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The Massachusetts Model: Massive Spending On Nonbenefit Costs

June 2nd, 2009

Plummeting coverage and soaring costs characterize the nation’s health insurance crisis. With much coverage for the nonelderly based on employment, job loss contributes to this misfortune. In response, Congress seems headed to emulate the 2006 Massachusetts “reform.” That’s an unpromising prescription because it seriously increases costs — just the opposite of what President Barack Obama cogently and correctly asserts that we need.

The “reform” requires all adult residents to obtain medical care insurance through individual purchase if they are not covered by an employer-provided plan, Medicaid — called MassHealth and limited to those with very low incomes — or CommonwealthCare, a means-tested subsidized program for those with income above MassHealth’s limit but below 300% of the poverty line.

The Massachusetts Reform Model: Increasing Costs, Not Reducing Them

None of these programs produces efficiencies. The design does not reduce total health insurance outlays. Rather, CommonwealthCare adds massive costs to determine eligibility and then the amount of subsidy due, on top of the subsidies themselves. Those individualized determinations must be done hundreds of thousands of times in Massachusetts (many million times if applied nationally), not once but again and again because incomes don’t hold still.

Moreover, the “reform” does nothing to reduce the untamed costs of matching hundreds of thousands of billings with thousands of plans containing differing, confusing rate schedules. Hordes of provider personnel must generate the billings, and then hordes of insurer administrators process them and pay — or often reject — billed items and then frequently wrangle over them with providers and patients. These procedures consume hundreds of billions of nonbenefit dollars a year. CommonwealthCare imposes not only premiums, but also deductibles and copays, which further complicate and add costs to processing bills. Those features often prevent the “insured” from using their insurance.

Individuals and families with incomes above 300% of the poverty level get no subsidy, but they must participate in their employer’s insurance plan, if there is one. Many employees have declined employment-based insurance because they could not afford the premiums, deductibles, and copays required. Under the “reform,” with those costs rising, they must participate or incur a penalty — over $1,000 in 2009. They can obtain an exemption only by persuading the Commonwealth Connector, the entity administering the program, that they cannot afford the least costly available policy. Success means no penalty — and no insurance.

The Connector, which solicits policies from private insurers, rejected all of the initial proposals as unaffordable. The insurers responded with policies with lower premiums but higher deductibles and copays. The law permits annual deductibles up to $2,000 for an individual or $4,000 for a family. Little wonder that the Connector has so far exempted more than 62,000 employees.

So the “reform” increases nonbenefit costs by the tens of billions (that would be hundreds of billions if used nationally) to ascertain eligibility, more tens of billions to ascertain how much subsidy each applicant qualifies for, plus the tens of billions for those subsidies. Then add the estimated 4 percentage points of cost to operate the Connector.

Subsidies Through Tax Credits: Dishonest And Inefficient

Reportedly the Senate Finance Committee favors providing the subsidies through tax credits, a favorite legislative dodge to hide the costs. (Tax expenditures, the government revenue lost through targeted favorable tax treatment, are the functional equivalent of direct government expenditures for purposes of determining deficits but are much less efficient.) And they require people to apply. Many people simply do not know what’s available and how to navigate the bureaucratic maze. So the tax dodge incurs costs and discourages participation.

On top of these obvious inadequacies, the cost of medical care insurance continues to rise for employers and employees. State and local governments see increased costs for their own employees and for government programs. The Massachusetts individual mandate does not reduce the second major factor in our crisis – out-of-control costs. It does just the opposite.

President Obama sensibly proposes that we build our economy on rock, not sand. But few programs are so shifting as means-tested programs, as the history of Medicaid demonstrates. State governments repeatedly downsize such plans when the economy worsens, demand for benefits increases, and tax revenues to pay for them shrink.

If Massachusetts Can’t Afford Its Reforms, Who Can?

As candidate Obama pointed out repeatedly, individual mandates are costly and hard to enforce. The commonwealth is struggling to meet the costs of the program, which are running higher than originally projected. Massachusetts has a high-wage economy that generates above average-tax revenues. But that income is proving insufficient to pay for the “reform”; as a result, the state is poaching on the funding for other health programs. If wealthy Massachusetts is in a bind to pay for this brand of reform, what can we expect of less fortunate states?

Massachusetts provides subsidized coverage to individuals and families with incomes up to 300% of the federal poverty level. Only nine other states have equally generous limits. With state budgets now stressed by falling income and property tax revenues and increased outlays caused by growing unemployment, it is dubious that other states could afford to match Massachusetts’ level of subsidies even if they wanted to. Nevertheless, the House reportedly is fashioning a Massachusetts-like measure with subsidies available up to 400% of the federal poverty level.

The Massachusetts “reform” that congressional committee chairs seem about to advocate will neither provide universal coverage nor rein in costs. Nor will the toothless “pledge” by the “health care industry” to save two trillion dollars “voluntarily.” Announced by President Obama on a Monday, the pledge had been disowned by hospital, insurer, pharmacy, and doctor participants by Thursday.

