The Magazine

Right Plan, Wrong State

The governor of Massachusetts takes a stab at health insurance reform.

Dec 5, 2005, Vol. 11, No. 12 • By ARNOLD KLING
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MASSACHUSETTS IS CONSIDERING HEALTH INSURANCE reform to address the problems of the uninsured. The federal government is pressuring the state to do something or lose several hundred million dollars in Medicaid funding. Two competing ideas are single-payer health care, favored by some on the left, and a multilayered insurance reform proposed by Republican governor Mitt Romney.

Single-payer means that the state government would provide health insurance to all citizens. Single-payer appeals to those who oppose private enterprise in general and private health insurance in particular. It is an article of faith on the left that a state monopoly on health insurance would reduce private-sector inefficiency by eliminating duplicate overhead and doing away with profits. Those on the left believe so strongly in the efficiency of government-provided insurance that they think single-payer would reduce premiums paid by consumers and businesses by more than enough to offset any increase in taxes.

Romney's plan instead would deal with the state's estimated 460,000 uninsured without tearing down the existing insurance system. In fact, parts of the reform package are designed to make it easier for employers to provide health insurance by reducing regulatory mandates for coverage. Other reforms are intended to ensure that workers retain health insurance when they lose or change jobs.

More dramatically, the Romney plan does not take a one-size-fits-all approach to the uninsured. After all, there are three gaps that account for the uninsured population in Massachusetts today:

* About 110,000 people who are below the poverty line and are eligible for Medicaid but not enrolled;

* About 150,000 people with incomes up to three times the level of the poverty line ("near poor"), meaning that they still cannot afford coverage without assistance;

* About 200,000 people with incomes at least three times the level of the poverty line, who choose to self-insure, meaning that they do not purchase health insurance.

The poor would be enrolled in Medicaid. The challenge for Massachusetts, as for all states, is that many poor people know that they will receive free medical care without enrolling in Medicaid, simply by showing up at the emergency room. Romney's plan would change this by enrolling eligible recipients whenever they obtain medical care, while abolishing state programs that support free medical care for the uninsured.

The near poor would be provided with Safety Net Care--a means-tested subsidy to purchase private health insurance. For example, a single person with an income of roughly $24,000 would pay just under $1,000 a year for coverage. The total cost of the policy is envisioned to be about $4,000, so the taxpayers of Massachusetts would pay about $3,000 a year in subsidy payments for this individual. Someone with lower income would receive a higher subsidy and pay less, and someone with higher income would receive a lower subsidy and pay more.

Those who self-insure could continue do so only if they posted a $10,000 bond in case they needed medical care. The bond guarantees that if they get sick, they will in fact pay for their own health care rather than "free ride."

To encourage the recalcitrant to purchase health insurance, the Romney plan envisions private insurance with somewhat higher deductibles than are common today. One briefing for the Romney plan suggests that deductibles should be in the $250 to $1,000 range, rather than no deductible, which the briefing implies is the standard currently.

THE ROMNEY PLAN seems designed to solve a problem of uninsured consumers "free riding" by obtaining health care services without paying for them. The "free riders" leave the tab to be picked up either by state programs or by health care providers padding the bills of the insured. I have not seen data on how much "free riding" costs the taxpayers of Massachusetts, but in other states the figures are not large as a percentage of total health care spending.

Another problem that concerns many people is the cost of health insurance. People on the left blame this on insurance companies. However, the dollars absorbed by insurance company overhead are only about 6 or 7 percent of total health care costs.

Health insurance is expensive for two reasons. The main reason is that we consume a very expensive mix of health care services. This "premium medicine" consists of specialists and advanced technology. For example, since 1975, while the U.S. population has increased by only 35 percent, the number of gastroenterologists has risen by 433 percent, the number of pulmonary specialists by 472 percent, and the number of diagnostic radiologists by 704 percent. Since 1980, the number of CAT scans per year has risen from 3.6 million to over 50 million, and the number of MRI exams per year has risen from 0 to about 25 million.