The elected leaders of Massachusetts have come up with a novel solution for the vexing problem of paying for health care: abolish the laws of arithmetic. Their new plan is a perfect illustration of what happens when politicians approach a problem unconstrained by reality.
The plan includes tax incentives and penalties for employers and individuals to get everyone covered by a health-care policy. It also promises affordable health insurance for people with modest incomes, under a program yet to be negotiated between the state and private insurance companies. Nevertheless, three numbers stand out: $295, the annual penalty per worker a company must pay to the state if it does not provide health insurance; $0, the deductible on the typical state-subsidized health-insurance policy under the plan; and $6,000, the average annual expenditure on health care for a Massachusetts resident. Each of these numbers represents one of the irreconcilable goals of health-care policy:
• $295 represents the goal of affordability. We would like to be able to purchase health-care coverage for $295 a year. If that's what it actually cost, my guess is that the problem of the uninsured would pretty much disappear.
• $0 represents the goal of insulation. As individuals, we would like to be insulated from health-care costs. That is why, instead of real insurance -- which would have us pay for at least the first $10,000 of health care out of pocket -- most of us have health-care policies with much lower deductibles.
• $6,000 represents the goal of accessibility. We want access to the best care that modern medicine can provide, whatever the expense.
The question is this: What insurance company will provide coverage with $0 deductible, at an annual premium of $295, for someone whose health care costs on average $6,000 a year? The numbers imply losses of over $5,700, not counting administrative costs. To subsidize zero-deductible health insurance, state taxpayers might have to pay out about $6,000 per recipient.
There is no reason to expect firms to rush to offer a policy to uninsured employees. It makes more sense for them to pay their $295 penalty and hand the health-insurance problem back to the individual -- and ultimately to the taxpayers of Massachusetts. Economically, consumers who face deductibles of $0 have no incentive to restrain health-care spending. They are only constrained by the time and discomfort involved in obtaining medical care.
If more Massachusetts consumers enjoy coverage without any deductible, then the average per-person expenditure on health care of $6,000 seems likely to go up. Health insurance companies will not write policies that lose them money. Policies with deductibles of $0 in a state where spending per person on health care is on average $6,000 a year will have very high annual premiums -- presumably over $6,000 a year.
The Massachusetts health plan promises to provide health-insurance companies with subsidies in order to induce them to offer these low-deductible insurance plans. The arithmetic suggests that these subsidies will have to be large -- thousands of dollars larger than the $295 per worker that the state plans to collect from employers that do not provide health insurance.
The problem of paying for health-care coverage, which politicians are declaring they have "solved," is really just beginning. The only way to make zero-deductible health insurance available at low cost is with a large subsidy; how much will depend on negotiations with insurance companies. Only when the size of the necessary tax increase becomes clear will Massachusetts's leaders learn the laws of arithmetic.
[Mr. Kling, an adjunct scholar with the Cato Institute, is the author of "Crisis of Abundance: Rethinking How We Pay for Health Care," forthcoming from Cato.] <<
Gov. Mitt Romney signed Massachusetts' first-in-the-nation bill designed to force all residents to get health insurance, but uncertain support from insurers raised questions about whether everyone would be covered at affordable rates.
The governor used his line-item veto to cancel a provision that would have required employers with 10 or more employees who don't provide insurance to start offering it or pay fees of $295 per employee. Mr. Romney has said that provision is unnecessary to fund the bill.
Democrats who control the state legislature said they expect to override the veto and restore the provision. They said it was a key part of the legislative compromise that led to the bill's overwhelming passage last week.
The Massachusetts bill is being watched widely as a possible pattern for other states and as a prime element in Mr. Romney's expected bid for the Republican presidential nomination in 2008. It reallocates existing federal and state funds and requires uninsured residents to buy health insurance, which the state would subsidize for poor people.
The state's Division of Insurance will now begin crafting regulations for health-insurance plans, and a new state entity called the Commonwealth Health Insurance Connector will begin reviewing and approving policies submitted by health insurers.
While doctors, health-care advocates and hospitals have generally been supportive of the Massachusetts plan, most health insurers have been cautious. Yesterday, the state's largest insurers, Blue Cross Blue Shield of Massachusetts and Harvard Pilgrim Health Care, declined to comment about their plans because they want to see the regulations.
Marylou Buyse, president of Massachusetts Association of Health Plans, a health insurers' trade group, said “it's going to be challenging to develop” affordable policies since the legislature said the new plans couldn't deny any benefits the state has mandated for other health-insurance programs. “The bill didn't give the insurers a lot of flexibility to come out with different products,” Ms. Buyse said.
However, Aetna Inc., a large insurer based in Hartford, Conn., hailed the plan as "a common-sense approach to addressing the single-greatest strain on the health-care system -- the uninsured." The company praised Massachusetts' effort to require health insurance for people 19 to 26 years old, whom Aetna refers to as "the invincibles" because so many skip insurance in the belief they won't need health care. Massachusetts made a special provision for $150-a-month health insurance for that group that is expected to offer limited benefits.
Stephen Weiner, a lawyer in the Boston firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo who represents hospitals, said that insurers "aren't sure yet" whether they can produce affordable policies -- and may end up trying to cut medical costs. "I see problems for hospitals, because insurers will want to negotiate lower rates overall," he said. <<
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