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Individual Health Care Mandates and the Problem of Affordability

Is an individual mandate to purchase health care insurance the solution to America's growing health insurance crisis? 

47 million Americans are without health care coverage and millions more are struggling to afford ever-rising premiums and higher deductibles and co-pays. In 2006, Massachusetts became the first state to require all residents to have health care coverage, known as an individual mandate, and the deadline to comply with the mandate is fast approaching on December 31, 2007. 

The problem with an individual mandate is that the vast majority of individuals impacted by it will be lower-income people who are working yet don't have access to employer-based health coverage. A report by the Blue Cross Blue Shield Foundation of Massachusetts shows that 75% of the uninsured live below 300% of poverty and most are working, yet they are not eligible for employer-sponsored coverage or can't afford what is offered to them. These numbers mirror most states. Uninsured Americans are very cost-sensitive as health care costs eat up a significantly larger portion of their income than higher income people, potentially making an individual mandate very burdensome on low-income and many middle-income families.  

Accordingly, the problem of affordability is the key issue for individual mandates. This Stateside Dispatch will examine Massachusetts' individual mandate and whether it has achieved affordability. We will highlight model reforms being proposed in Wisconsin, Maine, and California, which measure affordability by including all out of pocket costs - premiums, co-pays, and deductibles - in the calculation and limit total yearly insurance costs to a percentage of an individual's or family's income. Measuring affordability must consider more than just the cost of premiums and take into account the real-world financial realities of already financially stressed Americans.

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Massachusetts - Is the individual mandate affordable?

When Massachusetts enacted comprehensive health care reform, Chapter 58, in 2006, it was heralded as the first state to pass universal health care coverage, yet it still left many families unable to afford the health care they were now mandated to buy, unlike comprehensive plans enacted in Maine and Vermont which expanded coverage without an individual mandate. 

Massachusetts did try to make their mandate easier to stomach; the law included several measures to improve affordability of health care coverage, including subsidies to individuals and families living below 300% of the federal poverty line and combining the non-group and small group insurance markets, which is reducing individual premiums on average 15%.  The plan also created a unique state clearinghouse, called a Connector, to negotiate with private insurance companies to provide state residents with more affordable health care insurance options.  

But while the Connector authority determined that premiums should not exceed between 5% and 10% of an individual's income, that affordability requirement did not include the costs of deductibles, co-pays and other cost-sharing. Deductibles go as high as $2,000 per individual and $4,000 per family and total out of pocket spending limits can be $5,000 for an individual and $10,000 for families.

Under the rules, an individual earning just over 300% of the poverty line ($31,000) could face total health care costs of $7,100 when you add monthly premiums to the out of pocket limit. The cheapest option for a middle-age resident is about $175 per month, with a $2,000 deductible and out of pocket limit of $5,000. In the event of a major medical crisis, like a cancer diagnosis, a personal injury, or complications from managing a chronic disease, like diabetes, the combined costs would amount to 23% of the individual's income and could quickly result in a serious fiscal crisis, if not bankruptcy. 

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Loopholes to the Massachusetts Individual Mandate

Before other states adopt an individual mandate, they should recognize that Massachusetts itself understood the difficulty of ensuring affordability and wrote into the law loopholes to prevent these costs crushing state residents.

First, as mentioned above, there were subsidies for the lowest income individuals; for individuals purchasing insurance through the Connector, premiums are scaled as follows with $0 in premiums for individuals below 150% of poverty scaling up to $105 for individuals between 250% and 300% of poverty. For individuals ineligible for subsidies, or reduced premiums, the cost of plans offered through the Connector range from $122 to more than $800, with the cheapest option for middle-age residents starting at $175 a month. 

Second, although 200,000 previously uninsured residents have obtained health insurance in the past 16 months, anywhere from 150,000 to 300,000 residents have yet to sign up with an insurance plan.  After December 31st, any uninsured residents will be penalized in 2008 by losing a $210 tax exemption.  In 2009, the penalty will jump to "half the monthly cost of the least expensive plan available for each month that individual is uninsured."  But officials recognize that the still-high costs of health care in Massachusetts make imposing this penalty unfair.  The Connector authority is granting waivers to 20% of the state's uninsured residents, or roughly 65,000 individuals, exempting them from the individual mandate. 

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Measuring Affordability - Include ALL Out of Pocket Costs

The bottom line in the health care reform debate is the affordability of health care and coverage. The problem of affordability is especially pronounced with individual mandates. It is not enough to consider premiums only when determining the affordability of health care coverage and the feasibility of individual mandates. All out-of-pocket costs must be included when calculating the affordability of health care coverage. 

As already discussed, uninsured and low-income Americans are very cost-sensitive. Health care costs take up a larger slice of their income than higher income and insured Americans. As the Blue Cross Blue Shield of Massachusetts Foundation's report, Getting Ready for Reform: Insurance Coverage and Access to and Use of Care in Massachusetts in Fall 2006, points out,

An important issue to consider in assessing the quality of health care for low- and moderate-income adults is whether their health insurance coverage protects them from financial risk in the event of a major illness or surgery. Limited benefits and high cost-sharing place more of the financial risk of high health care costs on the individual.

