Massachusetts Will Try Anything ... Except Markets

Massachusetts Will Try Anything ... Except Markets
August 1, 2004

A proposed amendment to the Massachusetts state constitution, which would mandate that lawmakers provide medical insurance to all residents of the state, is the final stage in what critics have long warned would be a downward spiral for private health care insurance caused by state over-regulation.

The amendment proposal, reported by the Associated Press on April 6, would require the state legislature to "enact and implement such laws as will ensure that no Massachusetts resident lacks comprehensive, affordable, and equitably financed health insurance coverage for all medically necessary preventive, acute, and chronic health care and mental health care services, prescription drugs, and devices."



Dukakis's Play or Pay Plan

The proposed constitutional amendment is an attempt to address the unintended consequences of two decades of manipulation and over-regulation by state government of Massachusetts' insurance markets. The interference has left insurance rates high and consumers with only limited choices.

In the late 1980s, Massachusetts aimed to become the first state to create a single-payer health care system. The Universal Entitlement Act of 1988 was passed during an especially partisan time when the state's three-term governor, Michael Dukakis, was running for president.

Not unlike the Clinton administration's proposal to change the nation's health care system, the Dukakis plan tried to achieve universal coverage through an unfunded mandate on employers now called "play or pay." It required all businesses with 25 employees or more to provide health insurance as a benefit, or pay $1,680 per employee to a state pool from which otherwise-uncovered workers could receive insurance.

The state's ambitious universal health care plan, however, was never put into place. Just as the Dukakis presidential bid was falling short, the state's economy was tanking. With state revenues plummeting and private employers battered by the economic downturn, there was neither the political will nor the financial wherewithal to put a health care-for-all plan into place. After repeated delays, the Universal Entitlement Act was officially repealed by the legislature in 1995.



Over-Regulation in the 1990s and 2000

In 1996, the Massachusetts legislature passed the Non-Group Health Insurance Reform Act (Massachusetts calls individual insurance "non-group"), which severely harmed the underwriting, pricing, and marketing of individual and small group health insurance plans. Among the law's provisions were:

  • Insurers serving the Massachusetts small group market and insuring at least 5,000 persons (employees and dependents) were required to guarantee-issue at least one product in the non-group market.
  • The state division of insurance defined a standard individual insurance policy, specifying deductibles, premiums, and coverage mandates for one HMO, one PPO, and one indemnity-style plan. Insurers serving the individual insurance market were permitted to offer only the standardized plan in each category.
  • Approved plans were required to offer annual open enrollment periods.
  • Persons who were eligible for group coverage would not be eligible for non-group (individual) coverage.
  • Rates could be modified from the state-established community rate only for age and geography. The maximum deviation for age is two to one. Rates for plans with enhanced benefits could be adjusted for the value of the difference in benefits but not for expected health risks.
  • Insurance premiums would have to be approved by the insurance commissioner. Cumbersome and elaborate legislative language controls premiums so that no insurers' rates exceed the average rate of all insurers by more than two standard deviations.



Massachusetts academics Katherine Swartz, professor of health policy and management at the Harvard School of Public Health, and Deborah Garnick, professor at the Heller School for Social Policy and Management at Brandeis University, were both strong supporters of these measures and had championed their adoption in New Jersey. New Jersey officials testified in support of CR and GI before the Massachusetts legislature. (The disaster that befell New Jersey was fully examined in the February 2004 issue of Health Care News.)

Legislation passed in 2000 modified those rules in several ways. On the positive side, it allowed insurers to offer a second plan for individual insurance for HMO, PPO, and indemnity-style coverage, subject to approval by the Division of Insurance. The rule that persons eligible for group coverage could not be eligible for individual coverage was repealed, and individual insurers were made to serve consumers eligible under HIPAA. A reinsurance pool (not a high-risk insurance pool) was established.

On the negative side, at least for insurance companies trying to offer individual health insurance in the state, the 2000 legislation changed the open enrollment mandate from once a year to continuous, with pre-existing conditions excludable by insurers for only six months. If the insured had prior coverage within 63 days of his or her new coverage, there is full portability--no pre-existing conditions may be excluded.



Individual Market Meltdown

Guaranteed issue of individual health insurance policies allows consumers to game the system by buying health insurance after the onset of an illness and then dropping coverage when positive health returns. Community rating of premiums forces insurers to raise premiums for younger and healthier people in order to subsidize premiums for older and less healthy people. Often, this causes lower-income people who could have afforded to buy insurance to drop their coverage.

The new insurance regulations in Massachusetts had predictable results. Two years after the 1996 legislation was adopted, approximately 20 health insurers stopped marketing plans in Massachusetts, according to industry observer Daniel Heystek, owner of Gramercy Insurance Brokerage in Arlington.

The new laws destroyed the individual insurance market. Among companies that left were such highly respected firms as Golden Rule Insurance Company, Travelers Insurance Companies, Mutual of Omaha, and Time Insurance Company. A few others did not leave but stopped underwriting individual policies.

On October 20, 2003, the Boston Business Journal noted not all of the departures were due solely to the new law: "Two big changes came after the Boston-based John Hancock Mutual Life Insurance Company sold its health plan to a California company, while Prudential Insurance Company auctioned off its insurance plan. But the new state law undoubtedly played a major role in forcing other players out of the market, industry observers say."

