
consumers' dollars in the new Connector, offering new plans, such
as high deductible plans with premiums as low as $153 per month,
and more health plans are expected. The competing plans will have a
variety of co-payments, deductibles, and out-of-pocket payments.
While Massachusetts has had a long tradition of heavy health
care regulation, former Governor Romney was able to secure greater
flexibility for the state's market. Five reforms were key:
- Allowing insurers more flexibility to develop value-driven,
tiered networks of health care providers;
- Allowing insurers to offer products with higher annual
deductibles and co-payments;
- Allowing HMOs to offer health savings accounts (HSAs);
- Creating a new class of more affordable health insurance
products for persons ages 19 to 26 with dollar-limited annual
- Imposing a three-year moratorium on the imposition of new
health benefit mandates.
The Massachusetts legislature also agreed to permit health
insurers to factor participation in wellness programs and tobacco
use into setting premiums. Altogether, these changes would hardly
be considered revolutionary in many other states, but in
Massachusetts they were significant. On the basis of these limited
regulatory changes, plus revised estimates by Massachusetts's
insurance carriers during the course of the 2006 state legislative
debate, Romney projected a reduction in Massachusetts's health
The state's health care costs and insurance premiums could be
reduced even further in future years as a result of provisions of
the new law to establish greater transparency for consumers,
including the publication of comparative data on price and quality.
Those provisions were designed to address the fact that
Massachusetts's cost of care is among the highest in the nation.
The underlying cost of care is almost invariably the biggest factor
determining the cost of health insurance in any given state.
The Problem of Government Benefit
Notwithstanding the achievement of lower-than-expected health
insurance premiums, Massachusetts is still burdened by excessive
government control over benefit design. This inhibits flexibility
in coverage and increases costs to individuals and families. Other
states contemplating the adoption of a health insurance exchange
like the Connector would be wise to review and repeal unnecessary
insurance rules and outdated regulations as part of their efforts
to expand private health insurance coverage and make it more
As noted, the underlying cost of health care in Massachusetts is
very expensive. This reflects the prevailing level of high wages in
the state, the prevailing and expensive patterns of medical
practice, and the relatively uncompetitive hospital market. These
factors are aggravated by a level of government regulation over
health care plans, such as 43 benefit and provider mandates, that
is clearly excessive.
The Massachusetts legislature also standardized benefit coverage
for all citizens enrolled in the Commonwealth Care plan--that is,
those who earn below 300 percent of the federal poverty level and
are eligible for government assistance to purchase health coverage
through the Connector. The Commonwealth Care program is
administered by the board of the Connector.
Outside of Commonwealth Care, insurers have more flexibility in
structuring benefits for plans sold to non-subsidized individuals
through the Connector. The Massachusetts Connector board, however,
has two related responsibilities: granting a "seal of approval" for
plans to market their coverage and determining "minimum creditable
coverage" for persons in Massachusetts who will be required, as of
July 2007, to buy private health insurance under the state's
The "seal of approval," or certification provision, adds another
layer of regulatory approval for insurers seeking to offer coverage
through the Connector on top of the provisions of state insurance
law applied by the state's Department of Insurance. States
considering similar reforms should avoid this duplicative feature
in their reform designs. A simpler and fairer approach would be to
allow plans to be offered through a state health insurance exchange
on an "any willing plan" basis, meaning that a state's health
insurance exchange would have to offer any plan that is certified
by the state's insurance commissioner as meeting all the applicable
requirements of state insurance law. At the same time, states
should modify their basic health insurance laws as part of any
broader health reform legislation that establishes a state health
insurance exchange. Blocking health plan entry, in any way,
directly compromises the basic intent of a health insurance
exchange and, thus, the efficiency of a market based on consumer
choice and competition.
Likewise, the Massachusetts Connector board's authority to set a
"minimum creditable coverage" standard for what constitutes
acceptable coverage under the state's individual mandate is also
problematic. Given the peculiar political culture of Massachusetts,
this arrangement reflects the need to resolve the inherent conflict
in the legislature's insistence that coverage be affordable
and comprehensive. The result is that "affordable" coverage
options are more expensive because they include more regulatory
requirements for coverage. For example, the Connector board has
recently started making decisions concerning the minimum level of
drug coverage and lifetime caps on insurance, standards that are
incompatible with plan offerings already marketed in the state.