Also documenting the cost-sensitivity of low and middle income families is a June 2007 report by Health Access-California. The report states that a major medical event and a $5,000 deductible would financially "wipe out 40% of Californians" and a $10,000 out of pocket limit "would eliminate almost all the assets of 60% of Californians." 

Health Access shows that middle income families have few resources to withstand the potential costs of an individual mandate without strong protections for affordability that reflect a family's "real-world" ability to pay. Middle income families, earning as much as $70,000 a year, are struggling with higher everyday costs to afford a home, put money away in savings, and pay down credit card debt, tying up as much as one-third of their income.

The only true and fair way to ensure affordability of health care coverage for all families, those insured and those uninsured, is to limit ALL yearly out-of-pocket expenses - premiums, deductibles and co-pays - to a percentage of a family's or individual's income. This ensures that health care expenses do not exceed financial resources. Percentage-of-income limits on all yearly health care expenses should allow for other expenses, including housing, food, clothing, transportation, and the ability to accrue savings for family and education. More and more states are pursuing this model. 

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California: Limiting Individual Mandates with Aggressive Affordability Protections

California is debating a model bill combining a tight affordability rule with an individual mandate. Seeking common ground with Governor Schwarzenegger, who vetoed an earlier health care reform measure in part because it did not require all residents to obtain health care coverage, Assembly Speaker Fabian Nunez and Senate President Pro Tem Don Perata recently unveiled a new comprehensive reform proposal, AB x1 1: the Californian Health Care Reform and Cost Control Act, which includes an individual mandate.  However, the mandate is only enforced so long as total health insurance costs do not exceed 6.5% of family income, including premiums and out-of-pocket costs.  If health insurance costs consume more than 6.5% of income, a hardship exemption will automatically be given to avoid any penalties for non-compliance with the mandate.

To help achieve affordability, the leadership proposal includes robust expansions of public programs and sliding scale premium subsidies for lower income residents, amounting to the largest public program expansions in the country since the beginning of Medicare and Medicaid in the 1960's.  The expansions include covering all children, regardless of immigration status, up to 300% of poverty; covering all parents who are legal residents up to 300% of poverty; and covering single, childless adults up to 250% of poverty. 

The state would create a new purchasing pool for residents to obtain health coverage, similar to the Massachusetts Connector with subsidies for Californians with incomes up to 450% of poverty ($92,925) in the form of an advanceable tax-based credit to ensure total insurance costs do not exceed 6.5% of family income. These efforts go further than the Governor's own proposal, largely through higher income eligibility limits for public programs and subsidies, but are not at odds with the priorities and themes he presented in his proposal released in October. 

This revised proposal by legislative leadership, despite the problems of individual mandates, presents a promising model for ensuring affordability by tying total costs to a percentage of income and protecting families from undue health care expenses.  The Assembly Health Committee passed the proposal by a party-line 10-5 vote on November 15th.  Floor votes are expected after Thanksgiving.

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Other State Models to Achieve Affordability

Illinois Governor Rod Blagojevich's Illinois Covered initiative offers strong measures to ensure affordability of health care premiums, although it does not include deductibles and other insurance costs in the affordability measure.  The proposal, which does not include an individual mandate, is similar to many comprehensive reform packages that rely on a combination of public and private efforts to expand access to quality coverage. To help ensure affordability, Illinois Covered would provide premium subsidies to residents with incomes up to 400% of poverty, or $80,000 for a family of four, a level significantly higher than Massachusetts, yet smaller than the legislative proposal in California.  While the legislation would limited premium payments to a percentage of annual income, it doesn't cap out-of-pocket expenses, so many families might be able to afford the insurance but not be able to afford the health care co-payments in the case of serious illness. Illinois Covered stalled during this year's legislative session but the Governor continues to push for the reform package and pick-up support from key allies, including leaders of the AFL-CIO, SEIU and Teamsters.

A better option for affordability, similar to California's, was proposed earlier this year in Maine.  To ensure the state's public/private insurance program for individuals and small businesses, called DirigoChoice, is more broadly affordable, legislators sought to tie all insurance costs to an aggressive income scale through LD 1716.  Subsidies for DirigoChoice are currently offered to enrollees with incomes up to 300% of poverty, but, again, the subsidy scale does not directly limit an enrollee's total exposure to health care costs.  Under LD 1716, DirigoChoice enrollees with incomes up to 250% of poverty would receive full coverage at no charge.  Those between 251% and 300% of poverty would spend no more than 0.5% of their taxable income on coverage.  From 301% to 350% of poverty, enrollees would pay no more than 1% of their taxable income.  The scale would increase similarly up to a maximum of no more than 10% of taxable incomes being spent for coverage under the program.  Although the legislation failed, it presents a strong model for ensuring affordability of health care coverage.

