What the Massachusetts experiment teaches us about incremental efforts to increase coverage by expanding private insurance.
The American Prospect
April 21, 2008
For all their promise of change, Democrats are remarkably timid about changing the health-care system. The system now costs twice as much per person as those of other advanced countries and delivers worse average outcomes. It prices tens of millions of people out of health coverage altogether and limits care for countless others. Yet leading Democrats are clinging to this system, proposing to cover more people but not changing the system itself except at the margins. The timidity extends to choice of words. No one is supposed to say “single-payer” or “national health insurance” anymore, because that is “politically unrealistic”; the most we are allowed is to talk of reforming the system incrementally so that someday it will morph into “Medicare for all.”
Thus, the proposals for reform taken most seriously by Democrats — including Barack Obama and Hillary Clinton — would retain the central role of the investor-owned private insurance industry as well as the thousands of for-profit businesses it pays to deliver medical services. This is the industry, mind you, that has brought us to the predicament we’re in now, so let’s take a quick look at it.
The U.S. health system is unique in treating health care as a commodity to be bought and sold in a marketplace. Care is distributed according to the ability to pay, not according to medical need. Private insurers compete by avoiding high-risk individuals, limiting services for those they do cover, and, whenever possible, shifting costs to other payers or to patients in the form of high deductibles and co-payments. We have the only health system in the world based on avoiding sick people. It’s a chaotic and fragmented system that requires mountains of paperwork, which is one reason premiums are so high. Employers who offer health benefits react by capping their contributions, so that workers pay more out of pocket and bear the full brunt of premium increases.
Insurers contract with hospitals, HMOs, and other health facilities to provide the care. They, too, are often for-profit businesses that promote lucrative services for well-insured patients (such as coronary catheterization for Medicare recipients), while giving short shrift to less profitable ones (such as psychiatric services for the indigent). To compete in a market environment, even not-for-profit facilities behave in much the same way as for-profit ones. Doctors often act as entrepreneurs, investing in health facilities to which they refer patients. And because they are usually paid on a fee-for-service basis, they have a strong incentive to overuse tests and procedures that have the greatest profit margins.
All of this drives up costs to the overall system, while yielding profits for the various players within it. In fact, there’s a fundamental illogic to trying to contain costs in a market-based system. Markets are about expanding, not contracting. Like all businesses, hospitals want more, not fewer customers — but only as long as they can pay. Conventional wisdom holds that we need to retain this system because many Americans are satisfied with it. But except for industry spokespeople and politicians whose campaigns they support, I’ve never met anyone who actually is. Many people like their doctors, but that is not the same as liking the system.
The reforms favored by leading Democrats vary somewhat, but all have at their heart expanding insurance coverage through public subsidies for those who can’t afford the premiums or, alternatively, permitting those without access to good, affordable insurance to enroll in a new Medicare-type program that would be set up to provide them with coverage. Some reform proposals include a mandate requiring everyone to be insured.
Many proponents hope that a parallel Medicare-like system would eventually crowd out its less efficient private competitors, that under a play-or-pay requirement, employers would gradually decide to stop providing coverage and just pay into the common pool. However, this wishful thinking overlooks the power of the private health industry, through its huge lobby, to influence the rules so that it continues to profit while the public system is undermined.
All of these variations in the Democrats’ plans run into this intractable dilemma: If the system stays essentially as it is and we try to expand coverage, costs will inevitably rise. On the other hand, attempts to control costs will inevitably reduce coverage. Without fundamental reform, coverage and costs have to move in the same direction. Yet, we don’t have the option of expanding both coverage and costs. At 16 percent of gross domestic product, our health-care system is already unaffordable. In fact, costs are the central problem; universal health care would be easy if money were no object. Furthermore, none of the proposed reforms offers any workable mechanism for controlling the unsustainable inflation in health costs. Attempts to regulate private insurers to prevent the worst abuses would probably do little more than add to the complexity and administrative costs of the system.
The proposed reforms also make the fundamental mistake of confusing /insurance/ with /health care/. As many Americans are learning, the two are not the same — not by a long shot. Health insurance can easily be too skimpy or too laden with exceptions and co-charges to be of much use. What people really want when they’re sick is medical care, not medical insurance, just as they want education for their children, not the opportunity to buy education insurance.
Despite the Democrats’ coalescence around the same approach for achieving universal care, only one such plan has been implemented — the Massachusetts health-reform plan. It is therefore worth looking at in some detail.
MASSACHUSETTS MIRACLE OR MIRAGE?
