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Health Care Reform:

Covering the Commonwealths Uninsured Residents

A Model for the Purpose of Discussion Executive Office of Health and Human Services Ronald Preston, Secretary May 3, 2004

The numbers herein are necessarily estimates. Real numbers can come only once were closer to setting up the program. However, in developing these estimates, we were conservative. Both the money the initiative will take and the fees needed to generate this money are deliberately high. Timing: If we can work with interested parties over the summer, and the General Court starts its deliberations in the fall and legislates a program in the spring, we can have the program up by the summer of 2006.

INTRODUCTION
Everyone Should Have Health Insurance Providing access to health insurance for everyone is an important goal. It is important for the well being of persons who do not now have health insurance. It is important to the competitiveness of our businesses, to health care cost containment, and to the efficiency and effectiveness of our health care system. It is important to the comity of the Commonwealth. Being without health insurance is a hardship for all but the very wealthy. For any complex need, health care is expensive. If one cannot pay out of pocket, many health providers and services are beyond reach. One is mostly limited to hospitals, which are often inconvenient and not the best place for primary care or even some specialty care. If one is lucky, a community health center is nearby. But these are often very busy places. Studies show that uninsured people use fewer health services, and more often wait to seek care until small, less expensive ailments become life-threatening, more expensive ones. For most people, when calamity comes, being without health insurance raises the specter of financial ruin and endless problems getting the right care. Being without health insurance causes great anxiety. The problems of the uninsured do not belong just to them. Everyone else is also impacted. First, there are health concerns. If ones tuberculosis goes untreated, that endangers everyone. If one becomes disabled through want of care, one needs the help of others. Then, there are money concerns. Everyone else pays for the care the uninsured do receive. These costs are shifted onto providers and ultimately onto payers. Employers pay more to cover their employees. Insured individuals pay more for their coverage. In the Commonwealth, insurers, hospitals and the state pay more for the Uncompensated Care Pool. This cost shifting is fundamentally unfair. Employers who cover their workers must also cover the free care provided to the workers of employers who do not offer coverage. Individuals must not only pay for their own coverage, they must also pay higher premiums to subsidize the care of the uninsured. Cost shifting obscures the true costs of care. This matters because clarity is essential to rationalizing the market for health care. Health care is stupendously expensive, and relentlessly becoming more so. Medical advances that everyone wants drive most of the increase in costs. But much of it is also driven by medical errors, redundant or unnecessary tests and treatments, and administrative disarray. More efficiency is needed. A central means to this efficiency is effective bargaining between the buyers and the providers of care. Payers cannot negotiate transparently with providers when costs for the uninsured are buried in the numbers. Getting

Introduction 1

the uninsured insured is necessary for getting everyone at the table and all the facts on the table. Thus, a first step in addressing health costs is to have everyone insured. Covering Everyone Is Feasible The Executive Office of Health and Human Services has considered the feasibility of providing access to basic, affordable health insurance to all Massachusetts residents. Our investigation included literature reviews, discussions with other states, survey research, and economic analysis. We reviewed state and federal expansions that have been proposed over the years. We looked at the Commonwealths current health insurance market. We profiled Massachusetts uninsured population and the states employer market, using household surveys conducted in 1998, 2000 and 2002, and employer surveys conducted in 2001 and 2003.1 We have concluded that getting our uninsured covered is a doable task. Through MassHealth expansions, reforms to the small-group and non-group markets, and a strong employer base, Massachusetts has one of the lowest rates of uninsurance in the country. In 2002, approximately 418,000 people in Massachusetts were without health insurance.2 This is less than half the size of our Medicaid enrollment and only 6.7% of the Commonwealths residents. These particular 418,000 residents are also less expensive to insure than other groups. The uninsured tend to be mostly single, working young adults who usually need less intensive services. Uninsured families tend to be small, and small families cost less to insure than large families. Still, insuring everyone will be hard. The federal government has never managed it. Neither has any state. A state must contend with federal tax and labor laws, commerce regulation, Medicare and Medicaid. Each of these restricts what a state can do. A state must also be concerned with other states, and be careful not to competitively disadvantage its businesses and their employees. Getting everyone covered is more daunting than complex. What must be done is straightforward, but it challenges all parties. For everyone to benefit, everyone must contribute and compromise. Providers, employers and individuals have their parts. Both liberals and conservatives must bend.

Much of this work was supported by a federal state-planning grant from the Health Resources and Services Administration (HRSA). Massachusetts was one of the first eleven states to receive federal funding to research and propose models for increasing access to health insurance. We are one of several states this year that received a follow-up grant to continue this effort. The Division of Health Finance and Policy is currently completing a household survey to determine the current rate of uninsurance in the Commonwealth. We should have preliminary figures by June and complete findings by fall.

Introduction 2

Guiding Principles We spoke to health policy experts. They agreed that federal law and competition from other states make it hard for any one state to pursue coverage for all its residents. But they all had ideas, and from these we drew some basic principles that we built into our proposal. The proposal must be simple and clear (1) so that it can be readily described and (2) so that the legislative process can flesh it out. In part, earlier efforts to insure everyone failed because they were too confusing. We should lay out the basic idea, but then seek broad participation in the ultimate design both to ensure that it is thought through and to engender the buy-in needed for passage. The coverage offered must be much less expensive than that which is now available in the small-group and non-group markets. For this coverage to be less expensive: 1. 2. 3. 4. 5. Benefits must be less broad than state insurance law requires; All the uninsured must be in the risk pool; The care must be managed; Growth in provider rates must be contained; and Enrollee cost sharing must be significant.

The program must build on employer-sponsored insurance by providing coverage mostly to employees who do not have access to this insurance. The program must not substantially damage the market for more comprehensive coverage. No state has the means to replace the widespread availability of broad coverage that employer-sponsored insurance has traditionally provided. Therefore: 1. Benefits must be good enough to be worth the money, but not so good as to induce employers or employees to drop commercial insurance coverage; and 2. To discourage employers from dropping coverage, they must pay a fee for employees they do not cover.

