By Charlie Baker

I get asked this question a lot these days, which shouldn’t be that surprising.  Harvard Pilgrim is headquartered in Massachusetts, and the Massachusetts health care reform plan is already a couple of years old.  More importantly, it has added about 440,000 people to the insured ranks (185,000 through unsubsidized private plans and another 255,000 through subsidized, Medicaid-like coverage), has maintained high employer participation (over 70%) and doesn’t appear to be crowding out private coverage as public coverage expands.

But my answer to this question remains “it depends.” There were profound differences between Massachusetts and the rest of the country before health care reform took center stage here that make relying on our experience somewhat challenging for the nation as a whole. For example, Massachusetts already had guaranteed-issue requirements for individual health insurance coverage even before reform. Today, most states don’t. So in Massachusetts, individual coverage was available to anyone who wanted to buy it, but it was really, really expensive.

That’s because most of the people who buy individual coverage — absent a mandate to purchase — usually plan to use health care services once they purchase the insurance. Insurance works through risk pooling – a small number of people who get sick spend the premiums paid by a much larger group of people who don’t.  If most of the people who buy the product plan to use it, there’s not enough healthy people to keep the overall price down.

When the state merged the individual health insurance market with the small group health insurance market (businesses with 1-50 employees) as part of its reform efforts, prices for individual coverage went down by 25 percent (on a per capita basis, individuals spend a lot more on health care than small business employees – hence the big drop in price for the individuals when they got mushed together with all the small business employees).  At the same time, small group prices went up by 2 percent to pay for including the cost of all those individual purchasers in their risk pool. This was mostly missed during the implementation of reform, because medical expense trends went up by 10% over the same period of time, shielding the shift in expenses from individuals to small group.

In addition, most other states permit medically underwritten individual insurance – which weeds out people seeking to purchase coverage who might be high risk enrollees. They either get denied coverage, or shifted to a high risk pool for high risk enrollees. As a result, individual insurance in many states is very, very inexpensive for those who can access and purchase coverage.  Any national move to guarantee issue individual coverage – even with a mandate to buy – virtually assures that these people – and there are millions of them throughout the country – will pay a lot more for their health insurance coverage than they pay now. This is exactly the opposite of what happened when reform was passed in Massachusetts, and needless to say, this would make all those folks who have individual insurance now very unhappy.

Massachusetts also heavily regulated the small group health insurance market before reform, using rating  rules that capped how far apart the prices for expensive and inexpensive (relatively speaking) products could be, and prohibiting medical underwriting in the small group market. Today, most states allow significantly more flexibility than MA did before reform, and the MA rules today are even more restrictive than they were before reform.

While some might argue that bringing other states into line with Massachusetts’ standards could be more equitable to consumers and small business, there’s no doubt that big changes in how individual and small group products can be grouped, rated and priced will create millions of winners and millions of losers – at least in the short term. Winners don’t always notice the gain, because it usually gets lost in the noise (and doesn’t always translate into a big drop in price overall – just less of an increase), but the losers almost always notice they’ve been hit with a huge increase – and they don’t like it.

Third, Massachusetts had a declining population, a tight labor market, high per capita income, and relatively rich plan designs in its public and private health insurance programs to begin with. Our unemployment rate has been below the national average for the past couple of years, but not because we’ve been creating new jobs faster than the nation overall. It’s because our working population has been shrinking for years, making it easier for the state’s economy to appear to be relatively healthy compared to its peers.

As a result, employers have been looking for people more than people have been looking for work.  This “buyer’s market” has combined with a pretty high minimum coverage requirement to create a rich plan design as the so-called “basic” plan in Massachusetts.  Installing this ”basic” plan design nationally would be a huge step up from where most commercial insurance plans in other parts of the country are today.  Huge.

Fourth, state government was already making significant – and calculable – investments in paying for hospital-based services provided to people in Massachusetts who did not have insurance. It was worth about $1 billion, and was funded by a combination of assessments on health plans and providers, money from the state itself, and federal reimbursements through a Medicaid waiver. There is no calculation anywhere at the national level that could possibly help people understand what the “savings” from getting everyone covered might be to the system overall. Moreover, because Massachusetts already had so much money “in the game” so to speak, the Commonwealth did not have to raise taxes (much) to make the prospect of universal coverage a reality. I would think this trick will be much harder to pull off at the federal level.