Especially as states consider individual mandates, it is imperative that an affordability measure include all out-of-pocket medical costs, not just premiums, and take into consideration other real-world family expenses, including housing, food, clothing, transportation, higher education and the ability to accrue family savings.

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Ensuring Affordability of Employer Mandates

Employers play a vital role in the US health care system, providing health care coverage for more than 158 million Americans.  Ensuring continued employer participation is a key priority for health care reform. Massachusetts and Vermont were early leaders in requiring employers to provide health coverage for employees or pay penalty to the state, although penalties, at $295 and $360 per worker per year respectively, are pittance compared to the cost of health care coverage. 

As with opposition to individual mandates, business groups have complained that mandating employers to provide health care coverage is unfair in the face of ever-rising health care costs. In response, states are pursuing for employers some of the same affordability protections being proposed for individuals as part of employer mandates to provide health care coverage.

California - Affordability Protections for Small Businesses:  As with concern for the impact of individual mandates on uninsured and low-income individuals, there is concern for the impact of employer mandates on small businesses, which typically have tighter margins than large employers and are more susceptible to rising and unpredictable health insurance costs. Still, a survey of small business owners in California found that 80% believe employers should pay something to provide health care to their employees and 75% ranked the availability of affordable health care as extremely or very important.

Accordingly, California Speaker Nunez and Senate leader Perata have proposed a 6.5% maximum payroll-based employer mandate and includes sliding scale contributions for employers with payroll up to $250,000.  The employer fee sets payment increments of 2% and 4% for payrolls less than $250,000 and the full 6.5% fee for employers with annual payroll above $250,000.  

Although the 6.5% employer payroll fee is higher than the Governor's 4% proposal, it does include sliding scale contributions for firms with low payrolls, which is a priority for the Governor and was included in his own health care reform proposal.

As polling by the Herndon Alliance shows, Americans strongly identify with small businesses and are very concerned that reform not hurt small businesses.  Including affordability protections for small businesses as part of employer mandates can help engage small business owners and advocacy organizations as strong allies for reform.  

Healthy Wisconsin: A promising twist on ensuring affordability for individuals and employers is being pursued by legislators and health care advocates in Wisconsin, as we profiled this past summer. Healthy Wisconsin would preserve choice of providers while guaranteeing all residents comprehensive health care coverage equal to legislators' own health plans. The initiative would ensure shared responsibility by instituting a payroll-based fee paid by all employees, individuals, and employers. The payroll fee would replace all premiums in the current system and co-pays and deductibles would be minimal. 

The fees would be capped at 4% of social security wages for employees and 12% for employers (estimates placed the initial employer fee at 10.5% of wages). The virtue of a payroll-based payment system is that it ensures shared responsibility for health care and, importantly, each employee's and employer's payments are directly proportional to their income, or wages, and ability to pay. Additionally, payroll-based systems keep up with the times better than affordability programs which use the federal poverty level to determine eligibility for subsidies. As a Kaiser Family Foundation report shows, the value of the federal poverty level has not kept pace with health care costs. And so, subsidies to purchase health insurance coverage, as in Massachusetts and Maine, based on the federal poverty level may lose value over time as health care costs rise precipitously.

A study by the Lewin Group found that Healthy Wisconsin would save the state $13.8 billion over ten years, the average family $750 per year and employers that currently provide coverage an average 15% from their current costs. Healthy Wisconsin was passed by the state senate as part of its version of the budget. After a protracted budget debate, the conservative house succeeded in removing the package from the budget. However, progressives, led by State Sen. Jon Erpenbach vow to bring Healthy Wisconsin back as its own separate piece of legislation. 

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Conclusion

As a means to achieving quality and affordable health care for all, individual mandates are problematic absent strong affordability protections for consumers. As long as families are not protected from resource-depleting health care costs in the event of a medical crisis, individual mandates will only exacerbate the lack of affordable access to health care coverage that pervades our health care system. 

Several states in addition to Massachusetts and California are actively considering individual mandates to obtain health care insurance as key elements of comprehensive health care reform proposals, including ColoradoNew Mexico, and Iowa. The health care debate in these and other states must include affordability protections that limit total health insurance costs to a percentage of family income; a percentage that allows for other family expenses like food, clothing, transportation, housing, and the ability to accrue savings.

Lastly, it is important to note that despite the affordability challenges faced by Massachusetts and its individual mandate, the state's health care reform law has achieved significant and measurable success. The Connector authority, as an agent negotiating with insurance companies on behalf of consumers, is a strong model for bringing more affordable options to the market. Combining the individual and small group markets is a smart and practical way to create economies of scale and provide consumers with stronger negotiating power against insurance companies. Importantly, almost 140,000 residents have enrolled in subsidized coverage through the Connector, which is the level officials had expected by next July.  And, 55,000 residents have newly enrolled in MassHealth, the state Medicaid program. However, through September, only 8,306 residents had signed up for unsubsidized health care coverage through the Connector and anywhere from 150,000 to 300,000 residents remain uninsured.

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