Provider rates must be adequate. The program must strive to improve employers competitive position vis--vis employers in other states. At a minimum, the program must not disadvantage our business community. The program must be fair. Everyone must share in its benefits and burdens. 1. Employers who currently pay nothing toward their employees insurance must contribute something.
Introduction 3

2. Both employers who now sponsor insurance and all people who carry insurance must be freed of cost shifting for the uninsured. 3. Providers have their services covered for more patients, but providers rate increases must be limited. 4. The uninsured get insurance for the services most are likely to need, and that also provides protection against catastrophic health costs, but in that they are able, these people must share in the costs and accept management of their care. We incorporated these principles into various permutations. Mercer and Lewin provided actuarial support, and Dr. Jonathan Gruber did the econometric modeling.3 Dr. Gruber was involved early on in this process and assisted our workgroup in designing the insurance package. We asked him to determine cost-effective methods of increasing access to affordable health insurance in Massachusetts. Many models were run varying cost sharing, MassHealth coverage, subsidies, and benefit package components, including the cost effectiveness of expanding programs such as the Insurance Partnership (IP) and the State Childrens Health Insurance Program (SCHIP).

Dr. Gruber is an economist from MIT whose expertise is in developing models to assess the impact of various approaches to increasing access to health insurance (such as changes in the private insurance market, tax credits and Medicaid expansions).

Introduction 4

THE PROPOSAL AT A GLANCE


1. BasicHealth: The state establishes a new health plan that is offered by commercial health maintenance organizations (HMOs). It is available to all Massachusetts residents. Benefits: The benefits are slimmer than our current health insurance law requires. They include hospital inpatient care, limited physician/therapist visits, and limited pharmacy benefits. Cost Sharing/Catastrophic Coverage: There is significant cost sharing (coinsurance and deductibles) until these payments reach 4% of household income for individuals and 8% for families, after which there is no cost sharing for the rest of the year. Premiums: Average $230 per month for an individual, $500 for a family. Premium Subsidies: Premiums for BasicHealth are fully paid for individuals and families between 100% and 150% of the Federal Poverty Level (FPL). (People below 100% of poverty are eligible for MassHealth.) There are sliding-scale subsidies for individuals and families with household incomes between 150% and 400% FPL. No one eligible for Medicaid is eligible for BasicHealth subsidies. Availability: Individuals and families must purchase BasicHealth on their own. Employers cannot offer it. Rates: The premiums the state pays HMOs for BasicHealth are based on Medicare pricing, and increase as Medicare rates do. Plans are responsible for negotiating provider rates. Risk: The Commonwealth shares risk with the HMOs offering BasicHealth. Managed Care: Health plans use existing networks or establish new ones for BasicHealth. Administration: The Office of Health Insurance (OHI) is established within the Executive Office of Health and Human Services (EOHHS) to administer the program. Demonstrations: The OHI has broad authority to pilot different models of benefits and services with the HMOs.

The Proposal at a Glance 5

2. Individual Participation: All Massachusetts residents must have health insurance either through current options or through BasicHealth. 3. Employer Participation: Every employer in Massachusetts pays a fee of $150 per month for every full-time employee who does not have coverage through their employer. This fee is prorated for part-time employees working more than 10 hours but fewer than 30 hours per week. 4. Medicaid: MassHealth expands to cover all Massachusetts residents with household incomes at or below 100% FPL. 5. Insurance Partnership: MassHealth increases current subsidies for small employers to help pay for commercial health insurance. 6. Essential Community Providers: A fund is created to support the special work of forty-six community health centers and half a dozen safety-net hospitals that tailor their services to lowincome and other hard to serve populations. 7. Cost: $2.1B Expanding the MassHealth program to Massachusetts residents with incomes at or below 100% FPL ($489M); Providing full premium subsidies to individuals and families between 100% and 150% FPL and sliding-scale premium subsidies to individuals and families between 150% and 400% FPL towards purchase of BasicHealth ($1,035M), of which some $510M is the insureds obligation towards their premiums; Increased participation and support for employer-sponsored premium assistance programs including the Insurance Partnership ($337M); Essential Community Provider Fund ($101M); Administering BasicHealth ($50M); Creation of a risk reserve to support risk sharing or premium collection shortfalls ($70M); and Participation fee from the State in its role as an employer ($18M).

The Proposal at a Glance 6

8. Financing: $2.2B Using the current funding for the Uncompensated Care Pool ($330M). Hospital Assessment and the Surcharge Payers Amount are indexed to ensure that the rate of industry contribution keeps pace with the rate of overall revenue growth. Optimizing all opportunities through federal waivers to obtain federal matching funds for expenditures for providing health care coverage and subsidies ($399M). Premiums paid by residents for BasicHealth coverage ($510M). Assessing a fee on employers of $150 per month for every employee they do not cover. This fee is indexed to account for future growth in health care costs and is pro-rated for part-time workers ($951M).

The Proposal at a Glance 7

THE PROPOSAL DISCUSSED


1. BasicHealth For all residents to have insurance, people of modest means must be able to afford it. BasicHealth is meant to be an affordable last resort. Low-cost, basic insurance risks inducing crowd-out4 and adverse selection,5 which are both detrimental to the viability of broader insurance coverage. Thus, careful balances must be struck in every aspect of BasicHealths design. Still, we must expect some crowd-out and some adverse selection. Economists tell us that, even without BasicHealth, more employers will be dropping comprehensive coverage and more employees will be opting out of it. The cost of commercial coverage is becoming too great. BasicHealth may not even be to blame, they say, but it will be blamed anyhow. So, we must steel ourselves to this fact, and accept some run to BasicHealth. The uninsured number 400,000 plus; our models predict a total enrollment of 500,000 plus in BasicHealth. Benefits This product has a slimmer benefit package than those currently offered in the small-group and non-group health insurance markets. For each family member covered, BasicHealth includes hospital inpatient care, 3 prescriptions a month, and 15 doctor/therapist visits a year for physical health and another 15 for mental health. Other mandated services are not covered, such as substance abuse services, durable medical equipment (DME), chiropractic, fertility treatments or early intervention (see Table 1). A primary goal was to develop a product that is good coverage for most people, but not so attractive that large numbers of people prefer it to commercial plans. BasicHealth must be thought valuable enough to be worth the effort. On the other hand, we do not want to undermine employer-based insurance (crowd-out). We also do not want to undermine commercial coverage by having large numbers of healthy people opting out of this coverage. That would make the standard plans more expensive for the people who remain in them, and whose conditions require broader coverage (adverse selection). Another primary goal was to develop a product that costs approximately $200 per member per monthalmost half the cost of a typical HMO product in the non-group market. Therefore, it was necessary to tailor the package carefully. In designing the benefit package we experienced the predictable trade-offs between affordability and coverage.