Fifth, Massachusetts raised Medicaid payments to hospitals and physicians as part of the reform initiative by a lot – $270 MM over three years. That’s a 3 to 5 percent increase on top of regular inflation, plus or minus.  Duplicating this kind of positive incentive to support reform among providers at the federal level will be hard to do.

Finally, the health care cost problem wasn’t addressed by the MA health care reform plan.  In fact, a recent post on the Health Care For All blog argues that the decision to ignore the cost question made reform possible. “The main critique is that the (reform) plan over-regulates and does not do enough to control spending.  One of the lessons we drew from Massachusetts health reform is that coverage expansions, as hard as they are, are easier than serious cost control.  Massachusetts wisely decided not to hold coverage hostage to the difficult decisions about cost. In fact, expanding coverage increases the pressure to do something about costs, pressure that wouldn’t exist without the expansion.”

It’s also worth noting that Massachusetts enacted almost $800 MM in new taxes as part of its FY 2009 budget to fund, among other things, the third year of health care reform. This has not been a free ride financially, and won’t be going forward. In addition, the financial meltdown of the past three months only makes the state’s fiscal situation worse.

It’s hard for me to see how the federal government, given the enormous structural deficits staring policymakers straight in the face as far as the eye can see, can ignore the cost question as it pursues coverage expansion. In fact, most serious analysts of federal finances say health care reform HAS to do something about health care cost growth generally and Medicaid and Medicare cost growth in particular – or it simply takes a terrible situation and makes it even worse.

So what should the feds do? I suggest the following:

1) Reform the way Medicare pays for services. Over time, no single reform will mean more to the cost and quality of health care in this country than this one.  Medicare drives everything else.  Change Medicare, and you change the system.  It’s as simple as that. The fact that almost everyone who studies the health care system in this country knows this is true – but it doesn’t happen – illustrates how hard it is to do.

2) Fix the insane operating and financial relationship that exists between Medicare and Medicaid for low income seniors who qualify for both programs. This is a huge opportunity to reduce costs and improve health care quality for a very vulnerable population that’s deeply involved in the health care system.

3) Use federal matching funds from Medicaid and S-CHIP to encourage states to expand coverage for those populations that can’t access coverage through work, but don’t currently qualify for Medicaid. The role of federal Medicaid funds in encouraging the MA expansion was paramount. Without the threat of losing existing federal Medicaid funds if nothing got done, the reform plan wouldn’t have happened.

4) Combine guarantee issue in the individual market with an individual mandate to buy coverage. Use soft, escalating financial penalties to encourage people to buy coverage – maybe as take-up rates associated with Medicaid and S-CHIP expansions kick in – to encourage everyone – including healthy youngsters – to purchase coverage. Remember, if you don’t bring in the healthy people, all guarantee issue will do is raise prices for everyone who’s already got coverage in the individual market. On this one, Senator Clinton was right.

5) Define a minimum benefit plan design – which needs to be a minimum – not a maximum – and consider tying that standard to the federal tax deduction. But if the minimum ends up looking like what’s minimum in Massachusetts, that’s an enormous increase in costs and coverage requirements for the vast majority of the employed population in this country. That would be a bad idea.

Whether or not the federal government would need a Connector or an Exchange to do this is at least debatable. If there’s a minimum benefit standard, guaranteed issue, and a mandate to buy, I’m not sure why the federal government needs to set up shop as a seller/buyer/intermediary.  In Massachusetts, the Connector is spending more time regulating and overseeing the individual and small group market and managing the Medicaid-like Commonwealth Care program than it is spending selling private insurance. Plans can and do sell directly to individuals and small businesses – using products and market rules and standards that have been certified and approved by the Connector. But the Connector is not the preferred channel for buyers – so far anyway.

All in all, my big hope is that the federal government will do something on health care. It’s too big a player with too much influence and too much at stake to sit idly by and perpetuate the status quo. But as has been the case before on health care, there’s the talk of reform – and then there’s the walk. I’m hoping for the walk.