Massachusetts Health Care Reform

1. Massachusetts Health Care Reform August 2006

2. Why healthcare reform in Massachusetts? • Double-digit, annual increases in insurance premiums and the highest per capita healthcare spending in the nation • 460,000 uninsured in latest state survey • Small businesses and individuals facing significant barriers to entry for coverage • Limited availability of information to consumers and businesses precludes informed health insurance purchase decisions • Potential loss of at least $385 million in federal government Medicaid funding • Two “universal” healthcare ballot initiatives • $1 billion and growing of “free-care” forcing all stakeholders to deal with costs for uninsured and under-insured

3. Broad consensus that healthcare reform must be a “system”, not a “product” approach Cost Containment A Culture of Insurance Eliminate Cost Shifting Subsidies for Low Income Ease of Offer, Ease of Purchase Affordable Products

4. The Uninsured in Massachusetts • Total Commonwealth Population: 6,400,000 • Currently insured (93%) • Employer, individual, Medicare or Medicaid 5,940,000 • Currently uninsured (7%) 460,000 -<100% FPL 106,000 Medicaid Eligible but unenrolled • ~100-300% FPL 150,000 Commonwealth Care • >300 FPL 204,000 Affordable Private Insurance Note: Based on August 2004 Division of Health Care Finance statewide survey

5. Insurance market reforms: A good start Reformed Market Existing Market Individual/small market merger Dysfunctional individual market More products with HSAs Limited take-up of HSAs Value-driven networks “Any willing provider” 19-26 year-old market Bad value for younger adults Tobacco usage is a rating factor No consequence for lifestyle choices More flexible up to 25 years-old Hard cut-offs for dependent status Two year moratorium Growing list of mandatory benefits Mandatory, larger risk pools Optional, smaller risk pools

6. Insurance reforms will provide better value for consumers Existing Market Reformed Market Primary care Yes Yes Hospitalization Yes Yes Mental Health Yes Yes Prescription Drugs Yes Yes Provider network “Open Access” “Value-Driven” Annual deductible “First Dollar Coverage” $250-$1,000 Co-pays Low ($0,10,20) Moderate ($0,20,40) Monthly Premium $350+ $154 - $280

7. The Connector is a breakthrough concept • Requiring adoption of pre-tax premium payment options by businesses (e.g. Section 125 plans) • Providing small businesses, sole-proprietors, and individuals without access to an employer-sponsored plans with more affordable product choices • Shifting the small employer/employee health insurance relationship from design, benefits, product offering, and contribution to just a discussion regarding financial contribution • Reaching non-traditional workers through innovative means • Allowing choice and portability for the consumer

8. Non-offeredIndividuals Non-workingIndividuals SmallBusinesses SoleProprietors The Connector Insurance Connector MMCOs Blue CrossBlue Shield Tufts NHP Harvard Pilgrim New Entrants Fallon

9. “Commonwealth Care” makes private insurance affordable for eligible individuals • Redirects existing spending on the uninsured away from opaque bulk payments to providers to direct assistance to the individual • Premium assistance up to 300% of the Federal Poverty Level (FPL) • Zero premium for individuals under 100% FPL • Premiums increase with ability to pay up to 300% FPL • No cliff; glide-path to self-sufficiency • No deductibles permitted for low-income individuals • Private insurance plans offered exclusively through Medicaid Managed Care Organizations (MMCOs) for first three years • The Connector will serve as the exclusive administrator of Commonwealth Care premium assistance program • Works closely with Medicaid program to determine eligibility • SCHIP and Insurance Partnership programs expand to achieve the same objective

10. Commonwealth Care: Key assumptions • Approximately 200,000 individuals will be eligible • Average health insurance monthly premium is $300/individual • Average state subsidy will between 80-85% of the monthly premium • Over a transition period, over $1 billion in funding can be available for premium assistance • Medicaid demonstration project monies • Existing provider and payer assessments • DSH funding • Funds not used for premium assistance will remain available to compensate for “free-care” services

11. Commonwealth Care estimated costs Year 1 Cost Scenarios Participants’ Share MA Share Total Costs Participants Yield $151 MM 25% 50,000 $180 MM $29 MM $302 MM 50% 100,000 $360 MM $58 MM $454 MM 75% 150,000 $540 MM $86 MM $605 MM 100% 200,000 $720 MM $115 MM

12. Redeploying existing funding makes the program financially sustainable Ratio of Premium Assistance to “Free Care” – FY06-09 100% Premium Assistance Premium 80 Assistance Premium Assistance 60 Free Care Free Care 40 Free Care 20 Free Care 0 FY06 FY07 FY08 FY09

13. Employers remain the cornerstone for the provision of health insurance • Existing IRS/ERISA provisions • New state non-discrimination provisions • Requires all companies with 11 or more FTEs to set up a section 125 cafeteria plan such that non-offered employees can purchase insurance with pre-tax dollars • No contribution required • Free rider surcharge applies only for companies without section 125 cafeteria plan and pattern of excessive use of “free care” (proposed) • Uncompensated Care Pool Assessment on companies not offering employer-sponsored health insurance • Tied to the use of “free-care” by uninsured employees • Maximum assessment is $295/employee/year • “Offering employer” covers 25% of full-time employees or offers to contribute 33% of premium costs for full-time employees (proposed)

14. Personal responsibility: health insurance is the law • Statewide open-enrollment period in March 2007 • Both Commonwealth Care and whole insurance market • Beginning on July 1, 2007 all Massachusetts residents will be required to have health insurance • Enforcement mechanisms • Indicate insurance policy number on state tax return • Loss of personal tax exemption for tax year 2007 • Fine for each month without insurance equal to 50% of affordable insurance product cost for tax year 2008 • Religious exemption and affordability test

15. The law provides the blueprint, but success will be measured by its implementation Key Implementation Issues • Creation of affordable, quality health insurance products • Well-functioning Connector that addresses the needs of small businesses and consumers • Premium assistance program that is financially sustainable and not rife with adverse selection • True transparency in the cost and quality of healthcare services • All purchasers (large businesses, government, insurance companies) must demand that the fragmented healthcare supply-chain become more efficient and coordinated • Acceptance of personal responsibility principle by hospitals and individuals

16. Components are transferable • Some are easy (section 125, Connector-like organizer) • Others, essential to success (culture of insurance) • Depends on: • Characteristics of state’s population and uninsured • Insurance market factors (guaranteed issue, community-rated, competition in the market) • Employer composition and offer rate • How much is currently being spent on the uninsured • Federal waivers & flexibility, dollars on the table • Focus on access first, but also need strong cost containment features