Crowd-out: when people drop commercial insurance in favor of government sponsored insurance. Adverse selection: when sicker individuals gravitate to more comprehensive policies making them more expensive, or when healthier individuals forgo more comprehensive policies making them more expensive. In either case, the risk is spread only among people who need more services.

The Proposal Discussed 8

BasicHealth meets the basic needs of most people. However, it does not fully meet the needs of individuals with chronic maladies that require frequent doctors visits, frequent therapy, substantial equipment or regular support services. Covering these would have made the product too expensive. Low-income people are eligible for MassHealth, which covers comprehensive acute services, support services, and long-term care.

Table 1: Specifications of BasicHealth


Premium Costs Annual Deductible Annual Cost-sharing Limit Physician Services Routine Physical Exam Physician Office Visits Pre-natal Care Well Child Exams/Immunizations Hospital Outpatient Services Diagnostic X-ray, Lab and Testing Outpatient Surgery Radiation/Chemotherapy Inpatient Services (including maternity) Semi-private Room, Ancillaries, Therapy, X-ray, Lab, Surgical, and General Nursing Services Mental Health Inpatient Outpatient Emergency Department Visits Prescription Drugs $250 deductible, 20% coinsurance 40% coinsurance, 15 visit limit/year 40% coinsurance Limited to 3 prescriptions/month, generic substitution required, 50% coinsurance 40% coinsurance 40% coinsurance 40% coinsurance Per stay deductible of $250 <150% FPL no premium cost to enrollee, 150-400% FPL sliding scale subsidy None, except for hospital inpatient, $250 per stay 4% of household income individuals, 8% families (excludes premium contribution) Annual limit of 15 visits (per family member) 40% coinsurance 40% coinsurance 40% coinsurance 40% coinsurance

20% coinsurance

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A Partial List of Services Not Covered


Acupuncture Chemical Dependency Services Chiropractic Services Dental Services (except emergency treatment) Durable Medical Equipment Early Intervention Services Home Health Hospice Infertility Services Occupational, Physical and Speech Therapy Podiatry Rehab/Nursing Facility Vision Services

Cost Sharing Significant coinsurance comes at point of service: 20% for inpatient services, 40% for outpatient services, and 50% for prescription drugs. However, no individual or family has to spend more than 4% or 8% respectively of their household income a year for services covered by BasicHealth. Table 2 presents maximum out-of-pocket exposure for individuals and families of various income levels enrolled in BasicHealth. Many economists hold that first dollar coverage is a major driver of health costs and therefore health insurance costs. Substantial coinsurance gives people a stake in what their health care costs, thus discouraging their overuse of services and encouraging cost effective care. On the other hand, the fundamental idea of insurance is to protect against crushing losses, and therefore, capping cost sharing is also important.

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Table 2: Maximum Effect of Average Premiums and Out-of-Pocket Contributions on Individuals and Families by Income Level
100% Individuals Annual Gross Income $9,310 Annual Premium $0 Out of Pocket Maximum (4% Gross Income) $0 Total Spending $0 Total Spending as a Percent of Gross Income 0% Family of 4 Annual Gross Income $18,850 Annual Premium $0 Out-of-Pocket Maximum (8% Gross Income) $0 Total Spending $0 Total Spending as a Percent of Gross Income 0% $28,275 $0 $2,262 $2,262 8% $37,700 $1,202 $3,016 $4,218 11% $47,125 $2,405 $3,770 $6,175 13% $56,550 $3,607 $4,524 $8,131 14% $65,975 $4,809 $5,278 $10,087 15% $75,400 $6,011 $6,032 $12,043 16% 150% $13,965 $0 $559 $559 4% 200% $18,620 $552 $745 $1,297 7% 250% $23,275 $1,104 $931 $2,035 9% 300% $27,930 $1,656 $1,117 $2,773 10% 350% $32,585 $2,208 $1,303 $3,512 11% 400% $37,240 $2,760 $1,490 $4,250 11%

Premiums The state establishes and collects premiums for BasicHealth. Premiums are community rated, similar to the rating currently done in the non-group and small-group markets. Premiums are rated by age, and average $2,700 a year for individuals and $6,100 for families. The Department of Revenue collects premiums through payroll deductions and estimated taxes, and adjusts the amount based on subsidy eligibility. Premium Subsidies All residents, regardless of immigrant status, and their dependents whose incomes are at or below 150% FPL and who are not eligible for MassHealth do not have to pay premiums. Sliding scale subsidies for purchasing BasicHealth are provided for all non-MassHealth-eligible residents with incomes between 150% and 400% FPL (see Table 3 for current FPL levels by family size). These subsidies cover premiums only. All BasicHealth enrollees are still required to pay coinsurance and deductibles.

