The Massachusetts Health Reform Plan: A Brief Overview
CRS Report for Congress
The Massachusetts Health Reform Plan:
A Brief Overview
April Grady
Analyst in Social Legislation
Domestic Social Policy Division
Summary
In April 2006, Massachusetts passed legislation that aims to achieve near-universal
health insurance coverage by expanding Medicaid and State Children’s Health Insurance
Program (SCHIP) eligibility, providing premium subsidies for certain individuals, and
mandating the purchase of insurance for those who can afford it. To make private health
insurance plans more affordable and accessible, it modifies state insurance laws (e.g.,
it merges the state’s non-group and small group markets) and creates a public entity
called the Connector to serve as a clearinghouse for the purchase of insurance by small
employers and individuals who are not offered subsidized insurance by a large employer.
To pay for the legislation, the state will redirect some existing Medicaid funds that
are used to reimburse health care providers (primarily hospitals) for treating uninsured
and other patients who generate uncompensated care costs. It will also obtain additional
federal Medicaid and SCHIP dollars using new state general fund appropriations and
revenues from employers that do not offer health insurance. Another significant source
of funding, while not necessarily flowing through state coffers, is the mandate that
requires individuals to purchase insurance or face financial penalties. Over time, the
state expects to redirect additional funds from uncompensated care reimbursement to
other uses (e.g., premium subsidies) as its uninsured rate declines. However, the
legislation continues to provide significant support for hospitals and other providers.
This report highlights major elements of the Massachusetts legislation and raises
issues that Congress and other observers may consider as details of the state’s health
reform plan are worked out during implementation. It will not be updated.
Background
The state’s low uninsured rate and its ability to redirect and augment existing
financial resources were two key factors working in favor of the recently passed
Massachusetts health reform legislation. Input and support from across the political
spectrum also played an important role.
Congressional Research Service ˜ The Library of Congress
In terms of its uninsured population, Massachusetts has a lower percentage of
uninsured residents than most states. According to data from the Census Bureau’s
Current Population Survey (CPS), 11.7% of Massachusetts residents were uninsured for
all of 2004, compared to the national average of 15.7%.1 Based on its own biennial
survey, the state estimates an even lower uninsured figure.
Massachusetts spends about $2 billion annually in combined state and federal dollars
to support health care providers (primarily hospitals) that treat uninsured and other
patients who generate uncompensated care costs.2 Much of this funding is provided
through Medicaid, a joint federal-state program that finances health coverage for certain
low-income individuals, as well as disproportionate share hospital (DSH) payments for
hospitals that serve large numbers of low-income and Medicaid patients. Hoping to put
existing funds to better use, the state obtained federal permission under its Medicaid
waiver3 to redirect approximately $1.3 billion in DSH and other Medicaid payments that
largely benefit hospitals toward a plan to reduce its uninsured rate.4
The Massachusetts health reform legislation — whose details still must be approved
by the federal government, as required under the state’s Medicaid waiver — was more
than a year in the making. With input from political leaders on both sides of the aisle,
insurers, academics, businesses, hospitals, community organizations, and others, the
legislation garnered widespread support. Whether or not this support will remain strong
as details of the state’s plan are worked out during implementation is an open question.
Highlights of the Legislation
Highlights of the Massachusetts legislation are presented below in terms of the
impact on various stakeholders.5 Although Governor Romney vetoed several of the
provisions discussed here, they were preserved by the legislature through overrides. As
mentioned earlier, there are varying estimates of the size of the uninsured population in
Massachusetts. However, it has been widely reported that the state’s health reform
legislation assumes 550,000 uninsured residents, of whom 92,500 will obtain coverage
1 CRS Report 96-979, Health Insurance: Uninsured by State, 2004, by Chris L. Peterson.
2 Providers may incur uncompensated costs when they provide free care to the uninsured, but also
when they treat insured patients whose coverage excludes certain services or provides
reimbursement below the actual cost of care (a frequent complaint about the Medicaid program).
Because the state has a history of using complex financing mechanisms to obtain federal funds,
not all of the $2 billion actually results in payments to providers. For more information, see Blue
Cross Blue Shield of Massachusetts Foundation, Roadmap to Coverage (publications), available
at [http://www.roadmaptocoverage.org/pubs/main.html].
