Massachusetts Health Reform: Rising Expenses and Growing Expectations Could Undermine Employer Support

Massachusetts Health Reform: Rising Expenses and Growing Expectations Could Undermine Employer Support

Issue Brief No. 124 -- October 2008

Enacting health reform legislation in Massachusetts demanded considerable bipartisan compromise and buy-in from key stakeholders, employers among them. Yet, findings from a recent follow-up investigation by the Center for Studying Health System Change (HSC) point to two significant developments that may erode employer support as the reform unfolds. First, enhanced access to the individual insurance market, the availability of state-subsidized coverage options, and the financial burden of higher employee enrollment in employer-sponsored plans combined with climbing premiums could diminish employers' willingness and capacity to maintain coverage. Second, frustration among employers seems to be mounting as the state expands their obligations. Although the ranks of the uninsured have dropped markedly, the substantial expense of the reform has prompted the state to pursue additional financial contributions from stakeholders, including businesses. Broadening access to health coverage has been the reform's clear priority, but little progress has been made on reining in escalating healthcare expenditures. Both objectives must be tackled simultaneously; otherwise, the long-term sustainability of Massachusetts' coverage initiative remains in doubt.

Numerous Residents Obtain Coverage, but Healthcare Spending Keeps Climbing

Massachusetts' effort to achieve near-universal health insurance has been widely praised for expanding residents' access to coverage. Since the law took effect in 2006, approximately 439,000 individuals have obtained insurance -- considerably more than the 379,000 the state originally estimated as lacking coverage. Consequently, the proportion of uninsured working-age adults fell substantially, declining from 13 percent to 7 percent.

Central to the reform is the individual mandate, which places responsibility on residents to secure health insurance. Under this mandate, uninsured adults whom the state judges capable of affording coverage face a tax penalty. Although many complied, roughly 62,000 taxpayers were found unable to afford even the cheapest available plan in 2007; another 86,000 went without coverage and incurred the approximately $200 penalty.

The bulk of newly covered residents -- 57 percent -- enrolled in either free coverage through the state's Medicaid program (MassHealth) or subsidized plans via the Commonwealth Care program. The significant cost of these programs has driven the state to seek additional funding. A crucial revenue source is a Medicaid waiver recently renewed by the federal government, generating $21.2 billion over three years and including a $4.3 billion increase that reflects heavy demand for state-supported coverage and high program expenses. Beginning in July 2008, the state also raised tobacco taxes by $1 per pack, expected to generate $174 million in new revenue. Furthermore, Massachusetts passed a supplemental appropriations measure in July 2008 providing $89 million in additional funds, including assessments and fees imposed on health plans and providers.

The state continues to look to employers -- another critical stakeholder group -- to deepen their commitment to the reform. Employer backing was instrumental in passing the legislation. A previous reform attempt in the 1980s was never implemented due to employer resistance to a coverage mandate, so framing the current reform around individual responsibility helped secure employer support. Alongside the individual mandate, however, specific requirements apply to employers with 11 or more full-time-equivalent employees, intended to increase overall coverage accessibility for residents and help fund state programs for low-income populations.

Employers must establish Section 125, or cafeteria, plans enabling employees to buy health insurance with pre-tax dollars. Those failing to comply may face a "free-rider" surcharge if their employees' or dependents' care is covered by the state's Health Safety Net Trust Fund. Additionally, employers that do not provide a "fair and reasonable" contribution toward employees' coverage are assessed up to $295 per worker annually, intended to equalize the uncompensated care burden across all employers. These requirements continue to expand as the reform progresses.

HSC investigators recently carried out a follow-up site visit to Massachusetts to examine the reform's effect on employers more than a year into implementation. An earlier site visit in 2007 explored how employers were preparing for the reform's rollout. While employer support has remained relatively solid to date, findings from the latest follow-up suggest two potential shifts that may jeopardize continued backing. First, rising expenses from greater take-up of employer-sponsored coverage and escalating premiums, paired with improved access to the individual insurance market, could weaken employers' incentive and ability to provide coverage. Second, employer dissatisfaction appears to be growing as the state ratchets up their responsibilities.

Greater Enrollment in Employer-Sponsored Coverage

Although the state has achieved notable progress in reducing the uninsured population through state-subsidized programs, increased enrollment in employer-sponsored coverage has also been a major factor. Nearly 160,000 newly insured individuals -- 36 percent of the total -- satisfied the individual mandate by obtaining coverage through their workplace. Respondents largely attributed this increase to higher take-up among workers of existing employer insurance offerings.

The financial impact on employers from this additional coverage take-up is considerable. Based on assumptions similar to those previously used by the Massachusetts Taxpayers Foundation, the estimated added cost to employers is approximately $540 million. Expenses are expected to rise further as more residents enroll in employer plans to avoid the tax penalty, which will be substantially higher for 2008 -- set at half the annual premium of the lowest-cost available plan. For an adult earning roughly $31,000 per year, the penalty would be about $900.