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Table 3: Federal Poverty Level by Family Size


Family of 100% FPL 150% FPL 200% FPL 400% FPL 1 $9,310 $13,965 $18,620 $37,240 2 $12,490 $18,735 $24,980 $49,960 3 $15,670 $23,505 $31,340 $62,680 4 $18,850 $28,275 $37,700 $75,400

Availability Any Massachusetts resident can purchase BasicHealth for herself and her family. Immigrant status does not matter for eligibility. Any resident can buy BasicHealth from any of the several insurers who offer the plan. However, to discourage adverse selection in the employer-sponsored market, one cannot buy BasicHealth through an employer, and an employer cannot directly subsidize anyones premium. Economic modeling has shown that allowing this product to be sold in the small-group market would cause significant crowd-out and adverse selection. To reduce crowd-out further, we thought of requiring employees to take employer-sponsored health insurance if it is offered, thus making them ineligible for BasicHealth. We decided against this course. Many couples are insured through one partner. Straightening this out would be a logistical fiasco. More importantly, health care reform should not infringe on individual discretion any more than is absolutely necessary to our purpose. Most employers offer comprehensive health plans and most employees sign up for them. This includes employers offering and employees subscribing to self-funded health plans for which there are virtually no coverage requirements. Since even self-funded plans tend to be surprisingly broad, we thought it best to rely on the desire of most employers to provide and most employees to have comprehensive coverage. Another tactic to counter crowd-out would be to increase the percentage of employees a small employer must cover for that employer to offer small-group health insurance plans. Under current law insurers can require small businesses to cover 75 percent of their employees who are eligible to purchase insurance. That percentage could be raised. We decided not to do this as it risks some employers giving up on the small-group market altogether, relegating all of their employees to BasicHealth or MassHealth. Rates Payments to health plans providing BasicHealth are pegged to Medicare both in terms of immediate payment rates and annual growth in rates. The health plans, in turn, negotiate service rates with their network of providers. Since providers know what the health plans are being paid, they know what to demand and what to expect in their own rates.
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For providers to be willing to participate in BasicHealth, they will want rates above Medicaids. In all states, Medicaids charitable mission has meant bare-bones payments for most services and most providers. BasicHealth is not a poverty program, and therefore, BasicHealth provider rates should be higher. On the other hand, since BasicHealth must also be affordable, high-end commercial service rates are beyond its reach. That leaves middle-range commercial rates, which is about where Medicare is. In our meeting with five of the states commercial insurers, they felt that Medicare rates would be sufficient for enough providers to sustain a workable delivery network. The rate by which premium rates grow also matters. BasicHealth cannot sustain the 13 percent premium growth that has characterized the states commercial plans in recent years. Therefore, pegging BasicHealths growth to the Medicare rate of growth also makes sense. A composite Medicare inflation factor is used to adjust premiums annually. This composite is developed using a weighted average of the Medicare update factors for the various sectors of covered services, such as hospitals, physicians, community health centers, etc. Nearly everyone we consulted has said we must have restrictions on premium rates and their growth, or BasicHealth will become unaffordable. That being the case, we settled on a benchmark: Medicare. We wanted to avoid any return to wholesale provider rate setting by the state. The Commonwealth gave that up in the early 1990s, and no reasonable person wants it back. Comprehensive rate setting is too complicated to be desirable and too subject to political winds to be effective. Risk The state must share risk with the health plans offering BasicHealth. Plans do not have experience covering the uninsured, and therefore do not want to accept the full risk of covering them. On the other hand, the plans must have an incentive to manage costs. To mitigate the financial risk associated with covering a new population, the state provides individual and aggregate stop-loss protection through a self-funded risk reserve. Actuaries develop stop-loss thresholds and reserve amounts. The reserve account is available to all HMOs to help mitigate risk associated with outlier cases (e.g., persons with annual expenses above $50,000) and aggregate losses in excess of a predetermined amount. Thus, HMOs are partially protected from adverse selection, but also partly at risk, and therefore invested in the close management of outliers. Managed Care BasicHealth covers care that is managed. Affordable health care demands care coordination, as does cost control. HMOs offer BasicHealth and use coordinated networks to provide care. The HMOs can either use their existing networks, or they can develop networks just for BasicHealth.

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Some insurers have expressed an interest in incentive payments for meeting disease management or quality goals in their administration of BasicHealth. We should explore this possibility. Administration A new office is created within EOHHS to administer BasicHealth: the Office of Health Insurance (OHI). OHI is responsible for selecting and contracting with HMOs to provide this new product. Contract oversight includes review of marketing materials produced by participating HMOs, premium setting, reconciliation of stop-loss arrangements, quality measurement, and ensuring HMOs maintain provider networks that provide adequate access. OHI maintains a registry of insurance coverage for enforcing individual participation. Members choosing to meet the individual mandate by purchasing this new product sign up directly with a participating HMO and can apply for subsidy assistance through the HMO. Eligibility for premium subsidies is determined by the state by OHI or by MassHealth. Having subsidy applications go through MassHealth ensures that applicants who are eligible for MassHealth are offered MassHealth. MassHealth provides a more generous benefit package and leverages federal money. OHI is small and efficient. We do not need an independent or separate agency with a governing board. Grandeur is not our aim; neither is any set-up suggestive of an expanding role. The objective of OHI is not to dominate health policy, health care or the health insurance industry. Its objective is the competent administration of BasicHealth. OHI competitively selects 4-5 commercial HMOs to offer this new product. Initially, we considered hiring a single third party administrator. But with potentially 500,000 or more BasicHealth beneficiaries we must consider our states health insurers. Several of the highest quality and most well regarded HMOs in the country are based in Massachusetts, and we must not disrupt the health insurance market. Spreading BasicHealth enrollment is necessary to that end. On the other hand, limiting the number of health plans selected makes contract oversight more reasonable. Having 4-5 health plans gives each a substantial pool of subscribers. Using 4-5 competitively selected commercial HMOs for BasicHealth also gives us the advantages of their combined skills, and keeps BasicHealth firmly rooted in the private sector. Demonstrations Every health policy expert we consulted warned us that we cannot afford to make comprehensive insurance (what everyone wants) available to everyone. To do that we would have to revamp health care delivery to base it on evidenced-based best practices, to rationalize its administration and to reduce error and waste. Such cannot be done in a day or a year. No mere benefits package, however clever, can drive this change. However, allowing HMOs to pilot different packages and networks can foster change.

