The Massachusetts Mandate Update

Slippery slope to expanded private health insurance?


Health care is the top domestic political issue for the upcoming 2008 presidential election. In a recent New York Times/CBS poll 64 percent of Americans said the government should guarantee health insurance for all. Not quite a majority (47 percent) favored a national health insurance program covering everyone, administered by the government and financed by taxpayers. Is there any way to stop the rapidly accelerating slide toward universal government-funded health care?

Today, employers purchase health insurance for 153 million workers and their families. Why is that? Because ridiculous federal tax laws allow employers, but not individuals, to purchase health insurance with pre-tax dollars. Rather than paying an employee $1,000 more in wages, of which $400 will be taxed away, companies purchase $1,000 in additional health insurance tax-free. In this way companies funnel more than $140 billion a year in federal tax breaks to their workers. One more obstacle prevents health insurance from being tied to individuals rather than to jobs-the feds require that employers purchase group insurance.

At first glance, the mandate adopted by Massachusetts in April 2006 that every state resident carry a health insurance policy looks like just one more slippery step down the slope to nationalized health care. But is it? The seductive idea behind this individual mandate is that responsible Massachusetts policyholders and taxpayers should no longer have to pay $1 billion per year in uncompensated care for free riding uninsured individuals. Under the mandate, residents with incomes under the federal poverty level ($9,804 in annual income for an individual and $20,004 for a family of four) are enrolled in Massachusetts' version of Medicaid, called MassHealth. They may choose among four private health management organizations (HMOs) that already provide health care services financed by Medicaid. This is just more of the same.

The situation changes when we get to the 200,000 uninsured residents whose incomes are below 300 percent of the federal poverty level ($29,412 for an individual and $60,012 for a family of four). Under the new mandate they can choose among 7 private policies offered through the Commonwealth Health Insurance Connector (Connector). These Commonwealth Care health insurance policies are subsidized on a sliding scale. For example, adults earning between 100 and 150 percent of the federal poverty level must pay an $18 per month premium; between 150 and 200 percent, the adult premium rises to $40 per month; between 200 and 250 percent it's $70 per month; and it tops out between 250 and 300 percent at $106 per month. After that Massachusetts residents are expected to obtain insurance through their employers or buy it on their own.

Earlier this year, it looked as though the Mass Mandate might run aground on high costs. In response to the Connector's request for bids, insurers returned with premiums that would cost the average individual about $380 per month–this was about double what former Republican governor Mitt Romney and the legislature had expected. Connector board members rejected that as too high and asked for insurers to come back with new bids. The second round resulted in several basic plans, one of which can be purchased for as little as $175 per month. Coverage includes preventive care, primary physician care, hospitalization, and prescription drugs.

But what does the Massachusetts mandate have to do with expanding private health insurance? Instead of focusing on the mandate, conservative Heritage Foundation health policy analysts Ed Haislmaier and Nina Owcharenko point to two other core concepts-the creation of a single state health insurance exchange and the shifting subsidies from providers to consumers.

A state health insurance exchange like the Connector could address many of the distortions of our current system of third party payments for insurance. First, as they suggest, any resident could buy coverage through the exchange. Second, all of the plans sold through the exchange would effectively become individual policies. That means they are no longer linked to specific employers. Workers could take their health insurance with them as they pursue their careers with various employers. Third, employers could designate the exchange as an employer group plan. Why does this matter? Recall that in order to qualify for the health insurance tax break, employers must buy group health insurance.

Now in Massachusetts employers that use the Connector to purchase health insurance for their employees establish Section 125 cafeteria plans. These are IRS-sanctioned plans to which employees can contribute pre-tax dollars that they can use to purchase health insurance. "Since employers' coverage contributions are simply a subset of total compensation, as long as both employer and employee payments receive the same tax treatment, it becomes irrelevant how employers and their workers decided to divide those payments for accounting purposes," point out Haislmaier and Owcharenko. This means employers could make defined contributions to pay for health insurance and employees could pay additional amounts if they wanted a more expensive plan. In any case, Section 125 plans lower the real cost of health insurance to individuals by about 40 percent. As Governor Deval Patrick (D-Mass.) noted, if the low-cost $175 per month policy is purchased through a payroll deduction using pre-tax dollars, the net cost for someone earning $50,000 a year is reduced to $109 per month.

