Mandatory health insurance: lessons from Massachusetts.

• Author: Richardson, Craig J.
• Position: Report

What lessons can be learned from the implementation of mandatory health insurance? As the Obama administration contemplates enacting far-reaching health care reforms that increase the role of government, the case of Massachusetts is worth serious study. Massachusetts' three-year experiment with mandatory health insurance (known as Chapter 58 legislation) has been judged by some health economists to be a qualified success, since it reached a primary goal of lowering the number of uninsured in the state (Gruber 2009, Long and Masi 2008). On the other hand, Tanner (2008: 5) argues that previously uninsured citizens signed up for health insurance because it was free or heavily subsidized, not because of the mandate itself. Official state statistics claim the number of uninsured in the state dropped from 11 percent in 2005 to less than 3 percent in 2009 (Massachusetts Health Connector 2009). Tanner (2009) disputes this number and suggests the number is closer to 5 percent, using Urban Institute and Census surveys as evidence. What supporters and foes of mandatory health insurance both seem to agree on is that the number of uninsured has fallen in the state since Chapter 58, and yet there remain between 150,000 and 200,000 uninsured citizens.

Unlike a market-based solution, which would shrink the role of government while enhancing individual choices, Massachusetts mandates that individuals purchase health insurance, and it uses the "carrot and stick" approach. First, the state legislature created the Commonwealth Care Program in 2006, which allows lower-income residents to obtain health insurance subsidies, and second, it fines individuals (up to $912 per year in 2009) and qualifying firms ($295 per employee) if the individual is not insured.

There are reasons to be concerned about the rapidly growing expense of this program, which even advocates such as Gruber (2009) admit were put aside in the quest for universal coverage. The costs of Commonwealth Care have increased from $133 million in 2007 to an estimated $800 million by the end of 2009, as seen in Table 1, row (a), which is adapted from Raymond (2009). As is also seen in Table 1, row (b), this increase has been only partially offset by the corresponding $250 million drop in state expenditures for the uncompensated care pool, which Massachusetts pays to hospitals if individuals do not have health insurance. Note that since expenditures on uncompensated care dropped by only 34 percent, a substantial number of citizens are still uninsured, and perhaps are continuing to seek treatment through the emergency room rather than a primary care physician. Meanwhile, rows (d) and (e) represent changes in costs for state-provided medical insurance for the poor, or MassHealth, as it expanded coverage to previously uninsured individuals and simultaneously phased out supplemental Medicaid payments. Lastly, row (g) shows the increased payments to hospitals for low-income individuals who previously did not qualify for these government health programs.

The rapid growth in expenditures is not altogether surprising as Massachusetts only pays 50 cents for every $1 it spends on expanding its health care initiative. The federal government pays the other half in matching funds. From 2006 to 2009, Massachusetts' health care initiative, which includes supplemental payments to Medicaid and hospitals for unfunded care, increased from $1.04 billion to $1.86 billion, an increase of 78 percent, as seen in Table 1. Even if the federal government continues to pay half of the increase in these expenses, the growth rate in the state's spending on its health care initiative still averaged almost 26 percent from 2006 to 2009. The state now spends 33 percent more per person on health care than the national average, while in 1980 it was 23 percent more (Sack 2009). In total, annual expenditures on the state's health care initiative are projected to be $409 million higher in 2010 than in 2006 (after receiving an additional $409 million in federal reimbursements), which is an average increase of $102 million per year, as seen in Table 1. However, federal reimbursements are not guaranteed, and must be negotiated by the state (Dembner 2008). This puts Massachusetts in a particularly vulnerable position if there are future federal budget cuts, since their health care expenses could potentially rise even more quickly.

A $409 million increase in state expenditures ordinarily might not cause much .alarm during the budgetary process, since this was just a 2 percent increase in its $20 billion state budget, and a recent report by the nonpartisan Massachusetts Taxpayers Foundation (MTF) even states that the cost increase has been "marginal" (Raymond 2009: 7). The same report shows little concern about the underlying rapid rate of growth, since newly revised projections for 2010 show that enrollment and expenditures will plateau. However, these projections need to be taken with great caution, as past projections have been wide of the mark, as noted by MTF's most recent report (Raymond 2009). In any case, in the current fiscal crisis that Massachusetts and the nation faces, these higher health care costs take on greater significance. In 2009 the state collected $2 billion less tax revenue than in 2008, a drop of 10 percent. With only $500 to $800 million left in its "rainy day fund," the state is rapidly burning through its reserves (Massachusetts Taxpayers Foundation 2009). Thus, greater access to health care, a primary goal of the program, has been achieved, but the large increase in costs has put increased pressure on an already strapped state government.

As this article will explore, there is another, more hidden aspect of the Commonwealth Care program that may drive future costs far higher than originally projected. Embedded within the heavily subsidized program are several perverse incentives affecting firms and individuals. First, the program unintentionally gives incentives for smaller firms to discontinue health insurance so that their employees can sign up for cheaper state-subsidized care. Second, it gives incentives for employed individuals to earn less in order to qualify for higher benefits. Because subsidies immediately fall off as one crosses defined income brackets, instead of being slowly withdrawn, there are sudden and large implicit marginal tax rates that can exceed 100 percent in some cases. Enrollment in Commonwealth Care is expected to have "moderate" growth in 2010 according to state government projections, primarily due to the economic downturn (Governor's Budget 2009). Yet these incentives could cause enrollment to accelerate if more individuals and firms see and take advantage of the opportunities for government subsidies.

The outline of the rest of this article is as follows. First, it seeks to explain the mechanics of mandatory health insurance as it was enacted in Massachusetts, and the special difficulties of making health insurance a mandated purchase. Second, it explores in further detail the perverse incentives detailed above, with particular detail paid to the problems caused by the staggered health insurance subsidies for consumers. Finally, this article...