On top of cost pressures from increased enrollment, Massachusetts employers continue to face large premium hikes, reportedly reaching double digits for some small businesses. Respondents primarily attributed the escalating premiums to the rising costs within Massachusetts' characteristically expensive healthcare system. Many voiced concern that without the state seriously tackling the underlying cost drivers, the reform's current trajectory is financially unsustainable.

The reform law established the Massachusetts Health Care Quality and Cost Council to develop quality improvement and cost-containment strategies. However, its launch has been slow, and many expressed disappointment at the lack of concrete progress. Given the state's difficulty controlling healthcare spending, premiums are likely to keep climbing, at least in the near term.

Employers' Incentive to Provide Coverage May Weaken

Access to individual insurance has improved markedly under the reform. While this is a positive development, it also has the potential to reduce employers' motivation to offer coverage -- particularly those with many low-wage employees or those not already providing insurance. Roughly 32,000 newly covered individuals -- 7 percent of the total -- bought individual, non-subsidized coverage either through private carriers or through the Commonwealth Health Insurance Connector Authority (the Connector), the independent public agency administering key reform components including the Commonwealth Choice program.

A key strategy for improving individual coverage access was merging the small group market (750,000 individuals) with the nongroup market (50,000 individuals) to pool health risks. Before the reform, the nongroup market featured modified community rating, with premiums varying only by age, geography, and family size but not by gender or health status. Adverse selection plagued the nongroup market as older, less healthy individuals were more likely to purchase individual coverage. Because few people could afford the resulting high premiums, few insurers offered individual products. The merger was expected to cut nongroup premiums by about 15 percent while slightly raising small group rates. In practice, nongroup premiums fell more than anticipated -- the Connector reported that premiums for a 37-year-old buying individual coverage dropped by as much as 50 percent.

The Commonwealth Choice program has also made shopping for coverage much more convenient. Residents can select from an array of products offered by six different insurers. About 18,000 newly covered residents with individual policies -- 60 percent -- purchased through the Connector. This includes 4,000 young adults (ages 19-26) who bought insurance products specifically tailored to their age group and offered exclusively through the Connector. The Connector was also expected to serve as a marketplace for small employers to purchase coverage, but implementation was delayed. Several respondents noted that the delay may have resulted in missed opportunities to engage small employers that had not previously offered coverage.

Moreover, more individuals can now purchase nongroup coverage using pre-tax dollars through the reform's Section 125 plan requirement. This option saves employees an average of 41 percent -- though amounts vary by tax bracket -- on insurance premiums without direct employer involvement. Employees' reduced taxable income also lowers employer payroll taxes. Respondents indicated that establishing a Section 125 plan is not especially burdensome, and employers can get help from a variety of sources including the Connector, business organizations, and insurers. As of July 2008, the Connector had set up these plans for more than 3,000 employers, with approximately 1,000 employees buying coverage through this mechanism.

State-subsidized coverage could also diminish some employers' motivation to offer insurance -- especially those with large numbers of low-wage workers -- because in the absence of employer-provided coverage, low-wage employees may qualify for subsidized coverage through Commonwealth Care. Currently, individuals eligible for and offered employer coverage cannot receive state-subsidized benefits. The reform includes safeguards against crowd-out by setting Commonwealth Care's premium contributions and patient cost-sharing at levels comparable to employer-sponsored coverage. However, allowing low-wage workers unable to afford their employer's insurance to enroll in Commonwealth Care was under consideration. Some respondents predicted this change would generate significant crowd-out over time, driving substantially higher costs for the state.

While it is premature to determine whether employers' motivation to offer coverage will erode to the point of dropping plans, at least one preliminary report indicates a slight enrollment decline in the small group market. According to the Massachusetts Association of Health Plans, small group enrollment decreased by about 15,000 individuals in 2007, despite overall growth in employer-sponsored coverage take-up. Most respondents expected that large employers' commitment to offering coverage would remain largely steady in the near term, but small employers' interest and ability to continue administering health benefits may be waning -- a trend potentially accelerated by the economic downturn.

Employers Confront Expanding Obligations

The absence of an employer mandate in the legislation was crucial to securing employer backing. Yet, representatives of several small business groups were skeptical from the outset, given key questions left unresolved by the law and the broad discretion granted to state regulatory agencies and the Connector to define specific requirements. At the time, they considered it politically unwise to voice opposition. Also, given the diverse stakeholders involved and the national spotlight on the reform, there was strong pressure on employers to cooperate. But that dynamic may be shifting as employer obligations expand.

The inclusion of prescription drug coverage in the minimum creditable coverage requirements set by the Connector Board has particularly irritated employers. Effective January 1, 2009, individuals must have prescription drug coverage to satisfy the individual mandate and avoid the tax penalty. Although employers are not directly subject to the requirements, respondents anticipated they would be pressured to provide coverage that meets the standards. Otherwise, employees will need to obtain supplemental coverage or pay the penalty because their employer plan falls short. The Massachusetts Taxpayers Foundation estimated that roughly 163,000 insured residents lack prescription drug coverage, with more than 80 percent of them holding employer-sponsored plans. The estimated additional cost to employers for adding prescription drug coverage is $24 million.