This new "minimum creditable coverage" standard could affect the
existing insurance coverage of an estimated 200,000 Massachusetts
residents, eventually making them pay more than they would
otherwise. This number includes an estimated 90 percent of
employees in union-managed plans. In coping with this latest
regulatory wrinkle, the Connector's board has recently agreed to
grandfather in existing employer-based plans until 2009.
Nonetheless, the latest set of rules includes nine provisions
governing benefits, ranging from determinations of the acceptable
level of preventive care to deductible levels for drug
As Massachusetts's experience demonstrates, health policy is
riddled with unintended consequences. They can be costly, both
economically and politically. In crafting any health care reform,
state officials should make sure that they expand options, not
contract them, and allow individuals and businesses that already
have coverage to keep what they want.
Other states pursuing reform should avoid this type of problem
by applying a more basic and less discretionary standard. A good
alternative might be the standard for "creditable prior coverage"
contained in the federal Health Insurance Portability and
Accountability Act of 1996 (HIPAA). Any health care coverage that
meets the HIPAA standard would be automatically deemed to meet
state standards. That would achieve the objective of ensuring that
coverage is within the broad parameters of what is commonly
considered a "major medical" plan (as opposed to a "limited
benefit" plan), without unduly restricting benefit design or
inadvertently increasing costs for individuals who already have
Lessons for Other States
Massachusetts achieved two major health policy breakthroughs:
the creation of the Connector and the redirection, via a federal
waiver, of existing government health care subsidies from
institutions to individuals and families for private coverage.
The Connecter is a new market arrangement--a health insurance
exchange--in which individuals and families can choose and own
portable health insurance without the loss of the current generous
federal tax benefits. The shift in focus to individuals and away
from institutions, meanwhile, will progressively reduce reliance on
uncompensated care. With modifications, both policy changes are
exportable to other states, and imaginative state officials can use
them to lay the groundwork for major expansions of private,
personal, and portable health insurance coverage.
With regard to the specific role of the health insurance
exchange, state policymakers should take special care to avoid two
- Do not create another regulatory hurdle on top of basic
state insurance laws or create conflict with the authority of the
state's existing insurance regulator. The idea of the exchange
is to serve as a mechanism for facilitating a consumer-driven
health insurance system. Any certification for plan participation
in the new competitive market should be restricted to certification
that health plans are licensed to do business in the state. This
means, for all practical purposes, that the exchange should
facilitate transactions for any willing health plan.
- Do not impose new comprehensive standard benefits on private
plans. A notable weakness of the Massachusetts Connector's
design is its board's administrative determination of "minimum
creditable coverage." This carries the potential to undermine the
flexibility of plan offerings and increase costs, frustrating
choice, competition, and affordability of coverage. A far better
option is to leave with the state's insurance regulator the job of
certifying that all plans meet basic state standards such as fiscal
solvency, market conduct, coverage of basic benefit categories, and
consumer protection against clearly unreasonable provisions such as
excluding catastrophic expenses. Generally, states already have
these laws on their books, and their insurance regulators already
administer them. While many state lawmakers may have good reasons
to modify their states' basic insurance rules as a part of reform,
they should adhere to the principle that any changes should be
clear, predictably administered, and uniformly applied. At the end
of this process, there should be fewer rules, not more.
Massachusetts enacted a major reorganization of its health
insurance market to allow, for the first time, small business
employees the right to own personal and portable health insurance
that they can take from job to job without a loss of tax benefits.
While the recent premium estimates for health plans are in the
range of those originally targeted by former Governor Mitt Romney,
current Massachusetts law still unduly limits the flexibility of
health insurers in offering varied and even more affordable
The implementation phase of the Massachusetts Health Plan will
continue for at least another three years. To their credit,
Massachusetts officials and lawmakers recognize that they will need
to make further adjustments to their reform design as it is
The major lessons for other states considering similar insurance
market reforms are to pay particular attention to ensuring
regulatory simplicity, clarity, and predictability and to permit
insurers to offer consumers a wide range of alternative benefit
designs. These policies enable individuals and families to obtain
the coverage that best suits their personal preferences and
In pursuing health care reform, other states can build on the
policy breakthroughs achieved in Massachusetts but will have to
adjust the details of their reform design to account for their own
special circumstances, such as their demographic patterns, the way
the health care delivery system is organized, and how existing
uncompensated care is funded and delivered. These, in turn, are
shaped by the state's social and political culture.