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The Office of Health Insurance is given broad flexibility to pilot ideas with the HMOs offering BasicHealth. In that they are willing, these insurers may offer a second or third BasicHealth plan that manages given diseases, includes a special delivery network, or adheres to specific clinical guidelines or best practices. These other packages may offer richer benefits for the money, or be available only in certain parts of the state. 2. Individual Participation Every Massachusetts Resident Must Have Health Insurance The requirement to carry insurance can be satisfied by any of the following options: Maintaining health insurance coverage available in the commercial health insurance market (e.g., through ones employer or through the non-group market); Purchasing a catastrophic health insurance plan and maintaining a health savings account (HSA); Enrolling in a student health insurance plan though an institute of higher education; Enrolling in a public or private retiree health benefit plan; Purchasing BasicHealth; or Enrolling in a public health insurance program (e.g., MassHealth, Medicare, the Medical Security Plan).

Why Mandate Individual Participation? Covering the uninsured requires the alternative of an insurance plan that is more affordable than what is now available. The size and makeup of the risk pool is one of the factors that determine the cost of this product. Virtually all of the uninsured must be included to keep the cost down. The uninsured include a large portion of healthy young adults who cost less to cover, and therefore, their inclusion is vital. However, our modeling of voluntary programs based on incentives did not bring in enough uninsured to be viable. Too many healthy people do not see the value of insurance. Therefore, requiring insurance coverage is needed to make BasicHealth viable. Enforcement Most residents file taxes, request state licenses or apply for state services. Health insurance can be verified through these dealings. Health providers can also verify coverage. Drivers License/State ID/Vehicle Registration Require applicants to be covered by a health insurance policy as a prerequisite for a new or renewed drivers license, learners permit, state identification card or vehicle registration. The Registry of Motor Vehicles (RMV) can be responsible for verifying the health insurance status of residents. Ideally, the RMV check can simply be an RMV query to a separate database for yes/no response to state health insurance.
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Tax System Require state income tax filers to report on their tax return whether they and their dependents maintained health insurance coverage during the tax year for which they are filing (i.e., retrospectively). The Department of Revenue (DOR) can confirm health insurance status. Alternatively, the state may be able to assess a penalty for those unable to demonstrate compliance with the mandated health insurance coverage. Point of Service Require hospitals, community health centers and other providers to confirm the health insurance status of any individual seeking care. The patient, if uninsured and eligible, can be offered enrollment in MassHealth. Other uninsured patients can be offered BasicHealth. Proof of Coverage The most efficient, accurate and timely method of verifying health insurance status is to establish a Central Insurance Registry. The Registry can be accessed through a computer network, which is consistent with current efforts to streamline RMV or DOR administration through computerbased processes. 3. Employer Participation All Employers Must Contribute to the Cost of Insuring their Employees For each employee, an employer can meet this obligation by covering this employee with health insurance that meets the requirements of the federal Employee Retirement Income Security Act (ERISA). For every employee who is not offered or does not accept this coverage, the employer pays the state a fee of $150 a month. This fee is prorated for part-time workers, working more than 10 hours but fewer than 30 hours a week$150 is less than a dollar an hour for a full-time employee. The Department of Revenue collects the fee. This ensures greater compliance and a surer cash flow. Why the Fee? To cover the uninsured, there must be new money to subsidize coverage for low-income people and to administer the new health plan: BasicHealth. Obtaining this money through a broadbased tax would induce employers who are now sponsoring insurance to drop it, placing an even greater burden on taxpayers. Though employer-based health insurance may be an accident of World War II, it is what we have. No state has the means to replace this system. No state can underwrite the widespread availability of broad coverage that employer-sponsored insurance has traditionally provided. We want as many people as possible to have broad coverage, and therefore, as few as possible to need BasicHealth. Therefore, our intent is to fill gaps in employer-sponsored coverage.

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Fairness is also an issue. Most Massachusetts employers offer health insurance. In 2003, 98% of employers with 50 or more employees offered health insurance to their employees. Even businesses with fewer than 50 employers are more likely than not to sponsor coverage: sixtysix percent do. It is unfair to these businesses that their insurance costs are higher because other businesses do not do their part. In 2003, there were approximately 43,913 Massachusetts employers who did not provide health insurance or contribute to the health care costs of their employees. Seventy-three percent of the uninsured in Massachusetts are employed, and many work for employers who do not offer health insurance coverage. Levying a fee on employers who do not contribute to the cost of covering an employee discourages crowd-out, and injects a measure of fairness into the financing of health insurance. ERISA The biggest potential obstacle to state action is the Employee Retirement Income Security Act (ERISA). ERISA regulates employee welfare and benefit plans including those that provide, medical, surgical, hospital care or benefits for plan participants or their beneficiaries through the purchase of insurance or otherwise.6 The ERISA statute contains broad language preempting any and all state laws insofar as they...relate to an employee benefit plan.7 ERISA allows businesses to self insure, which is to bear the risk themselves for providing health insurance to their employees. When a business self insures, state insurance law cannot specify the scope of this coverage. ERISA itself contains few stipulations on what must be included in a self insured benefit package. Therefore, self insured employers can pay very little of the cost of their plans or offer plans that are far less adequate than BasicHealth. But if employers do either, their employees are likely to opt for BasicHealth and the employers will be paying a fee for each one who does. The legality of such a fee has not been tested in federal court. Nonetheless, theres a solid legal argument for a states imposing this contribution, with some approaches being more defensible than others. The following makes the strongest case: 1. The legislation establishes a publicly financed health coverage program that is financed partially with employer contributions (taxes) required from all types of employers. 2. The employer contribution of $150 per employee is imposed on all employers and does not make any reference to employer sponsored health plans (i.e., the contribution is required of all employers not just those who do not provide health insurance).8

Sec.3 (1) 29 USC Sec.1002 (1). Sec. 514(a), 29 USC 1144 Note: the state Constitution may require uniform taxation of all employers, not just those who do not provide health insurance.

