NCPA - National Center for Policy Analysis


June 18, 2010

How did health care costs in Massachusetts get so big?  A major reason is the practice of giving huge subsidies for low- to medium-earners, says Shawn Tully, a senior editor-at-large with 

One of the most fascinating features of the Massachusetts health care reform plan is that it introduced a system of subsidized policies, sold through an insurance "exchange" that's extremely similar to the one in the new federal plan, says Tully. 

For example: 

  • Under Commonwealth Care, the state subsidizes plans -- offered by private carriers -- for residents who earn up to $66,150 who are not covered by employers.
  • The aid is extremely generous; at $44,000, families pay around $1,000 a year in premiums, and at the $66,150 maximum, they contribute around $3,000. 

The problem is that the actual annual cost of these plans is around $10,000, so the subsides are enormous -- that's 90 percent for families earning $44,000.  And while the costs keep going up, the share paid by the enrollee barely budges.  According to Michael Tanner, a senior fellow with the Cato Institute, it's a situation where the entire escalation in costs is paid by the government, not the people receiving the care. 

The federal plan also subsidizes care provided through state-run exchanges, says Tully: 

  • The patients' contributions are bigger than in the Massachusetts plan; for example, a family earning $66,000 would pay $6,300 a year in the federally subsidized state exchanges.
  • But the federal plan offers subsidies far higher along the income scale, aiding families of four making up to $88,200.
  • And surprisingly, the federal plans would probably prove a lot more costly than the ones in Massachusetts, where the state prides itself on restraining what they pay by squeezing providers, who then shift the added costs to private customers. 

The big problem arises if far more people sign up for these exchange-offered plans than anticipated.  That's been the case in Massachusetts.  And it could still get a lot worse there.  A potential disaster threatens the federal plan if employers staring dropping coverage, since a flood of newcomers would rush into the state-funded pools, says Tully. 

Source: Shawn Tully, "Five painful health care lessons from Massachusetts," Fortune, June 15, 2010. 

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