Health Insurance for the Masses

By Robert E. Moffit
Special to
Wednesday, May 31, 2006; 12:00 AM

Massachusetts recently passed a landmark health care reform. Hammered out after years of work and months of wrangling over the fine print, it was a compromise between Governor Mitt Romney, a conservative Republican, and the Democratic leadership of Massachusetts legislature.

Many economists have long sought the creation of a new market for health insurance where individuals and families would be allowed to own and control their own health insurance, just like they own and control other types of insurance. On a limited scale - and with no Congressional help in reforming federal tax rules for health care- Governor Romney achieved that goal.

Extensive media commentary on the Massachusetts experiment is of uneven accuracy. Most often overlooked are two key health policy changes that have never been attempted anywhere else in the United States.

First, Massachusetts eases the access of small business workers to affordable health insurance. Workers in mom and pop firms are most vulnerable to a loss of health care coverage because insurance today is tied to the job. Under the federal tax code, workers get generous tax breaks for health insurance only if their employer offers it; if the employer doesn't offer health insurance, the worker must pay for it with after-tax dollars, making the total cost of an equivalent benefits package significantly more expensive

Governor Romney tackled this problem by creating a new kind of health insurance market that is neither a regulatory agency nor a health insurance purchasing agent; it primarily processes premium payments and related paperwork. Analogous to a stock exchange, the "connector" is a single market with various offerings in which workers and their families can buy health insurance products.

This is a huge change: Workers, not employers, become the customers for health insurance policies. They can pick and choose from a variety a health insurance plans, including health savings account plans, and pay premiums tax-free out of flexible spending accounts. Employers can also make defined contributions to the health plans of the employees' choice. But because the employer would designate the "connector" (itself) as the employer's plan, for purposes of the federal tax code, all the premium payments, plus the value of the health benefits themselves, would be tax-free to small business employees and employers alike. This change would not only facilitate personal choice of health coverage, but also introduce fairness into the tax treatment of health insurance, which today overwhelmingly favors upper income employees of large companies.

In effect, Governor Romney created a new system allowing for personal choice of health plans for small business employees. More importantly, these employees will be able to own these health policies like they own other types of insurance, and take their health insurance from job to job without a tax penalty.

The new market will also facilitate coverage for a lot of workers in non-traditional jobs, including part time and seasonal employees, contractors and sole proprietors, and individuals with more than one job. Allowing more flexibility in the health insurance offerings, Governor Romney estimates the new law will also enable carriers to reduce average individual premiums by anywhere from 20 to 50 percent.

The second big change is the restructuring of health care financing. In 2005, Massachusetts racked up more than 1.3 billion in compensated care costs incurred by the uninsured.. Today, hundreds of millions of state and federal dollars go to hospitals and other health care facilities caring for those without insurance. Working with a waiver from the United Department of Health and Human Services (HHS), Romney turned the existing government subsidies upside down. He managed to target hundreds of millions of state and federal dollars previously going to hospitals and facilities directly to low-income individuals and families in the form of "premium assistance," thus enabling them to buy private insurance for their care, rather than simply cramming the emergency rooms at public expense.

Year in and year out, in trying to help poor working families buy health insurance, President George W. Bush, as well as leading Democrats and Republicans in Congress, have proposed billions in new spending in the form of health care tax credits or vouchers. In Congress, nothing happened. In Massachusetts, Governor Romney accomplished the same goal, but he did it using existing government funding for the uninsured.

Massachusetts is a very liberal state, governed by heavy levels of regulation and control. Critics of the Massachusetts health care reform say that it doesn't go far enough in deregulating the health system, and they oppose the near universal coverage through government mandates to buy health insurance. Regardless of their political views, the rest of America should not overlook Massachusetts' innovations in health insurance market and financing reform. In the more conservative states, with greater opportunities to cut costly red tape, the possibilities for more far reaching free market health reform could be revolutionary.

Robert E. Moffit, Ph.D., is director of the Center for Health Policy Studies at The Heritage Foundation (

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