3 Section 1115 of the Social Security Act gives the Secretary of Health and Human Services the
authority to waive certain statutory requirements of the Medicaid program (and others), thereby
allowing states to operate their programs in ways not otherwise allowed under federal rules.
4 See Massachusetts Medicaid Policy Institute, The MassHealth Waiver (Apr. 2005), available
at [http://www.massmedicaid.org/pdfs/MassHealth_Waiver.pdf].
5 Unless otherwise noted, sources include Health Care Reform Conference Committee Bill
(presentation, Apr. 3, 2006), Health Care Access and Affordability Conference Report (summary
and fact sheet), and Chapter 58 of the Acts of 2006, available at [http://www.mass.gov/legis].
through the state’s MassHealth program, 207,500 will obtain subsidized private insurance
through a new Commonwealth Care program, 215,000 will obtain private insurance as
a result of the individual mandate, and 35,000 will remain uninsured.
Insurance Market. To make private health insurance plans more affordable and
accessible, the legislation modifies state insurance laws and creates an independent public
entity called the Commonwealth Health Insurance Connector to serve as a clearinghouse
for the purchase of insurance. As of July 2007, the state will merge its non-group and
small group (50 or fewer employees) health insurance markets. Prior to the merger, a
special commission will examine the impact on premiums.6 (In 2005, the median total
monthly small group premium was $365 for an individual and $950 for a family in
Massachusetts.7) There is a moratorium on the creation of new state-mandated health
benefits until at least January 2008. To increase the range of high-deductible plans linked
to health savings accounts (HSAs) with lower premiums that are available in the state,
health maintenance organizations (HMOs) will be allowed to offer such plans. Insurers
offering family policies will be required to cover children for two years after they lose
dependent status or through age 25, whichever occurs first.
The Connector will facilitate access to private insurance plans for small employers
and individuals who are not offered insurance by a large employer (one with more than
50 employees) that pays part of the premium. Plans will be offered through the Connector
beginning in April 2007. These plans will have to meet the same requirements as other
plans in the state, except that they may contract with selected providers (allowing plans
to negotiate lower payment rates or steer individuals to quality providers) instead of “any
willing provider” (allowing individuals with insurance to have more choices). The
Connector will be the only source for specially designed, lower-cost plans for young
adults (ages 19 through 26). The board of the Connector will establish and manage a
system for collecting all premium payments made by or on behalf of individuals obtaining
insurance through the Connector. Small employers that obtain insurance through the
Connector must accept a binding agreement that specifies conditions of participation (e.g.,
the employer may only change its health plan eligibility criteria or contribution amounts
during a time period designated by the Connector).
Individuals. The legislation aims to insure nearly all state residents through a
combination of expanded Medicaid and State Children’s Health Insurance Program
(SCHIP) eligibility, premium subsidies, and an individual mandate. As of July 2006,
children’s eligibility for MassHealth, the state’s public coverage program funded with
Medicaid and SCHIP dollars, will increase from 200% of the federal poverty line (FPL)
to 300%. (In 2006, 300% FPL is $49,800 for a family of three and $60,000 for a family
of four.) Enrollment caps for certain disabled, HIV-positive, and unemployed adults will
be raised. Benefits that were cut in 2002 (e.g., dental, vision) will be restored. Eligibility
6 The state estimates that non-group premiums will drop by 24%. Although a recent study found
that merging the markets could increase small group premiums, it did not take all components of
the final bill into account (e.g., an expanded risk pool as a result of the individual mandate). See
Karen Bender and Beth Fritchen, Impact of Several Proposed Changes in the Individual and
Small Group Insurance Market (Mercer Oliver Wyman, Dec. 15, 2005).
7 Massachusetts Division of Health Care Finance and Policy, Massachusetts HRSA State
Planning Grant (Oct. 2005), available at [http://www.statecoverage.net/statereports/ma50.pdf].
for the Insurance Partnership Program, a part of MassHealth that helps pay the employee
share of premiums for individuals who work for a small employer that pays at least half
of its employees’ premium costs, will increase from 200% to 300% FPL.