The stated aim of the Non-Group Health Insurance Reform Act was to make sure no one in Massachusetts would go uninsured. That goal was not realized. According to a report published in the March 26, 2004 issue of the Boston Business Journal, Blue Cross Blue Shield statistics, based on state reports, reveal that the number of uninsured persons in the state has increased from 365,000 in 2000 to more than 500,000 today.



High Insurance Premiums

The 2000 Medical Expenditure Survey, conducted by the Agency for Healthcare Research and Quality, finds Massachusetts to have the highest average annual premiums in the nation at $8,468.86, with New Jersey coming in second at $8,274.53, for family coverage through small group policies.

Individual insurance rates in the state are also high, and the share of persons insured in the state's individual insurance market fell from more than 12 percent in 1992 to just 7 percent in 2002.

Monthly premiums in the state's nongroup market range from $346.74 for a 25-year-old individual, offered by Fallon Community Health Plan Inc., to as high as $3,606.06 for the two-adult plan offered in Boston by The MEGA Life Insurance Company. (See accompanying table.) Those rates are substantially higher than the national average annual premiums reported in the Jan./Feb. 2004 issue of Healthplan magazine: $2,070 for single coverage and $4,009 for family coverage. (See "Honest Look at the Individual Market," in Greg Scandlen's "Consumer Choice Matters" column on page 12 of this issue.)

In an April 6 newswire report by the Associated Press, insurance broker Heystek said he could have lined up coverage for a single 25-year-old at rates starting at $25 a month prior to CR and GI. "Premiums under many individual plans have since skyrocketed," said Heystek, "rising to more than $600 a month or more. It differs from company to company. For an individual to spend less than $180 a month is now the exception. It [CR and GI] has limited the choice."

The high cost of health insurance is the reason most often given by those who have not purchased insurance. Yet Massachusetts policymakers, claiming to be concerned about the state's uninsured rate, nevertheless continue to pass laws that increase the price of insurance.



Health Insurance for All?

With so much evidence available showing the failure of past attempts to regulate the state's private insurance market, what should Massachusetts' elected officials do? According to a coalition of liberal advocacy groups called the Health Care for Massachusetts Campaign, the solution is ... even more regulation! The group is the force behind the Health Care Insurance for Massachusetts Constitutional Initiative.

That proposal will be presented to the state's voters only if approved by the current legislature and again by the new, two-year legislature that will take office in January 2005. The soonest the question could appear on the ballot, then, is November 2006.

The amendment's supporters say it will force lawmakers to come to grips with the state's health care crisis. Dr. Peter Slavin, president of Massachusetts General Hospital, told the Associated Press, "Some say we cannot afford the cost of covering the uninsured, but we are already paying for the much higher costs of failing to provide health care to those who need it."

Critics say the amendment would just extend to ridiculous and expensive extremes the failed policies of the past. Eileen McAnneny, vice president of government affairs for Associated Industries of Massachusetts, says the amendment could cost the state's taxpayers as much as $3 billion. Bill Vernon of the Massachusetts National Federation of Independent Business said "this amendment is not necessary. It is a statement of a goal that we all share ... but it doesn't get us any closer to that goal."

State Rep. William Galvin (D-Canton) warns, "if this becomes part of our constitution, the Legislature will be forced to come up with some solution and when they do, it's going to be taken to the SJC [Supreme Judicial Court] and the SJC is going to mandate it." Punting to the judiciary the difficult decisions about how to define, finance, and deliver a major new public entitlement is hardly good public policy.



Better Alternatives

Other states have been more successful than Massachusetts in keeping health insurance premiums affordable, the uninsured rate low, and the quality of health care services high. Policies they have used include:

  • Establish a high-risk health insurance pool for the medically uninsurable by using the $1 million seed money fund established by the Bush administration under the 2003 Trade Adjustment Act.
  • Repeal guaranteed issue and community rating rules, which would encourage insurers to re-enter the state by discouraging behavior that leads to higher rates for everyone, but especially for younger and healthy consumers. The high-risk pool then acts as a safety net for those who cannot qualify for or afford insurance.
  • Repeal the cumbersome rate approval process that discourages price competition and offering consumers more choices.
  • Allow health insurance companies to offer "mandate-free" insurance polices to individuals and to small group plan sponsors.
  • Encourage the use of Health Savings Accounts by giving public employees the option to choose them and providing state income tax deductions for deposits made to the accounts.



Conclusion

By now, Massachusetts policymakers should know better than to propose more state regulation as the solution to the state's health insurance woes. Rules and regulations already on the books have driven up prices and reduced consumer choices. More of the same kind of regulation will only produce more of the same results.

Much more promising than the constitutional initiative is a reform agenda that allows Massachusetts to take advantage of the trend toward consumer-driven health care. Competition among insurers and providers can lower prices and rationalize services; giving consumers choices can help them find the combination of price, service, and financial risk that is best for them.

Massachusetts needs to overcome its fear of markets if it ever hopes to achieve the goal of access to quality health care for all.



Next month: New Hampshire


Conrad F. Meier is managing editor of Health Care News. His email address is meier@heartland.org.