By Niko Karvounis

Niko Karvounis tracks the health care system for the Century Foundation. This post first appeared on the HealthBeat blog, one of our favorite health care reads.

The Massachusetts experiment in health care reform is all about expanding access.  But it doesn’t try to control costs. This, in a nutshell, is why it’s running into trouble.

The plan didn’t reform health care delivery, just coverage. Granted, in terms of bringing more people in under the tent, it’s been a success: Since the plan went into effect in 2006, 439,000 people have signed up for insurance — a number that represents more than two-thirds of the estimated 600,000 people uninsured in the state two years ago. This surge in coverage has reduced use of emergency rooms for routine care by 37 percent, which has saved the state about $68 million. (Going to the ER for routine care drives up health care costs by creating longer wait times and tying up resources that can be used to help patients who are critically ill).

But even with these savings, Massachusetts is having trouble funding its plan. Earlier this month the Boston Globe reported
that the governor’s office is planning to shift more responsibility for
funding to employers. Currently, the Mass. Health care law requires
most employers with more than 10 full-time employees to offer health
coverage or to pay an annual ‘fair share’ penalty of $295 per worker:
this is called ‘pay or play’, an employer either provides coverage or
pays a fee toward the system for not doing so).

To “play” rather than “pay,” employers must show either that they are paying at least 33 percent of their full-time workers’ premiums within the first 90 days of employment, Or that they are making sure that at least 25 percent of their full-time workers are covered on the company’s plan. (In other words, they must be paying a large enough share of the premiums so that 25 percent of their employees can afford the plan they offer.)   

Now, instead of giving employers this Either/Or option, the new proposal requires that employers do both –or fork over the penalty fee. In a sense, this is an admirable move by the government, since its intention is to push toward truly universal coverage. But there’s also a game of scrounging-for-dollars going on here:  The state wants employers to pay more—to, in the words of Mass. Governor Deval Patrick, “step up” and embrace “shared responsibility”—either by covering a greater share of health care costs or paying more in penalty fees.

As you might expect, businesses are putting up a fight. They say that Patrick’s proposal “ignores the obvious,” which is the fact that “employers definitely are doing their part.” While it’s tempting to vilify “Big Employer” as stingy and selfish, the truth is that there’s only so much you can ask businesses to do without harming citizens.

As I pointed out in a March blog post, research shows that there’s a big tradeoff between health care costs and workers wages: when employers have to pay a lot for health care, they take the cost out of employees’ paychecks. Or, as a 2004 study from the International Journal of Health Care Finance and Economics put it, "the amount of earnings a worker must give up for gaining health insurance is roughly equal to the amount an employer must pay for such coverage."

In other words, you can’t bleed employers dry without also screwing workers. True, big corporations might have deep enough pockets to pay more for health care without adjusting workers’ wages. But they’re still bottom-line driven enterprises, which means that they’re going to try and break even wherever possible. Unless you want to see laws that strictly regulate the correlation between business health care costs and workers’ wages, the working Joe’s income is going to take a hit as employers shoulder more health care costs.

The other choice employers have is to opt out of coverage and instead pay the penalty. Many have pointed out that, for employers, this is an attractive option—particularly in Massachusetts, which, as of 2007, had the highest annual health care costs per employee in the country: $9,304. That’s a lot more than $295 a year. We can be certain that this fee will rise in the future. And once it gets high enough for employers to choose health coverage over the fee, they’re still going to take the cost of that coverage out of workers’ wages.

On the one hand, one might argue that this is fair—that workers are better off with health insurance rather than higher salaries. Massachusetts is a relatively wealthy state: in 2008, median income for a family of four stood a $85,420 (so half of the population earned more than that).  Insofar as some of Massachusetts wealthier citizens don’t have health insurance, it probably would make sense for them to earn a little less, and be covered. Some would insist that this should be an individual choice, but the truth is, if an individual decides to go without insurance, we all wind up paying the cost when he or she becomes seriously ill. On the other hand, many households could not afford to take a pay cut — especially when you consider the cost of housing in Massachusetts.