As of October 2006, certain uninsured individuals with family incomes at or below
300% FPL ($29,400 for a single person) will be eligible to have premium assistance
payments made on their behalf through a Commonwealth Care Health Insurance Program
operated by the Connector. To qualify, individuals must neither be eligible for public
coverage nor eligible (either directly or through a family member) in the past six months
for insurance offered by an employer that pays at least 20% of the premium for family
coverage or 33% for individual coverage. Program enrollees will face no deductibles.
Those at or below 100% FPL ($9,800 for a single person) will receive full premium
subsidies, and those between 100% and 300% FPL will receive subsidies on a sliding
scale determined by the board of the Connector. Until June 2009, the state’s four
Medicaid managed care organizations are the only plans that may receive premium
assistance payments from the program unless specific enrollment targets are not met.
As of July 2007, all adult residents of the state are required to have health insurance
if it is deemed “affordable” at their income level under a schedule to be set by the board
of the Connector. Individuals will report their insurance status on state income tax forms.
Beginning with tax year 2007, those who do not have insurance and are not exempt from
the mandate will lose their state income tax personal exemption. (The current state
income tax rate is a flat 5.3%, with a personal exemption of $3,575 for singles and double
that amount for married couples. If the personal exemption did not apply, the maximum
increase in tax liability would be $189 for a single person and $379 for a couple. Some
state or federal tax provisions could reduce this liability.) Beginning with tax year 2008,
an additional penalty will be levied for each month an individual is without insurance,
equal to 50% of the lowest premium for which he or she would have qualified. It will be
collected through withholding of state income tax refunds. If no refund is due or the
penalty exceeds the refund amount, the state will notify the taxpayer and may use existing
state income tax enforcement and collection procedures to obtain the balance owed.
Employers. To help finance the legislation, some employers that do not offer
insurance will pay fees to the state. If an employer with more than 10 employees does not
offer a group health insurance plan to which it makes a fair and reasonable premium
contribution (to be defined in regulation), it will pay a “fair share employer contribution”
of no more than $295 per employee per year. If employees or their dependents incur
$50,000 or more in free care costs paid by the state in any given year, a separate “free
rider surcharge” of between 10% and 100% of the state’s cost may be levied. The free
rider surcharge will not apply to employers that offer to contribute toward or arrange for
the purchase of health insurance (including through the Connector or the state’s Insurance
Partnership Program), are subject to a collective bargaining agreement that governs the
employment conditions of an individual receiving free care, or have 10 or fewer
employees. Employers with more than 10 employees also must adopt and maintain a
“cafeteria plan” that allows health insurance premiums to be paid on a pre-tax basis.
Health Care Providers. Although the state expects to redirect additional funds
from uncompensated care reimbursement to other uses (e.g., premium subsidies) as its
uninsured rate declines, the legislation continues to provide significant support for
hospitals and other providers. In each of FY2007-FY2009, $90 million will be used to
increase Medicaid payment rates for hospitals and physicians. Hospital rate increases
after FY2007 will be contingent on adherence to quality standards and achievement of
performance benchmarks. A new state health care quality and cost council will establish
goals, develop performance benchmarks, and maintain a consumer health information
website with cost and quality data (organized to the extent possible by facility, clinician,
or physician group practice). Payment rates for two Medicaid managed care organizations
affiliated with hospitals in Boston and Cambridge that treat large numbers of uninsured
and other patients who generate uncompensated care costs will be maintained with $87
million in each of FY2007-FY2009. These hospitals and others in the state will continue
to receive significant Medicaid payments (more than $1 billion in FY20078) to cover
uncompensated care costs.
State and Federal Budgets. To pay for the legislation, the state will redirect
some existing Medicaid funds that are used to reimburse health care providers (primarily
hospitals) for uncompensated care costs (e.g., the state will redirect $160 million to
Commonwealth Care premium subsidies in FY2007). Massachusetts will also obtain
additional federal Medicaid and SCHIP dollars (at least $144 million in FY2007) using
new state general fund appropriations ($125 million) and revenues from employers that9
do not offer health insurance (at least $45 million). Another significant source of
funding, while not necessarily flowing through state coffers, will be insurance premiums
paid by those who comply with the individual mandate and financial penalties paid by
those who do not.
