An Unhealthy Policy Prescription

Why Gov. Mitt Romney's universal health care plan isn't right for Massachusetts, Michigan or elsewhere

Massachusetts Republican Gov. Mitt Romney’s plan to offer universal health coverage to everyone in his state is inspiring other governors, including Michigan’s Jennifer Granholm, to consider similar programs. But RomneyCare is the wrong prescription for anyone who believes that consumer choice – not government mandates – is the key to better and more cost-effective health care in this country.

Romney’s plan will allegedly perform the miracle of covering all of Massachusetts’ 555,000 or so uninsured residents without new taxes or a government takeover of health care. Maybe that’s a credible sales pitch in the home of the Big Dig, but in the real world it’s extremely unlikely.

The plan imposes an unprecedented mandate requiring every Massachusetts resident to have health insurance by July 2007. Initially, those who fail to comply will be punished by losing their personal exemption on the state income tax. Continued non-compliance will invite a penalty equal to half the cost of a standard insurance policy – as determined by the state.

Romney justifies these measures on grounds that uninsured individuals are free-riders who force others to pay their emergency room tab when they fall sick. He claims this costs the state $1 billion every year.

Under his plan, removing that $1 billion burden will allow the state to subsidize coverage on a sliding scale for uninsured people with incomes up to 300 percent of the poverty level – more than $55,000 for a family of four. Since the median income for a typical family is $44,389, RomneyCare effectively extends new entitlements well into the middle class, notes Michael Tanner, Director of Health and Welfare Studies at the Cato Institute.

Entitlements have a habit of exceeding original cost projections. Romney relies on an MIT econometric model to claim a total cost below the cost of uncompensated care, but this calculation is based on current health care use rates. In contrast, a legislative analysis that reasonably assumes higher use rates predicted at least a $160 million shortfall within the first two years. This will drive up overall health care costs and insurance premiums, which in turn will necessitate larger subsidies. Furthermore, the program will encourage employers to drop coverage of employees who can qualify for state-subsidized coverage. It all translates into more government health care spending, inevitably paving the way for future tax hikes.

What about those who aren’t covered by their employer, or by government programs such as Medicare and Medicaid, and so won’t qualify for the health insurance subsidies?

For them, Romney has created something called “connector coverage,” which he touts as a market-based innovation. Any individual who buys coverage through a newly minted “Massachusetts Health Care Connector” can do so with pre-tax dollars, just as employers currently do.

In principle, this is a promising approach that will allow more individuals to buy their own insurance that will follow them from job to job, freedom not available to those with employer-provided insurance. Furthermore, this Connector will band individuals and small businesses into large purchasing pools, giving them the same economies of scale that large employers use to negotiate better prices.

Unfortunately, this is not all the Connector would do. It will also vet insurance plans, allowing only those it deems to be of “high quality and good value.” Catastrophic plans that offer only bare-bones coverage with high deductibles aren’t likely to qualify, given that the Massachusetts Legislature has already mandated some 40 benefits – including hair prostheses and chiropractic services.

So the Connector plans are likely to be expensive, which means some individuals will be forced to pay the penalties rather than buy the plans – a rather perverse side effect. This will thwart the state’s purported goal of universal coverage, and generate political pressure for premium caps and price controls.

In effect, RomneyCare will likely restrict consumer choice, lead to new taxes and open the door to crippling regulations on the insurance marketplace. This is not a model that other states should be too eager to emulate – at least not until it is proven that these concerns are unjustified.

Shikha Dalmia is a senior policy analyst at Reason Foundation. An archive of her work is here. This column was originally written for the Mackinac Center for Public Policy.