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3. The state provides an immediate tax credit for the amount of the contribution for each employee the employer covers. The credit should not be conditioned on the adequacy of the packages (to avoid binding plan administrator choices). 4. The statute is neutral on whether the employer pays the tax or provides insurance.9 4. Medicaid We modify MassHealth to mesh with BasicHealth so that together they can cover the uninsured that cannot or will not subscribe to standard health insurance. This tailoring simplifies the program and some eligibility expansions. These changes require approvals by our federal partners, the Centers for Medicare & Medicaid Services (CMS). The Childrens Medical Security Plan (CMSP) is eliminated because CMSP enrollees, many of whom are undocumented aliens, are eligible for either MassHealth or BasicHealth. Also, both programs provide more comprehensive coverage than CMSP. We keep the Medical Security Plan (MSP). MSP provides health insurance to certain Massachusetts residents with incomes below 400% FPL who are eligible to receive unemployment benefits. MSP enrollees can receive either partial premium subsidies toward COBRA premium payments to continue their previous employers health coverage, or can receive direct coverage through a Blue Cross Blue Shield-contracted indemnity plan. The state receives federal match for all state expenditures for health insurance coverage for MSP enrollees. It therefore makes sense to continue this alternative, rather than have people who are briefly unemployed purchasing BasicHealth and then dropping it. MassHealth Simplification The Executive Office of Health and Human Services consolidates MassHealth plans. There are now six benefit packages. We want three: 1. MassHealth Standard All Title XIX (Medicaid), Title XXI (State Childrens Health Insurance Program or SCHIP), and CommonHealth eligible (higher income disabled) members are enrolled in MassHealth Standard, the most comprehensive MassHealth coverage. Standard members receive benefits directly or through premium assistance if they have cost-effective

Blue Cross and Blue Shield Plans v. Travelers Insurance Company 115 S.Ct. 1671 (1995)

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employer-sponsored insurance. If they do, Medicaid pays for commercial insurance coverage and then pays directly for Medicaid services that this coverage does not include (wrap around). Standard Medicaid covers a broader range of services than are available through any commercial insurance. Standard Medicaid covers long-term care and an array of social supports. 2. MassHealth Essential All MassHealth beneficiaries who are eligible only under the MassHealth waiver with income at or below 100% FPL are enrolled in MassHealth Essential, a less comprehensive coverage benefit. MassHealth Essential does not cover most long-term care services and some acute services.10 Essential members receive benefits directly or through premium assistance if they have cost-effective employer-sponsored insurance. 3. MassHealth Premium Assistance All residents with incomes between 100% and 200% FPL who receive MassHealth through the waiver and whose employer participates in the Insurance Partnership are enrolled in MassHealth Premium Assistance,11 which provides financial assistance for the purchase of standard commercial health insurance. Increasing MassHealth Eligibility Uniformly to 100% FPL Every Massachusetts resident whose household income is at or below 100% FPL is eligible for MassHealth, regardless of U.S. citizenship status. We estimate that 148,000 individuals will be enrolled in MassHealth Essential. This figure includes individuals already enrolled in MassHealth Essential, those eligible for it but not enrolled, and the newly covered populations: aliens and childless adults who are not long-term unemployed. In addition, another 424,000 individuals may avail themselves of existing premium subsidy programs designed to maintain their participation in their employers plans. Those eligible under Title XIX and Title XXI are enrolled in the most generous benefit packageMassHealth Standard, while the remaining residents, who would otherwise be uninsured, are enrolled in less-comprehensive MassHealth Essential. We do not change MassHealth eligibility rules for residents with incomes greater than 100% FPL. The individual participation requirement of health care reform incents people who are eligible for MassHealth to enroll in MassHealth. MassHealth-eligible residents do not receive a subsidy for the purchase of BasicHealth. This approach is warranted for the following reasons:

10

NOT COVERED: adult day health, adult foster care, chronic disease/rehab hospital, day habilitation, early intervention, hearing aid, home health, hospice, nursing facility, personal care services, private duty nursing and audiology/hearing aid, chiropractic, Chapter 766, nurse midwife, orthotic, vision care, transportation. We preserve the Insurance Partnership, a program for small employers (i.e. employers with up to 50 full-time employees) that offer comprehensive health insurance and pay at least 50% of the cost for each employee at or below 200% of the FPL.)

11

The Proposal Discussed 19

It is cost effective for the state to encourage MassHealth-eligible residents to enroll in MassHealth because the state can get substantial federal reimbursement for MassHealth, but not for BasicHealth; and The MassHealth provider rates are lower than the BasicHealth provider rates since the latter are based on Medicare rates.

To maintain equity between BasicHealth and MassHealth, we do not charge premiums to anyone in MassHealth or non-MassHealth-eligible residents with incomes at or below 150% FPL, who purchase BasicHealth. As noted above, all individuals in the state with incomes below 100% FPL are encouraged to enroll in MassHealth Essential (and are not charged premiums), and individuals in BasicHealth with incomes between 100% and 150% FPL receive full premium subsidies. The sliding scale premium amounts for MassHealth members with incomes above 150% FPL remain as they are now. Federal Approval and Budget Neutrality To make the proposed changes to the MassHealth program and to receive federal reimbursement for these changes, the state must receive approval from the Centers for Medicare & Medicaid Services (CMS). The intent is to amend the current 1115 waiver in a manner that maximizes federal reimbursements. CMS waiver approval hinges upon demonstrating to CMS that the proposed MassHealth changes are budget neutral to the federal government. In general, a state may not spend more for a program administered through an 1115 waiver than it would have spent in the absence of the waiver. The budget neutrality test caps the amount of waiver expenditures that can qualify for federal reimbursement. There appears to be sufficient room in the budget neutrality cap to cover the individuals with incomes at or below 100% FPL and receive federal reimbursement. 5. Insurance Partnership The Insurance Partnership (IP) is an existing MassHealth waiver program. IP helps both small employers and their low-income employees buy commercial health insurance. For each low-income employee who enrolls,12 a subsidy is paid to a small employer13 that offers comprehensive health insurance to its employees and pays at least 50% of the cost of that health insurance. Employees must take up the health insurance offered by these employers, and be determined eligible for MassHealth. The employee also receives a subsidy for premiums.