The second core concept is the shift from subsidizing providers to subsidizing consumers. As previously described, the Mass Mandate transforms $1 billion paid out to providers for uncompensated care into subsidies for insurance premiums of lower income citizens who are not eligible for Medicaid or State Children's Health Insurance Program (SCHIP). Haislmaier and Owcharenko note that subsidies don't have to stop there. "Other states might consider a broader reform strategy that uses the exchange to cover some Medicaid or SCHIP enrollees," they suggest.

Consider that Massachusetts now spends an average of $5,213 per year on each Medicaid enrollee-that's $442 per month. Currently this money is paid by the government to one of four HMOs. What if instead, Massachusetts Medicaid recipients got a voucher worth that much with which they could buy their own health insurance policies? And let's say that the state and federal governments insist that it all must be spent on health insurance and health care. In a thoroughly privatized health insurance market, voucher recipients would shop around, just like their wealthier fellow citizens will, for policies that fit their needs including less expensive high deductible policies. Assuming they choose a high deductible policy, voucher recipients could deposit left over funds in health savings accounts to cover any expenses incurred before meeting their deductibles.

The Massachusetts mandate has plenty of critics. Michael Tanner, director of health and welfare studies at the libertarian Cato Institute, argues that the mandate is unlikely to actually achieve universal coverage. He cites the fact that 47 states mandate car insurance, yet more than 14 percent of drivers are uninsured. Massachusetts intends to enforce the mandate by withholding state income tax refunds. Tanner is right that attempts to enforce a mandate through monitoring, withholding or fines will be problematic.

However, enforcement will be much less difficult if lower income Americans are subsidized by means of vouchers with which they purchase their own health insurance. Vouchers will tend to be self-enforcing since they cannot be spent on other products or services. Tanner also argues that determining the proper subsidies for individuals will be complex and thus engender new intrusive bureaucracies. However, this difficulty might be avoided in part by establishing an annual open enrollment period in which Americans seeking vouchers would qualify based on their current incomes.

Tanner is also rightly concerned about "mandate creep." As 1800 current state insurance mandates show, various disease and provider lobbies will continue to seek to get politicians to mandate coverage of their specialties and diseases. Tanner argues that as more "benefits" are added to the mandated insurance package, costs will rise. In turn, politicians will be pressured to increase subsidies to keep up with the rising costs. He believes that this public choice dynamic would lead inevitably to price controls. Tanner further suggests, "Since consumers would have little or no leverage over insurers (they can no longer refuse to buy their products), they can eventually be expected to turn to the only entity that can hold down their costs-the government." In fact, the left-leaning Foundation for Taxpayer and Consumer Rights is already calling for government cost controls on Massachusetts health care plans.

While consumers must buy some coverage, they can refuse to buy any particular insurers' product. Under a universal mandate in which all insurance is purchased privately by individuals using their own money or dedicated vouchers, competition among insurers will tend to keep costs down. Unfortunately, Massachusetts has not chosen to use vouchers yet.

The Massachusetts mandate is far from perfect but it has set up the pre-conditions-a state health insurance exchange and consumer subsidies–for enabling the expansion of private health insurance. Given the growing clamor for national health care, individual mandates may be the only politically viable way to preserve private health care.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

Disclosure: I am looking at individual mandates as a second-best alternative to what is likely to occur politically. The rationing and cost controls that come with nationalized health care would be the death of biomedical innovation. By the way, my friends over at Cato lump me in with the Republicans for Big Brother on this issue. Instead I would argue that I'm trying to figure out how to keep Big Brother from becoming Big Nurse. Oh yes, I don't own any stock in any health insurance companies.