Ultimately, the only way to make a universal health care system sustainable both for employers and employees is to tackle the high cost of health care in Massachusetts.  As noted, in the Commonwealth, the average annual premium for an employee’s health care is $9,304 —significantly more than the national average of $6,881.

As Maggie has pointed out in the past, this is not because insurers in Massachusetts are profiteering. Insurance is expensive in the Commonwealth because its citizens consume more health care than people in many other states. They undergo more tests and procedures than most of us, and they see more specialists. Look at a graph of average health care expenditures per person in Massachusetts compared to average health care expenditures in the rest of the U.S., and you find that in Massachusetts, individuals receive an average of  nearly $10,000 worth of care each year—compared to just a little over $7,000 per capita nationwide.

High consumption of care is driven, Maggie explained,“by the fact that the state is a medical Mecca, crowded with academic medical centers, specialists and the equipment needed to perform any test the human mind is capable of inventing.”

As she originally explained in this article, in states where there are more hospital beds and more specialists, the population receives more aggressive, more intensive, and more expensive care. Even after adjusting for local prices, race, age, and the underlying health of the population, supply drives demand.  And it turns out that the Bay State has one doctor for every 267 citizens—versus one doctor for every 425 people in the nation as a whole. Meanwhile, the state boasts an abundance of specialists, while suffering a critical shortage of primary care physicians.

For reform to work in Massachusetts, the state needs to make care more cost-effective, not just more accessible. That means encouraging providers to emphasize proven treatments that can do the most good for the most people which avoiding over-priced, not fully proven bleeding edge services and products.

This won’t be easy. As Ezra Klein recently pointed out on his blog at The American Prospect: “people generally like to equate better health with awesomer technology, but developing a slightly better drug for late-stage cancer — a good, profitable innovation — will do much less for health than getting the flu vaccine to everyone who needs it, or creating systems so everyone with elevated cardiac risk is on statins. These interventions are low innovation, but actually extremely effective…Saving some level of money on innovation in order to rechannel it to access and basic interventions would probably make the country a whole lot healthier. But I don’t think you’re allowed to say that.” Yet if health care is to improve—in both Massachusetts and the U.S.—this is exactly what we need to say.

In fact, Massachusetts is a classic example of the technology-cost problem. According to a Boston Globe report, between 1997 and 2004, the number of MRI scanners in Massachusetts tripled to 145, about the total for all of Canada. From 1998 to 2002, the number of patient MRI scans in the state increased by 80 percent, to almost 500,00 a year. With insurers paying between $500 and $1,400 to cover a scan, the numbers add up: in 2003, Harvard Pilgrim, a non-profit insurer, shelled out $73 million on MRI scans, even as other costs increased as well. It should come as no surprise that a state with so much medical technology, also has more medical and clinical lab technicians than any state in the union.: 184.06 per 1,000 of the population, almost twice the national average of 101.32

Massachusetts also reports an abundance of hospital beds—enough to allow patients to spend an average of 11.8 days in the hospital during their last six months of life—compared to 9.5 days in Maine.  None of this is consciously planned. It’s just that if the beds are available, it’s easier to hospitalize the patient. And once they are in the hospital, it’s easy to refer them to a dozen specialists, assuming that enough specialists are available.

Bottom line, health care in Massachusetts is extremely expensive, thanks to supply-side factors—which means expanding and sustaining full coverage is, fiscally speaking, a tough proposition. Luckily, steps are being taken to address cost issues : in June, the state’s biggest insurer and the state itself said that they would stop reimbursing doctors and hospitals for 28 medical errors.

Certainly punishing doctors isn’t the key to sustainable health reform—and some errors are more “preventable” than others. But changing health care delivery—that is, changing patterns in the types and volume of treatments and procedures made available to patients—is the key to making health care run smoothly in the long-term. Universal coverage is wonderful and necessary. But it’s only one piece of the health care puzzle.