Issues to Consider
In any health insurance system, including the one that Massachusetts has planned for
itself, there are two overarching tradeoffs. The first is between benefits and costs: more
generous coverage entails higher costs, which must be borne by someone. The second is
among participants who share the costs: insurers, providers, employers, families and
individuals, government, and taxpayers. The Massachusetts legislation provides a
framework for achieving near-universal health insurance coverage that attempts to balance
these tradeoffs. It also leaves many important details to be worked out during
implementation. The remainder of this report discusses some of the issues Massachusetts
will face as it continues to address tradeoffs in its health reform plan.
Individual Affordability. Since many people will be required to purchase health
insurance, a key question is how much premiums will cost. In 2005, the median total
annual small group premium was $4,380 for an individual and $11,400 for a family in
Massachusetts. For a single person making $29,400 per year (300% FPL), the median
premium represents almost 15% of gross income. For a family of four making $60,000
(300% FPL), it represents 19%. (Premiums may represent a smaller percentage of income
if they are paid on a pre-tax basis since the tax savings in effect reduce the cost.) If lower-
cost health insurance plans are not available, some people could be exempted from the
individual mandate under the Connector’s affordability schedule. Others who purchase
8 Massachusetts Executive Office of Health and Human Services, CMS Waiver Submission
Information, available at [http://www.mass.gov/eohhs].
9 Premium subsidy spending and Medicaid and employer revenues, ibid.
plans that offer lower premiums in exchange for high deductibles or other significant cost-
sharing requirements may find it difficult to pay for care.
State Cost. Premium costs are also a concern for the state because it will be
providing subsidies for individuals at or below 300% FPL via the Commonwealth Care
program. Since it has an ongoing relationship with the Medicaid managed care
organizations that have been given exclusive rights to the program’s subsidies until June
2009, initial premium costs may not be a major issue. However, if more people qualify
for subsidies than anticipated, or plan premiums are higher than expected, state costs
could increase. As a safety valve, the legislation allows for a cap on Commonwealth Care
enrollment. However, this could leave some individuals unable to afford insurance.
Another issue for the state is that its federal Medicaid funding is capped under its
Medicaid waiver. If program costs surpass a fixed budget ceiling, the state must fund the
excess with state-only dollars or cap enrollment. In recent waiver documents, the state
estimates that its health reform legislation leaves approximately $12 million in “room”
below its Medicaid budget ceiling over the next two years.
Subsidy Design. The design of sliding scale premium subsidies for the
Commonwealth Care program will affect both individual affordability and state cost.
Presumably, consideration will be given to how the subsidies interact with the
affordability scale set by the board of the Connector. For example, if the board
determines that an affordable policy for a single person at 200% FPL ($19,600) should
cost no more than 10% of income, a subsidy might be set to equal the difference between
10% ($1,960) and the lowest premium available to the individual. If the gap between
affordable and actual premiums is large, subsidy costs for the state could be high.
Employer Coverage. There are a number of provisions in the Massachusetts
legislation that are designed to prevent employers from dropping coverage or offering
different health plans to different workers, and to prevent individuals from dropping
private coverage in favor of public. However, state officials have noted that “creative”
behavior down the road may require additional policy changes to discourage erosion of
the employer market.
Federal Perspective. As discussed earlier, although Massachusetts expects to
obtain additional Medicaid dollars to help finance the legislation, federal funding will not
exceed a cap agreed to under the state’s Medicaid waiver. The state will also rely on
SCHIP, another capped funding source. To date, the federal government has assisted
Massachusetts and other states that have exhausted their federal SCHIP funds by
redistributing unspent funds from other states and, more recently, providing an additional
appropriation. A less straightforward federal (and state) “cost” of the Massachusetts
legislation may come in the form of forgone tax revenue. Because employers will be
required to set up cafeteria plans that allow health insurance premiums to be paid on a
pre-tax basis, income and payroll tax receipts may be reduced.
Aside from the issue of financing, there are other ways in which federal legislation
could have an impact on the state’s health reform efforts. For example, bills such as S.
2510 and S. 1955, which contain reforms intended to improve access to health insurance
for small businesses (e.g., new purchasing arrangements, federal standards for benefit
coverage), might require the state to rethink major elements of its legislation.