12

For the IP, low-income employee is defined as an employee with household income at or below 200% FPL small = 50 or fewer full-time employees

13

The Proposal Discussed 20

For employers meeting the above requirements, the IP pays the employer a monthly subsidy as follows: $33.33 per individual, $66.66 per couple, $66.66 for one adult and one child, and $83.33 per family. MassHealth effectively subsidizes the employees premium costs up to the following: $123.00 per individual, $246.00 per couple, $288.00 for one adult and one child, and $438.00 for a family of three (two adults and one child). MassHealth only pays subsidies up to the cost of the employees share of the premium. To discourage crowd-out, we increase the IPs employer subsidy by 25%, since these subsidies have not been increased since the program began the late 1990s. 6. Essential Community Providers We establish an essential community provider fund (ECPF) to help pay the warranted but exceptional costs of essential community providers (ECPs). Seed money for this fund comes from the current funding sources of the Uncompensated Care Pool and employer participation fees. As much as possible, we augment this seed money with federal matching funds by using it to make enhanced Medicaid payments and Disproportionate Share Hospital (DSH)14 payments, both of which generate 50 cents on the dollar. Although their backgrounds and circumstances vary widely, all modest income residents have difficulty accessing and using health care. The Commonwealths health centers and safetynet hospitals15 specialize in meeting the variegated needs of this population. This proposal for MassHealth and BasicHealth provides significant resources to these providers. Nonetheless, these providers still incur significant unreimbursed patient care costs. Not addressing these extra costs would endanger the missions and even survival of these institutions. We would face huge pressure to maintain the Uncompensated Care Pool (the Pool). The Pool is an unwieldy anachronism that is impossible to manage effectively or fairly since it reimburses hospitals and health centers for self-reported costs that are impossible to verify or justify by any uniform standard. Medicaid rates and DSH payments are more straightforward mechanisms. They allow us to provide more measured and purposeful subsidies.

14

DSH payments are for uncompensated care in hospitals serving a disproportionate share of Medicaid or non-paying patients. Within certain limits, these DSH payments are federally matched dollar for dollar. e.g., Boston Medical Center, Cambridge Health Alliance, Brockton Hospital, and Lawrence General Hospital.

15

The Proposal Discussed 21

We must abolish the Pool. To do this, everyone must have health insurance, and we must establish this residual essential community provider fund to address residual needs. Essential Community Providers have extra needs that are both real and legitimate. First, for the patients that enroll in BasicHealth, providers receive no payment for certain medical services that fall outside the benefit package: e.g., longer-term mental health needs, all substance abuse treatments, some pharmacy costs for chronic diseases; and all outpatient visits for those with medical conditions requiring more than 15 medical visits per year. Lower income patients with complex needs are likely to continue to resort to Essential Community Providers. Second, out-of-pocket coinsurance liabilities for most outpatient and other primary care services are significant (40%) and are not subsidized until individuals and families reach their household income cap. ECPs currently find it difficult to collect copayments from the lower-income patients who are likely to continue to come to these providers. Third, both hospitals and federally qualified health centers carry legal obligations to serve patients regardless of their ability to pay. Hospitals remain obligated under the federal Emergency Medical Treatment and Active Labor Act (EMTALA) to provide emergency and stabilization services to all. Community health centers carry responsibility for primary care and in some cases, pharmacy services to low-income patients under Sections 330 and 340B of the federal Public Health Service Act. Finally, despite our individual participation requirement, some residents will not comply; some will be unaware, disorganized, or simply resistant. Some will say that they cannot afford their share of the premiums or copayments. Chances are, however, they will still head to Essential Community Providers for care. For both hospital Medicaid rates and DSH payments, there are limits to federal reimbursements. We must take care to arrange the rates and payments to maximum effect. Caps on hospital Medicaid rates are called upper payment limits (UPLs). MassHealth has recently completed 2002, 2003 and 2004 UPL calculations. We believe that the calculations are methodologically conservative. The 2004 UPL calculations revealed substantial room on inpatient acute hospital spending and a moderate level of room on outpatient spending, which will allow the Commonwealth to pay hospitals more in Medicaid rates. Caps on uncompensated care costs are called disproportionate share hospital (DSH) payment limits. The Commonwealths statewide annual DSH cap for Federal Financial Year (FFY) 04 through FFY13 is $574.5M. In FFY04, the Commonwealth is using all but $63M of this $574.5M. DSH payments must stay within these limits to maximize the ratio of federal reimbursement.

The Proposal Discussed 22

Table 4: Summary of Funding Sources and Spending for Proposed Model ($M)

Costs ($M) Cost to the State $489 $525 $337 $101 $50 $70 $18 $1,590 Insureds Obligation $510 Total $489 $1,035 $337 $101 $50 $70 $18 $2,100

MassHealth Expansion BasicHealth Employer-sponsored Insurance/Premium Assistance Essential Community Provider Fund Administration and Enforcement Risk Reserve State Employer Participation Fee Total Sources of Revenue ($M)

$510

Pool Assessment and Surcharge on Payers Federal Financial Participation BasicHealth Premiums Employer Participation Fee Total Margin Margin as a Percentage of Total Cost

Revenue Insureds Premium to the State Contribution $330 $399 $510 $951 $1,680 $90 6% $510

Total $330 $399 $951 $2,190 $90 4%

Assumptions MassHealth Expansion: includes individuals new to MassHealth who are eligible but unenrolled and MassHealth Essential. BasicHealth: includes all insured who enroll in this new product. Subsidies will be provided to those between 100% and 400% FPL who are otherwise ineligible for MassHealth. All insureds with incomes over 150% FPL contribute towards premium cost. Insureds over 400% FPL pay full premium cost. Essential Community Provider Fund: supports the technical and network development for community health centers and hospitals. Risk Reserve: allows for risk sharing for catastrophic claims and nonpayment of premiums. Administration and Enforcement: includes the Office of Health Insurance; premium collection activities by DOR; contract management and oversight; and Central Insurance Registry. State Employer Participation Fee: reflects the cost to the state of the Employer Fee that will be levied for the state employees who do not take up GIC sponsored insurance. Pool Assessment and Surcharge on Payers: Pool assessments and surcharges will be maintained and increase in future years by a percentage tied to hospital revenue growth generally. Employer Participation Fee: at $150 per employee per month for each employee that the employer does not cover. Number of Uninsured: if the total number of uninsured individuals is greater than 418,000, the additional cost to the program would be approximately $1,300 per person per year, according to the model. MassHealth Members in MCOs: the estimates for MassHealth are based on a fee-for-service environment, not a fixed capitated program with monthly premiums. Estimates of Increased Take-up of Premium Assistance Programs: e.g., IP are high. If this doesnt occur, significantly less revenue is required.