Americans are the heirs of constitutional genius. Federalism
offers structural opportunities for public policy innovation
greater than those found in any other constitutional arrangement.
The states have the flexibility to address their divergent needs
and circumstances, and their initiative provides other state
lawmakers with the opportunity to evaluate and learn from these
Robert E. Moffit, Ph.D.,
is Director of the Center for Health Policy Studies at The Heritage
Commonwealth of Massachusetts, Executive Department, "New Health Insurance Plan Will Be
Available for Under $200," Press Release, March 3,
Ibid., p. 2. The Massachusetts premium estimate is based on
the purchase of coverage for a 37-year-old person making $50,000
per year. Under the design of the Connector, an employer's defined
contribution for private health insurance would be tax free, as it
is today in conventional defined benefit health insurance plans.
Moreover, individual employees can also take advantage of the
general tax breaks under existing federal law by using an
employer-based flexible spending account (a Section 125 account)
from which individuals can make individual health insurance premium
payments tax free to purchase a health plan through the
Only 23 percent of Americans have any choice of insurance carriers.
See Alain Enthoven, "Employment Based Health Insurance Is failing:
Now What?" Health Affairs Web Exclusive, May 28, 2003, p.
misleading $380 per month premium was leaked to the media and
quickly seized upon by prominent critics of the Massachusetts
reform, both liberal and conservative.
Hon. Timothy Murphy, Secretary of the Executive Office of Health
and Human Services of Massachusetts, "Massachusetts Health Reform,"
presentation to The Heritage Foundation, April 10, 2006.
Ibid., p. 3.
a detailed discussion of what state officials should adopt and
avoid in the Massachusetts health plan, see Nina Owcharenko and
Robert E. Moffit, Ph.D., "The Massachusetts Health Plan: Lessons
for the States," Heritage Foundation Backgrounder No. 1953,
July 18, 2006, at www.heritage.org/research/healthcare/bg1953.cfm.
Victoria Craig Bunce, J.P. Wieske, and Vlasta Prikazsky, "Health
Insurance Mandates in The States 2007," Council for Affordable
health Insurance, 2007.
For example, the law does not permit deductibles in health plans
offered to persons receiving premium assistance. As Professor Mark
Pauly, an economist at the Wharton School of the University of
Pennsylvania, has remarked:
Getting decent coverage to almost everyone is a better initial
goal than getting perfect coverage to fewer of the uninsured.
Rather than focus on details of subsidized coverage--as
Massachusetts seems to be doing because of its extensive list of
coverage mandates--the initial focus should be on providing
coverage of greater actual value than a given benchmark, leaving
plan details to consumers, not special interests or public health
(Mark V. Pauly, "Is Massachusetts a Model at Last?" American
Enterprise Institute, Health Policy Outlook, No. 1, January
2007, p. 3.)
For a discussion of this essential point within the context of a
health insurance exchange, see Edmund F. Haislmaier, "Health Care
reform in Maryland: Doing It Right," Heritage Foundation
Lecture No. 1002, March 20, 2007, at www.heritage.org/research/healthcare/hl1002.cfm.
Alice Dembner, "State May Give Insured More Time to Upgrade; July
Still Deadline to Have Coverage," The Boston Globe, March
While this is the right direction for policy, implementation would
be improved if the subsidy were a direct voucher for individuals
and families that they could apply to their chosen plan rather than
a subsidy embedded in the premium.
For a discussion of both policy breakthroughs, see Edmund F.
Haislmaier and Nina Owcharenko, "The Massachusetts Approach: A New
Way To Restructure State Health Insurance Markets and Public
Programs," Health Affairs, Vol. 25, No. 6 (November/December
2006), pp. 1580-1590.
This means that the functions of the health insurance exchange
would be limited to preparing descriptions of competing health
plans for distribution to employers and employees; enrolling
employers, employees, and their families; disseminating information
and enrollment procedures; collecting and transmitting health
insurance premiums; and administering any government subsidies or
premium assistance for eligible enrollees.