Given the high cost of the reform, many respondents expressed dismay at what they viewed as overly generous benefit requirements, believing these standards fuel cost pressures and make affordable coverage even harder to achieve.

Other recent changes have also frustrated employers and prompted some pushback. Starting January 1, 2009, the state planned to revise the standards for defining a "fair and reasonable" contribution, requiring employers with more than 50 full-time-equivalent employees to meet both thresholds (33 percent premium contribution and 25 percent employee take-up). Initially, the state proposed applying this stricter criteria to employers with 11 or more workers. After pushback from the employer community concerned that small businesses would be disproportionately affected, the state compromised and excluded employers with fewer than 50 employees. The state also agreed to allow employers with 75 percent or greater take-up among full-time employees to pass the fair share test, regardless of their contribution rate. Under the revised standard, the state estimates that approximately 1,100 employers will owe the fair share assessment, expected to raise about $30 million annually -- nearly four times the amount previously collected.

The state is also revamping fair share filing requirements. Instead of annual filings, employers must now report quarterly. Several respondents noted that the more frequent filings create added administrative burden and have contributed to mounting employer frustration.

As obligations increase and affect a broader set of employers -- including those already offering coverage -- it raises an important question about whether the reform is effectively evolving into an employer mandate. Federal ERISA regulations effectively pre-empt self-funded employer health plans from state health insurance laws, including coverage mandates. Some respondents were surprised that no ERISA challenge to the reform law had been attempted in Massachusetts, noting that a successful legal challenge could potentially unravel key reform components.

Implications

Massachusetts has achieved remarkable progress in broadening access to healthcare coverage, and the number of uninsured residents has fallen significantly. Yet nearly two years into the reform, the state has done little to tackle rising healthcare costs.

While the reform was built on the principle of individual responsibility, the reality is that individuals have limited capacity to do more, particularly considering that nearly 60 percent of the newly insured gained coverage through state-funded programs. As the economy weakens, cost pressures on the state may intensify as more individuals seek subsidized coverage. Inevitably, other stakeholders -- health plans, providers, and employers -- will be called upon to shoulder greater responsibility. Yet, additional levies on plans and providers are likely to be passed on to employers through higher premiums. Thus, it may ultimately be employers who bear a disproportionate share of the financial burden.

Employers provide health benefits to attract and retain a capable workforce. But this remains a voluntary activity, and if the reform unfolds in ways they consider disadvantageous, they may push back and pursue judicial or other remedies. This concern may be especially acute for employers offering coverage whose workers face tax penalties because the plan does not meet state standards. Other employers -- particularly small businesses that are financially vulnerable -- may conclude that the demands of offering employee coverage are too burdensome or costly relative to the benefits, and may choose to stop providing it. Furthermore, employers currently not offering coverage are unlikely to start if they perceive the associated obligations as financially or administratively onerous.

In its pursuit of near-universal coverage, Massachusetts has clearly prioritized expanding access over controlling costs. Yet, long-term viability demands that both goals be addressed in tandem. Without credible cost-containment measures, healthcare spending will continue to escalate, which may ultimately undermine this historic coverage initiative.

Data Source

In 2008, HSC carried out a follow-up site visit to Massachusetts examining the second-year impact of the state's health reform law on employers. The initial site visit occurred in January 2007, with findings published in an HSC Issue Brief that July. Between May and August 2008, HSC researchers interviewed 28 key stakeholders, including employer group representatives, benefits consultants, brokers, health plan officials, providers, policy makers, advocates, and other knowledgeable observers to gather their perspectives on how the reform is evolving and its impact on employers. A two-person research team conducted each interview, and notes were transcribed and jointly reviewed for quality assurance. Interview responses were coded and analyzed using Atlas.ti, a qualitative research software tool.

Sources and Further Reading

Kaiser Family Foundation — Massachusetts Health Reform — KFF analysis of the Massachusetts reform's coverage gains, costs, and lessons for national health policy.

Commonwealth Fund — Massachusetts Employer Coverage and Costs — Research on employer-sponsored insurance trends and cost pressures under the Massachusetts reform.

Centers for Medicare & Medicaid Services — Medicaid Waivers — CMS resources on Medicaid demonstration waivers, including the type of federal waiver that funded Massachusetts' coverage expansion.

Health Affairs — Massachusetts Health Reform and Employer Coverage — Peer-reviewed research examining the early effects of the Massachusetts reform on employer-sponsored insurance and state healthcare spending.

Robert Wood Johnson Foundation — HSC Research on Massachusetts Reform — RWJF-funded research from the Center for Studying Health System Change on employer impacts of the Massachusetts health reform law.