This plan, which was enacted in April 2006 amid extraordinary hoopla, set out to cover the 500,000 to 750,000 uninsured residents of the state, and to see that the coverage for everyone else met a minimum standard. To that end, the state would purchase insurance for everyone with incomes beneath the federal poverty level, and partially subsidize it for those earning up to three times the poverty level (which now comes to $31,200 per year for an individual). Everyone else — roughly 200,000 to 250,000 people — would have to purchase his or her own insurance or face stiff fines. The legislation established a new state agency, the Commonwealth Health Insurance Connector, which would try to make sure insurance was affordable and met the minimum standard and which would also determine the level of subsidies.
Financing the plan was iffy from the outset. When fully implemented, it was projected to cost the state only $125 million in new money the first year — not very much in a state with a $26 billion budget. Mostly it would be financed by diverting existing funds from two sources: Medicaid, under a two-year waiver that would permit federal money to be used for this purpose, and the state’s generous “free care pool,” which was established to provide direct services to uninsured patients in safety-net facilities and is supported by assessments on hospitals and insurers. There would also be a paltry fine on employers who didn’t offer insurance, but no one thought that would be an important source of funding. Success would depend crucially on the individual mandate requiring those with incomes more than three times the poverty level to pay for their own insurance.
What’s happened since then? While those beneath the poverty level signed up for free insurance in even greater numbers than anticipated, very few people who were required to pay for their own insurance signed up. Even those eligible for partial subsidies were slow to enroll. The deadline to purchase insurance had to be extended, and 60,000 uninsured people were exempted from the mandate because — yes, that’s right — they couldn’t afford it (so much for universality). The state modified its requirement that all insurance meet a minimum standard. Jon Kingsdale, the executive director of the Commonwealth Health Insurance Connector, told me that was because the federal Employee Retirement Income Security Act prohibits states from setting standards when employers act as their own insurers (didn’t the Massachusetts legislators know that when they crafted the law?), but he said that next year workers will be responsible for somehow upgrading their own policies, or (you guessed it) be fined.
Don’t get me wrong. Massachusetts is to be congratulated for seeking to extend health care to everyone in the state. Every decent society should ensure health care, just as it does education, clean water, and police and fire protection. Massachusetts’ plan is an ambitious and well-intentioned effort. But unfortunately, it’s extremely unlikely to work for three main reasons.
First, the individual mandate is harsh, regressive, and probably unenforceable. It requires the near-poor to pay a much higher percentage of their income on health care than their more affluent neighbors. Although insurers are prohibited from charging more for people with medical conditions, older people have to pay more. The premiums for a 57-year-old are twice as much as for a 27-year-old. According to the Connector’s Web site in March of this year, the least expensive plan for a 57-year-old had a premium of $4,700 per year, a $2,000 deductible, and substantial co-pays and co-insurance up to $4,000 per year. (That cap did not include prescription drugs.) So a hypothetical 57-year-old with a $32,000 annual income (just over three times the poverty level) could pay as much as $8,700 out of pocket — or over a quarter of his income. Family plans are, of course, different, but the effect is the same. Next year, those who haven’t purchased insurance will be fined half the premium of the lowest-priced plan. Truly this is the Squeeze Blood from a Turnip Plan.
It also lets employers off the hook. They’re supposed to pay a $295 per employee fine if they don’t provide health benefits, but they’re now considered to have met their obligation if they offer benefits to just 25 percent of their employees or contribute 33 percent of the premiums — no matter whether employees accept the offer and no matter how skimpy the coverage. And a $295 fine is no incentive to provide insurance that costs upward of $5,000. So the growing problem of underinsurance will be left to workers themselves to solve.
Second, like all such plans, the Massachusetts strategy pretends that having insurance is the same as having health care. The Connector makes much of the fact that some 300,000 people who were previously uninsured now have insurance, but most of those already had access to health care, either through the free-care pool or Medicaid. So it’s something of a shell game, with money that would have been spent directly on health care passed through insurance companies instead (which keep quite a lot of it).
The Connector offers a choice of insurance plans from four different companies for those eligible for state subsidies (called Commonwealth Care), and from six companies for those who have to purchase their own (Commonwealth Choice). There is a trade-off between premiums, on the one hand, and deductibles and other out-of-pocket costs, on the other. The plans with the lowest premiums have the highest deductibles and other costs. But those who select the cheapest plans are likely to be precisely those least able to afford high out-of-pocket costs. So they could end up with health insurance that they can’t afford to use but have to pay for anyway. The speaker of the Massachusetts House of Representatives, Salvatore DiMasi, one of the prime movers behind the plan, wasn’t worried. He told /The Boston Globe/ last year, “We’re moving to universal insurance and then toward insurance that has substantial benefits. That’s the key.” Can he really believe that after people have signed up for stripped-down coverage, and costs have continued to climb, there will be the money and political will to add to the benefit package?