Until we confront the billions wasted by matching hundreds of thousands of bills with thousands of differing plans, we will not achieve the savings needed to pay for covering everyone comprehensively. Our present course seems headed for reform in name only.

A Better Way: Medicare For All

There is a better, easier way: simply expand Medicare to non-aged and non-disabled Americans. Medicare has been up and running for over four decades, has a better cost-restraint record than both private insurance and public means-tested programs, and actually put reasonable limits on provider payments. It would cover everyone without the huge costs of means-testing. Medicare uses private insurers for administration and should continue to employ thousands of their experienced employees. Eliminating the nonbenefit costs of private insurance — commissions, Wall-Street-size executive compensation, and advertising — would save tens of billions of dollars. Simplifying billing — by using one payment schedule instead of thousands — would save hundreds of billions.

Medicare for All offers the most practical way to achieve universal coverage and reduce per capita costs. Now that’s reform we can believe in.

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1 Trackback for “The Massachusetts Model: Massive Spending On Nonbenefit Costs”

  1. The Massachusetts Model: Massive Spending On Nonbenefit Costs | HEALTHY LIFE GUIDE
    June 3rd, 2009 at 12:58 am

7 Responses to “The Massachusetts Model: Massive Spending On Nonbenefit Costs”

  1. Merton Bernstein Says:

    The blog authors comments on others’ comments: “As the dimensions imply, our observation
    that non-benefit health insurance costs run to hundreds of billions of
    dollars a year refers to the national health care expenditure total.
    That description derives, in part, from the 2008 McKinsey Quarterly
    article reporting that such costs run to about $300 billion, consisting
    mostly of inefficient bill processing. That huge amount results largely
    from the need of thousands of health care providers to prepare their
    bills based on their own innumerable price schedules that vary according
    with the plan involved and the subsequent need of insurers to match up
    the detailed bill entries with their numerous policies. The main thrust
    of our blog is that the additional need under the Massachusetts-type
    plan to ascertain individual eligibility for subsidies based on a
    sliding scale of income and the subsidies increases non-benefit costs
    enormously. That’s the take-away message. Inasmuch as Medicare’s total
    non-benefit costs run to about 3% of benefits, private plan non-benefit
    costs must run substantially above the 15% plus average cost of
    processing bills set out in the McKinsey article.
    “This is not time to be cowed by past failures. We cannot continue to
    waste hundreds of billions of dollars on a broken system.”


  2. Claudia Chaufan Says:

    Roger Collier (and others) writes that “aside from ignoring the total political infeasibility of Medicare-for-all, the authors seem unaware of Medicare’s lack of controls over utilization, its encouragement of ever-increasing provider expenditures on resources, its dependence on cost-shifts to private payers for financial viability, and the growing number of physicians withdrawing from the program”.

    Mr. Collier correctly characterizes some of the problems of Medicare, but confuses the symptom with the disease. Lack of controls over utilization is not a problem of financing, but of delivery, that both private and publicly financed insurance can have and that can, and should, be addressed through several ways, e.g., aligning payment with quality and getting rid of perverse incentives that our system generally has (much more in the for profit private sector).

    As to Medicare depending on shifting costs to private insurers for financial viability it is actually quite the opposite. Thanks to Medicare, which picks up the bill of the most costly patients, private insurers have been able to survive and thrive way beyond their shelf life, dumping on all of us, taxpayers, the burden of spiriling healthcare costs, including, yet not limited to, administrate waste and ridiculously high prices (I recommend “it;’s the prices, stupid!”, by Anderson and Reinhardt). .

    As to doctors withdrawing, to my knowledge they are withdrawing from medicine generally because many can no longer stand dealing with multiple insurers, being forced to be business savvy, etc. not what most of us signed up for when we chose medical school in the first place.

    As to political feasibility, to my knowledge what makes any policy politically feasible has never been what politicians are willing to do, but rather the cost on them of not following the popular will.

    Of course this is true in a democracy, which I believe we have, however imperfect. But even Otto Von Bismark, First Chancellor of the German Empire, and witness of the socialist revolutions that spanned Europe in the mid19th century, realized that you cannot push ordinary folks too hard. He wrote “the social insecurity of the worker is what makes them a peril to the state”. So he created the first collective, non profit insurance system, the precursor of the current German health care system.

    We fail to learn from others at our peril.

    Thanks professors Bernstein and Altman for your timely analysis.

  3. AnnEMalone Says:

    As many in Massachusetts know, I am a long time health reform advocate and a nurse who is a very vocal critic of the Massachusetts Model. I view our “landmark law” largely as a sham of grand proportion. This is because it does not reform our health care system. What the law does is as described by the authors of this HA blog entry (but I do question if their figures of “hundreds of billions in nonbenefit dollars” is meant to read “millions”?) and these things do not constitute health system reform. It is true that some of the so-called “Commonwealth Choice” plans (saavy marketing isn’t it, what they named some of the insurance products that residents are forced under the law to purchase?) do indeed have very high deductibles and co-pays of $2K for individual, $4K for couple or family. In the interest of relevant disclosure, Brian Rosman who is a stalwart defender of the law, works for an organization that receives significant funding from the private insurance industry in Massachusetts.

