1. Massachusetts Health Care Reform August 2006

2. 2 Why healthcare reform in Massachusetts?  Double-digit, annual increases in insurance premiums and the highest per capita healthcare spending in the nation  460,000 uninsured in latest state survey  Small businesses and individuals facing significant barriers to entry for coverage  Limited availability of information to consumers and businesses precludes informed health insurance purchase decisions  Potential loss of at least $385 million in federal government Medicaid funding  Two “universal” healthcare ballot initiatives  $1 billion and growing of “free-care” forcing all stakeholders to deal with costs for uninsured and under-insured

3. 3 Broad consensus that healthcare reform must be a “system”, not a “product” approach Affordable Products Ease of Offer, Ease of Purchase Cost Containment A Culture of Insurance Eliminate Cost Shifting Subsidies for Low Income

4. 4 The Uninsured in Massachusetts  Total Commonwealth Population:6,400,000  Currently insured (93%) -Employer, individual, Medicare or Medicaid 5,940,000  Currently uninsured (7%)460,000 -<100% FPL106,000Medicaid Eligible but unenrolled -~100-300% FPL150,000Commonwealth Care ->300 FPL204,000Affordable Private Insurance Note: Based on August 2004 Division of Health Care Finance statewide survey

5. 5 Insurance market reforms: A good start Existing Market Reformed Market Dysfunctional individual market Individual/small market merger Limited take-up of HSAs More products with HSAs Bad value for younger adults 19-26 year-old market “Any willing provider” Value-driven networks No consequence for lifestyle choices Tobacco usage is a rating factor Hard cut-offs for dependent status More flexible up to 25 years-old Optional, smaller risk pools Mandatory, larger risk pools Growing list of mandatory benefits Two year moratorium

6. 6 Insurance reforms will provide better value for consumers Existing MarketReformed Market Primary careYes HospitalizationYes Prescription DrugsYes Mental HealthYes Provider network“Open Access”“Value-Driven” Annual deductible“First Dollar Coverage”$250-$1,000 Co-paysLow ($0,10,20)Moderate ($0,20,40) Monthly Premium$350+$154 - $280

7. 7 The Connector is a breakthrough concept  Requiring adoption of pre-tax premium payment options by businesses (e.g. Section 125 plans)  Providing small businesses, sole-proprietors, and individuals without access to an employer-sponsored plans with more affordable product choices  Shifting the small employer/employee health insurance relationship from design, benefits, product offering, and contribution to just a discussion regarding financial contribution  Reaching non-traditional workers through innovative means  Allowing choice and portability for the consumer

8. 8 Non-offered Individuals Small Businesses Sole Proprietors Non-working Individuals Blue Cross Blue Shield Fallon Harvard Pilgrim Insurance Connector The Connector New Entrants MMCOs Tufts NHP

9. 9 “Commonwealth Care” makes private insurance affordable for eligible individuals  Redirects existing spending on the uninsured away from opaque bulk payments to providers to direct assistance to the individual  Premium assistance up to 300% of the Federal Poverty Level (FPL) -Zero premium for individuals under 100% FPL -Premiums increase with ability to pay up to 300% FPL -No cliff; glide-path to self-sufficiency -No deductibles permitted for low-income individuals  Private insurance plans offered exclusively through Medicaid Managed Care Organizations (MMCOs) for first three years  The Connector will serve as the exclusive administrator of Commonwealth Care premium assistance program -Works closely with Medicaid program to determine eligibility  SCHIP and Insurance Partnership programs expand to achieve the same objective

10. 10 Commonwealth Care: Key assumptions  Approximately 200,000 individuals will be eligible  Average health insurance monthly premium is $300/individual  Average state subsidy will between 80-85% of the monthly premium  Over a transition period, over $1 billion in funding can be available for premium assistance -Medicaid demonstration project monies -Existing provider and payer assessments -DSH funding  Funds not used for premium assistance will remain available to compensate for “free-care” services

11. 11 Commonwealth Care estimated costs Yield 25% 50% 75% 100% Total Costs $180 MM $360 MM $540 MM $720 MM Participants’ Share $29 MM $58 MM $86 MM $115 MM Participants 50,000 100,000 150,000 200,000 MA Share $151 MM $302 MM $454 MM $605 MM Year 1 Cost Scenarios

12. 12 Redeploying existing funding makes the program financially sustainable Ratio of Premium Assistance to “Free Care” – FY06-09 Free Care Premium Assistance Free Care Premium Assistance Free Care Premium Assistance Free Care FY06FY07FY08FY09 0 20 40 60 80 100%

13. 13 Employers remain the cornerstone for the provision of health insurance  Existing IRS/ERISA provisions  New state non-discrimination provisions  Requires all companies with 11 or more FTEs to set up a section 125 cafeteria plan such that non-offered employees can purchase insurance with pre-tax dollars -No contribution required -Free rider surcharge applies only for companies without section 125 cafeteria plan and pattern of excessive use of “free care” (proposed)  Uncompensated Care Pool Assessment on companies not offering employer-sponsored health insurance -Tied to the use of “free-care” by uninsured employees -Maximum assessment is $295/employee/year -“Offering employer” covers 25% of full-time employees or offers to contribute 33% of premium costs for full-time employees (proposed)

14. 14 Personal responsibility: health insurance is the law  Statewide open-enrollment period in March 2007 -Both Commonwealth Care and whole insurance market  Beginning on July 1, 2007 all Massachusetts residents will be required to have health insurance  Enforcement mechanisms -Indicate insurance policy number on state tax return -Loss of personal tax exemption for tax year 2007 -Fine for each month without insurance equal to 50% of affordable insurance product cost for tax year 2008  Religious exemption and affordability test

15. 15 The law provides the blueprint, but success will be measured by its implementation  Creation of affordable, quality health insurance products  Well-functioning Connector that addresses the needs of small businesses and consumers  Premium assistance program that is financially sustainable and not rife with adverse selection  True transparency in the cost and quality of healthcare services  All purchasers (large businesses, government, insurance companies) must demand that the fragmented healthcare supply-chain become more efficient and coordinated  Acceptance of personal responsibility principle by hospitals and individuals Key Implementation Issues

16. 16 Components are transferable  Some are easy (section 125, Connector-like organizer)  Others, essential to success (culture of insurance)  Depends on: -Characteristics of state’s population and uninsured -Insurance market factors (guaranteed issue, community-rated, competition in the market) -Employer composition and offer rate -How much is currently being spent on the uninsured -Federal waivers & flexibility, dollars on the table  Focus on access first, but also need strong cost containment features