The Massachusetts Healthcare Mirage

April 13, 2006

All the signs suggest that the new Massachusetts healthcare bill is far less than meets the eye. Democrats, liberals, and business interests have been too quick to praise an act that appears to punish the “little guy’ while leaving the big guys untouched. Mandating health care coverage doesn’t solve the problem of the uninsured any more than mandating home ownership ends vagrancy, and this bill’s likely to do far more for politicians than it will for the state’s uninsured.

The bill’s architects (if a ramshackle creation like this one deserves the “architecture” label) have failed to consider the fact that healthcare, at more than 15% of the GDP, is an economy in and of itself – and an economy is first and foremost a system. It has interlocking parts, and when one moves the others are all affected.

The bill does accomplish two things right away. First, it allows the state to retain $385 million in Medicaid funding that it was about to lose in July under a federal deadline. It looks like it only provides $125 million in new funds (the other $1 billion is being moved around from other areas), so in effect the rest of us are subsidizing more than half of the cost – something that can’t be repeated on a nationwide basis without significant impact on the federal budget. (And I’d love to have the time and resources to do a detailed study on where that $1 billion is coming from, and what will be lost as a result.)

Second, and perhaps more importantly to its drafters, it permits a hearty round of self-congratulation for everyone concerned: Gov. Romney, legislators, and those who participated in its drafting.

In fairness, there is some genuine imagination visible in the bill’s mechanistic aspects, especially the ‘Connector’ design. And the restoration of cuts in the MassHealth program are particularly welcome – but again, at what cost?

As others have pointed out, the state’s 6.4 million residents are more likely to be insured than in some other states, since only 11% lack coverage. The scale of the “uninsured” problem is, therefore, smaller and more manageable than elsewhere. Even so, real trouble is coming down the road.

(Caveat: These comments are preliminary. I would ideally like to spend a lot more time with the bill, Massachusetts economic and epidemiological data, and any upcoming regulations. I’ll continue to research it as other work obligations permit. In the meantime, any additional info is welcome. )

Signs of Trouble

Several factors combine to suggest a downhill slide for this bill once it’s enacted into law. These include “adverse selection,” the poorly-structured incentives for smaller businesses, and the coming political pressure to relieve sanctions against employers.

Insurance distributes risk among a wide pool of participants. In order to work, there must be enough people paying in (with premiums) to support the costs for those who cost the plan money. In health care, that means you need lots more healthy people than sick ones, or the plan collapses.

“Adverse selection” happens when the cost of premiums are so high, relative to the incomes of those who are offered the insurance, that people are only willing to pay for it when they expect to get more out of it than they put in. And who does that in health insurance? Sick people.

The plan seems like a sitting duck for adverse selection. Here’s why:

1. The fine for not participating in year 1 is $150. Premiums will be in the thousands, even with subsidies – and that’s for the healthiest pool of candidates, young adults. (Others are guessing $2,400, but I’d be willing to go as high as $3,000.) So participation in Year One will be limited to people who have every reason to believe they’ll get $2,000 or $3,000 worth of care out of the system. They’re likely to be pretty sick folks.
2. Insurers, having taken a beating in Year One, will need to make up the difference in Year Two. That’s when an estimated $3,000 for a young adult becomes reasonable or even low (unless the bill and subsequent regulations control for this in some way). The tax penalty in Year 2 becomes ½ of the premium cost, or $1,500. That’s still a lot of money for a low-income worker, so the program – already running in the red – will continue to be adversely selected against.
3. Premiums will continue to rise dramatically in coming years, unless the state intervenes. The result? Premiums that uninsured workers can’t afford to pay, which means that they’ll be hit with ever-increasing tax penalties. The program will end up punishing the very people it’s supposed to help.

What happens for small businesses? They either pony up for health insurance, which will have a dramatic impact on their bottom line, or they pay a per-employee annual fee of $295. That’s an easy one, at first: $295 is a lot less than the thousands it costs to insure employees, so they’ll go that route. The result? Once again, low income employees will be faced with either paying thousands in premiums or being penalized by the state law that was supposedly created to help them.

(The $295 is called the employer’s “Fair Share Contribution.” Does anyone else see the irony of calling $295 the employer’s “fair share,” while low income workers are being forced to pay thousands in tax penalties?)

The kicker for small businesses comes in the “free rider” provision to the bill, which holds those businesses responsible when their employees use the emergency health care system. They’re exempted from the first $50,000 of costs, but these cases can easily run into the hundreds of thousands or even millions.

The plan’s designers may have thought that the “free rider” penalty would scare businesses into purchasing health insurance. Most entrepreneurs know, however, that small businesses often struggle to meet their payroll. Many business people will choose to “bet” that their employees won’t need emergency care – or maybe it’s fairer to say they’ll have no choice in the matter.

What’s going to happen when small businesses start going into bankruptcy because of the huge medical bills they’re hit with under this provision? Either the Massachusetts economy will suffer, or this part of the bill will be rolled back. if it’s the latter, that will either leave the uninsured with mountains of debt when they need emergency care, or throw the problem back onto the hospitals and the state.

Cui Bono?

As the lawyers say, cui bono – who benefits? If lower-income workers and small businesses lose under this bill, then who wins?

At first glance, the health insurance industry seems to be a winner, but that may not prove to be the case if insurers are left with money-losing plans and political pressure not to raise rates. They seem to be happy now, but they may feel differently in 18 months. Their actuaries and underwriters should be working overtime on this one, because the conventional wisdom may come back to bite them.

Big businesses are much more likely to already insure their workers than smaller ones, so they’ve gotten much more of a free pass from this bill than smaller ones have. Bigger businesses often get much better consideration from policy makers of both parties than small businesses do, which I would contend is bad for the future growth of the economy. This bill is no exception.

But the real beneficiaries are the politicians. In a world where economic complexities don’t get media play, this bill makes everyone involved – the Governor and the Legislature included – look good. And if and when it all hits the fan, there probably won’t be a lot of blowback for the politicians who made the law.

In the meantime, life may have just gotten a little rougher for uninsured lower-income workers. For them, this bill may be a Pyrrhic victory at best.


One Response to “The Massachusetts Healthcare Mirage”

  1. […] of Massachusetts’ mandate-driven health reform initiative. We disagreed then, and said that the “Massachusetts miracle” would have serious problems. It now appears that – sadly – we were right (see here and here and […]

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