Massachusetts Starts to Tackle Health Care Costs the Right Way

The Economics of Health Care Costs are Finally Getting Through

As everyone who follows politics knows, Massachusetts under Republican Gov. Mitt Romney enacted a health insurance plan that required, amongst other things, that every individual in the state have health insurance.  The rationale was the issue of the “free rider”, the fact that those without insurance who needed care they could not pay for were riding free on the backs of those who did have insurance.

Despite Mr. Romney’s fervent disavowal of the plan as a model for other states for political reasons, the program has been a success in getting residents to have health insurance.

Only 2 percent of residents and a fraction of 1 percent of children in Massachusetts are uninsured. The law’s popularity has given state leaders added incentive to make it financially sustainable.

But like the national health law enacted by the Obama Administration, the plan in Massachusetts did little to contain cost, and Massachusetts has high medical costs.

A state report last year found that per capita health spending in Massachusetts was 15 percent above the national average. And from 2007 to 2009, private health insurance premiums rose between 5 and 10 percent annually, according to another state study.

So now the state is embarking on a plan to control costs by doing what many economists, including The Dismal Political economist said should be done, having fixed payments instead of fee for service.  Under fee for procedure, the incentives are to have greater costs, because each dollar of increased cost is a dollar of income to health care providers.  Under a fix payment regime,

The networks would receive an annual fee for the care of each patient, with higher payments for patients deemed to be greater health risks and with bonuses for high-quality care. In theory, the healthier these so-called accountable care organizations can keep their patients, the more reimbursement they can pocket as profit. 

Is it that simple?  Well yes and no.  In concept it is that simple, implementation is another factor.  But Massachusetts seems well on the way to implement such a program, and if it succeeds it could be the model for other states.  Of course, this would also mean a new round of disavowals by Mr. Romney, unless of course the program proved popular, which case Mr. Romney would be expected to embrace it.