Third and most important, there is no effective mechanism for containing costs. Insurance companies can set premiums as high as they like. If they’re much higher than the competition, of course, the Connector can choose not to offer those plans. But if all the companies raise their premiums at about the same rate, there’s not much the agency can do. And sure enough, premiums have continued to rise faster than the background inflation rate (10 percent for Commonwealth Care next year). The only way to hold them in check is to cut benefits or increase deductibles and co-payments. (The Connector actually favors increasing co-payments to prevent Commonwealth Care from becoming so attractive that employers will drop coverage and send workers to the state plan.) Insurance will quickly become too expensive, as well as increasingly inadequate. The state, which now faces a $1.2 billion budget shortfall and health costs of $147 million more than projected, will not be able to contribute much more from general revenues. Funding depends utterly on the Medicaid waiver being renewed in July, by no means a sure thing.
THE VERDICT: SINGLE-PAYER
Massachusetts is not the first state to come up with a plan to provide near-universal health insurance to its residents, although it is the first to rely on an individual mandate. Maine tried it in 2003, Minnesota and Tennessee in 1992, to name a few. And Massachusetts made an earlier attempt in 1988. All were greeted with great enthusiasm and fanfare in the media. And all failed and died with scarcely a whimper. More recently, California, inspired by Massachusetts, tried to pass similar legislation. Despite Gov. Schwarzenegger’s support, it died in the state Senate in January. It didn’t have resources anywhere near comparable to those in Massachusetts, mainly the Medicaid funds and free-care pool, and had to rely more on employer contributions. What all the state efforts have had in common is that they left our current dysfunctional system essentially intact and simply tried to expand it around the edges.
The only workable solution is a single-payer system (there, I said it), in which everyone is provided with whatever care he or she needs regardless of age and medical condition. There would no longer be a private insurance industry, which adds little of value yet skims a substantial fraction of the health-care dollar right off the top. Employers, too, would no longer be involved in health care. Care would be provided in nonprofit facilities. The most progressive way to fund such a system would be through an earmarked income tax, which would be more than offset by eliminating premiums and out-of-pocket expenses.
This is not the same as Medicare for all. Medicare is embedded in our market-based entrepreneurial private system, and therefore experiences many of the same inflationary forces, including having to deal with profit-maximizing hospitals and physicians’ groups. Doctors’ fees are skewed to reward highly paid specialists for doing as many expensive tests and procedures as possible. As a result, Medicare inflation is almost as high as inflation in the private sector and similarly unsustainable.
In addition, Medicare is not what it once was. For the past eight years, it has been at the mercy of an administration intent on dismantling and privatizing it. The prescription-drug benefit enacted in 2003 is an example. It’s a bonanza for the pharmaceutical industry because it forbids Medicare from using its purchasing power to get good prices. Medicare recipients have also been encouraged to enroll in private health plans, which are paid on average 12 percent more than it would cost traditional Medicare to care for the same people. Even as public funds are siphoned off to the private sector, premiums and co-payments have been increased, and there are now proposals for means testing — a superficially attractive idea but ultimately a grave threat to any public program.
Over the years there have been many independent analyses of the costs of converting to a single-payer system, either within a state or nationally. They include studies by the General Accounting Office, the Congressional Budget Office, and consulting firms, such as the Lewin group, hired by state governments and, in Massachusetts, the state medical society. Most found that a single-payer system would initially cost roughly the same as the system it replaced, while providing universal coverage, and over time would be much cheaper.
Polls have shown that most people, and most Massachusetts doctors, favor a single-payer system. The Boston Globe called for a national single-payer system last May. In an editorial about the big three automakers’ desire to transfer health costs to the autoworkers’ union, the Globe said, “It would make more sense for the federal government to oversee a national health system financed from taxes. The cost could be spread across the entire population, rather than borne by Chrysler or other companies that no longer enjoy the assured profitability of their best years.”
Nevertheless, the private insurance industry has managed to convince many political leaders, including progressives, that a single-payer system is unrealistic. But what is truly unrealistic is anything else. My greatest concern about the Massachusetts plan is that when it unravels, people will draw the wrong lesson. They will assume that universal care at a cost we can afford is impossible, and give up on it. It’s not impossible; it’s just unlikely to be achievable while leaving our dysfunctional system in place. Can we make it right? I’m tempted to say, “Yes, we can.”
Marcia Angell, M.D. is a senior lecturer on social medicine at the Harvard Medical School and former editor-in-chief of The New England Journal of Medicine.