The Proposal Discussed 23

7. Cost: $2.1B Our estimates are in FY05 dollars for a full year of operation, and are based on actuarial estimates of premium costs from Mercer Government Consulting, modeling work by Dr. Jonathan Gruber, and EOHHS estimates. Actual program costs need significant refinement and adjustment for actual program start dates, but at this point are very conservative. Our estimates are based on providing direct coverage to a number of Massachusetts residents (including the current MassHealth Essential population), subsidies to many more, and the cost of administering and operating the program. MassHealth Covers Lowest Income Residents The estimated cost of MassHealth for the 148,000 insureds with incomes less than 100% FPL is $489M. For the purposes of this discussion, this estimate includes all newly insured individuals and those currently enrolled in MassHealth Essential who may ultimately be counted as MassHealth Essential. BasicHealth The cost of BasicHealth for individuals and families up to 400% of FPL is estimated at $525M. Subsidies are provided on a sliding scale tied to income and decrease in a linear relationship to higher income levels. Insureds contribute another $510M through premium payments, for a total cost of $1.035B. Increasing Support and Increased Demand for Premium Assistance Programs Supporting continued employer participation in premium assistance programs including the Insurance Partnership through subsidies is estimated at $337M, including an additional $2M to increase the employer subsidy by 25%. Essential Community Provider Fund Additional funding is needed for essential community providers (ESPs). Despite our best efforts, some people will still not have insurance. Moreover, some medical services will fall outside the benefit package, as described above. Hospitals and health centers will remain obligated under applicable federal laws to provide certain services to all, regardless of ability to pay. Therefore, the Proposal includes a funding allowance in the amount of $101M for the continuing uncompensated costs incurred by hospitals and health centers. Administration and Enforcement Administrative costs are estimated at $50M, approximately 5% of medical spending. This supports the new Office of Health Insurance, additional resources for DOR and DET. Functions include administering the contracts with participating HMOs, collecting premiums and employer fees, enforcing the individual mandate, actuarial services, marketing, and outreach.
The Proposal Discussed 24

Risk Reserve We have set aside $70M as a risk reserve against several unknowns including, but not limited to: failure to pay premiums, out-of-pocket costs in excess of budgeted amounts, and one-time rate adjustments to meet the needs of the newly insured (pent up demand). State Employer Participation Fee Like other employers, the state must pay a fee for every state employee who does not opt for state coverage. This obligation is estimated to be $18 million. 8. Financing: $2.2B Consistent with our goal of sharing the burden of providing health care for low-income individuals, the revenue stream to support state costs comes from existing assessments and surcharges for uncompensated care, federal financial participation for qualifying expenditures, employer participation fees, and premiums paid by people enrolled in BasicHealth. Uncompensated Care Pool Revenue The Pool has been supported by relatively flat assessments on hospitals and surcharges on payers (commercial health insurers in Massachusetts). In past years, $270M to $315M in annually revenues were raised; in FY05, House I seeks $330M. Retention of this revenue stream is a critical component of HCRI financing. Beginning in FY06, the assessments and surcharges will be reformulated as a percentage of total hospital or insurer revenue based on the relationship of the FY05 payment to total revenue for each group. Over time this will enable this component to grow. Each dollar of these state revenues, when expended on Title XIX qualifying programs, will generate a dollar of federal revenue. Seek Greater Federal Financial Participation (Assumes Limited Approval) We estimate $399M in federal financial participation. This is based on allowable expenditures for any newly covered persons meeting current MassHealth eligibility criteria, MassHealth Essential, administrative costs, and the residual pool. The estimates assume that some percentage of those who might be eligible for MassHealth by virtue of age or income may need to be state-only due to citizenship issues. Note that this category includes federal financial participation previously claimed on the Pool expenditures; under the Proposal, federal revenues would flow from BasicHealth and Reserve Fund expenditures. If we are successful in achieving additional federal approval, the estimate of federal financial participation may increase. BasicHealth Premiums We estimate $510M in premium payments from BasicHealth members with incomes at 150% FPL and above.
The Proposal Discussed 25

Employer Fees Encourage Continued Private Market Participation Revenue from employers that do not offer health insurance or that have employees declining the employers offered insurance form the cornerstone of the revenue package. At $150 per employee per month, we estimate that we could achieve as much as $951M in new revenue to directly support all aspects of BasicHealth. Margin: $90M

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CONCLUSION
As there is nothing new under the sun, there are no new ideas in this proposal. Rather, it is the combination of these ideas that is unusual, each keeping unlikely company with the others. The left wing, the right wing and possibly everyone in between will be affronted by one or another feature. So will every interested party, be they administrators, clinicians, insurers, providers, suppliers, manufacturers, employers, employees, advocates or academics. On the other hand, all of these factions and parties will also find something to like. Health reform fails when people differ on their first choice, but agree on their secondthat being to do nothing. We pursue health insurance for everyone, a benefit to everyone. We presume that to get there, everyone must pay some or give some, and most must do both. If our proposal goes anywhere, its elements will undoubtedly be heated, cooled, split and recombined. But our premise will stand. Everyone must pay some or give some, and most must do both. If we all do our parts, we can do this task. We will see everyone insured, and we will thereby lay a foundation for a better commonwealth and better health care for all.

Conclusion 27