    The misleading spin put on the MA insurance law by its architects (largely the insurance industry and the politicians who choose not to challenge the abuses of that industry) has been appalling, to say the least. Contrary to being meaningful reform of the system, the MA insurance law simply mandates purchase of private health insurance for all state residents except those who are granted permission from the state to remain uninsured. Yes, it does create MInimum Creditible Coverage (MCC) benefits–but not for “youth” who get serious illnesses, too. MCC makes sense, but in the absence of enacting serious cost controls it is not reform.

    The law relies on massive amounts of new public dollars to subsidize purchase of private insurance policies for many. This has led to many other worthy public programs being starved for funds–public health, education, and on and on. These are the reasons why countless others in the state and across the nation who know the law’s details and who are not on the dole of the insurance industry also have concluded that the MA Plan is a give-a-way to the private health insurance industry in the state. Mr Rosman’s comment here references “An independent review found the charge of uncontrolled costs to be a “myth.”” but what he does not state is that the “independnet review” was crafted by a group, the Mass. Taxpayer’s Foundation, that has Blue Cross and Blue Shield on it’s board of trustees; this begs the question: What are the funding sources for the group conducting this so-called “independent review” ?

    Due to being a health professional and health reform advocate in Massachusetts, I have had the benefit (or the curse, many might say) of following the law’s creation closely over years of careful groundwork that was laid out by MA Blue Cross and Blue Shield Corporation and their joined-at the-hip partner, the BCBS of MA Foundation. Brian Rosman’s organization and just about every other “advocacy” group in the state has come to rely on a stream of regular funding from Blue Cross and Blue Shield, this being one part of the careful groundwork that paved the way for a law establishing mandatory purchase of private health insurance with no cost controls.

    Thankfully, people are smartening up and paying attention to the details as our national reform process moves forward; there’s a groundswell opinion among both the general public and health policy experts that an improved Medicare Part E (for Everyone) for all who want it is what will provide America the health system reform we so urgently need.

  4. RogerCollier Says:

    Aside from ignoring the total political infeasibility of Medicare-for-all, the authors seem unaware of Medicare’s lack of controls over utilization, its encouragement of ever-increasing provider expenditures on resources, its dependence on cost-shifts to private payers for financial viability, and the growing number of physicians withdrawing from the program.
    There’s lots wrong with the Massachusetts structure as a model for reform, but Medicare isn’t the solution.

  5. Brian Rosman Says:

    Bernstein and Altman make a number of factual errors in their review of health reform in Massachusetts. Commonwealth Care, subsidized coverage for low-income adults, has no deductibles. Affordability exemptions from the individual mandate are available automatically through the tax system, without requiring any convincing of the Connector.

    The assertion that the reform plan “increases nonbenefit costs by the tens of billions” is just nonsense. Real spending for all health care by all payers grew by about $1.9 billion from 2005 to 2007, as coverage increased by over 400,000 people. Massachusetts has the lowest uninsurance rate – 2.6% – of any state. Massachusetts is the only state where employer-provided coverage is increasing, Massachusetts is the only state to limit deductibles and require preventive care be provided before any deductible. An independent review found the charge of uncontrolled costs to be a “myth.”

    Massachusetts is still a work in progress, and there is still much to be done. State leaders are pursuing comprehensive payment reform, medical home initiatives and many other improvements. But national leaders can learn much from the successes so far.

  6. John Ballard Says:

    I like the idea of Medicare for all but don’t think it’s politically feasible this time around. The next step in the national learning curve will have to be MA writ large. Maybe then, finally, our elected representatives will start to do the arithmetic and see how much of the revenue stream is being used for insurance company share-holders, highly-paid sales people, advertising and executive bonuses.

    It has taken the catastrophe of the auto industry to castrate the unions which led them to the brink of total evaporation. Something of the sort will have to come to pass in health care to divest the system of private insurance. There is a proper place for insurance in the mix, but at the edge, not the core of the mission.

    Someone said that General Motors was a health care provider that also sold cars. Likewise, today we are looking at financial institutions in the form of insurance companies that offer stockholders a return on their investment, and also treat a few medical problems on the side.

  7. Jack Shoemaker Says:

    Thanks for the thoughtful and fact-based analysis of how much we waste just administrating health-care payments under our current systems. (One fact caught my eye. Your write, “These procedures consume hundreds of billions of nonbenefit dollars a year.” in your fourth paragraph. I don’t have the data, but a figure of “hundreds of billions” for a Massachusetts strikes me as hyperbolic.) Notwithstanding, after you enumerate all the ills associated with government-directed health-care payment, you draw the conclusion that making the program even bigger – Medicare for All – is the answer. I’m not convinced. Sure, by making “everyone” categorically eligible, you should see a reduction in the costs associated with establishing eligibility. But, the problem won’t go copmpletely away. What about non-citizens and other fringes of society? More to the point, what makes you think that CMS can handle an even bigger workload than today? It would be a supreme irony if M4A wins the day only to have CMS expand the reach of existing MA programs run by the same insurers you blame for too-high commissions and Wall-Street level executive compensation.

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