An Ambitious Plan to Reform US Health Care

Recently, Democrats in the US House of Representatives unveiled a 1,018 page health reform package, entitled “America’s Affordable Health Choices Act,” which was based on the requirements set out by President Obama to lower health care costs, let people kept their current insurance and substantially decrease the number of uninsured Americans (currently estimated at 45.7 million). The full text of the bill can be seen here and a there is a summary of the bill’s provisions here .

The proposal is very similar to, and builds on, the groundbreaking health care reforms implemented in Massachusetts in 2006 and 2008 which I analyze more fully here . The House Democrats seem to have learned the lessons, both positive and negative, from the Massachusetts reforms. While both bills are extremely complex, I will try to explain and analyze their key points briefly.

Like the Massachusetts reforms, the House bill is based on the premise of shared responsibility – that providing health insurance is the combined responsibility of government, individuals, employers and health care providers.

The most controversial aspect of both bills is the introduction of an “individual mandate” requiring every person to obtain and maintain health insurance or pay a penalty, except in cases of economic hardship. Under the House bill, the penalty for not having insurance is 2.5% of the modified adjusted gross income above a certain level. In order to enable individuals to purchase insurance and comply with the mandate, the bill provides for a sliding scale of affordability credits (subsidies) which reduce the up-front costs of premiums for individuals and families who earn up to 400% of the Federal Poverty Level (currently about $43,000 for an individual or $88,000 for a family of four).

Employers will also have to contribute to health insurance through a “pay or play” mandate. That means that employers will have to either provide adequate health insurance for their employees (play) or pay a tax of up to 8 percent of payroll towards health insurance benefits (pay). Small businesses (with payrolls of $250,000 or less) will be exempt from the employer responsibility requirement and may be eligible for a new small business tax credit to voluntarily provide coverage to employees.

Finally, the House bill calls for the creation of a Health Insurance Exchange (called “The Connector” in Massachusetts). Essentially, different (private and public) health insurance plans will be available through a large quasi-governmental exchange. This creates a marketplace where individuals and small employers can compare prices and services covered among different potential insurers. It is designed to work like a buying cooperative, generating lower premiums from the greater purchasing power that results from combining many individuals and smaller employers into a single, state-run insurance pool. The only key difference between the Massachusetts Connector and the federal Exchange is that the latter will contain a public insurance option that would exist alongside and compete with the private offerings.

The Massachusetts reforms have been extremely successful in signing people up for insurance and significantly reducing the number of uninsured in that state. Two years after implementation, 439,000 people had signed up for health insurance. The uninsurance rate in Massachusetts dropped from 11% in 2005 to 2.6% – currently the lowest uninsurance rate in the US and less than half of the next lowest state. Furthermore, the substantial increase in the number of people with insurance has led to a dramatic drop in the number of patients seeking routine care in emergency rooms and a more efficient use of health care services.

The success of the Massachusetts model indicates that an individual mandate is necessary to significantly increase the number and percentage of uninsured individuals who sign up for health insurance. It is the only way to ensure that healthy (and young) individuals enter into and stabilize risk pools, and bring down the average costs to insurance companies. The Congressional Budget Office has estimated that the House proposal with the individual mandate would cover 97% of Americans by 2015 and would reduce the number of nonelderly Americans who lack insurance by 37 million.

Unfortunately, however, the Massachusetts reform was (potentially critically) flawed. The key failure was that Massachusetts expanded access to and broadened health insurance coverage without any cost containment mechanisms, an unsustainable model in the long-term. The state has already had to raise taxes on cigarettes and recently cut $100 million from its Commonwealth Care fund which subsidizes insurance premiums for poor residents. Learning from Massachusetts, the House Democrats’ bill contains significant mechanisms to both increase government revenues and reduce health care costs.

The House bill proposes to raise revenues by imposing a surtax on the richest 1.2% of Americans (individuals earning over $280,000 and couples earning over $350,000). It has also built in several cost-containment measures. For example, the bill intends to lower costs through investment in electronic health information technology systems and by increasing competition in the insurance and drug markets. In addition, a substantial part of the bill is devoted to promoting up-stream prevention and wellness measures, strengthening public health and increasing access to primary care, which are all designed to contain costs in the long run. It is not clear if these long-term cost-containment strategies will be sufficient to keep the plan deficit-neutral as intended, but at least the House Democrats recognize the need for substantial cost-containment mechanisms in addition to a subsidized individual mandate.

The House Democrats’ bill must still go through three house committees who can amend it before it goes to the entire House for a vote, and the Senate is currently considering two additional health care bills. Clearly, the health care reform battle is far from over. But the House Democrats have learned from the Massachusetts reforms and made an ambitious, realistic and significant proposal to reduce the number of uninsured Americans and increase access to health care in the near future.