Jim Stergios and Amy Lischko

Health care fails small businesses

By Jim Stergios and Amy Lischko
May 12, 2010

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NOT LONG AFTER President Nixon took the unprecedented step of imposing peacetime wage and price controls, the American people learned a basic economic lesson: Artificial controls don’t work unless underlying costs are controlled.

Four decades later, the Patrick administration is imposing controls on small business health insurance rates. The move will prove to be little more than an election-year reprise of Nixon’s failed effort.

The Commonwealth’s 2006 health care reform was supposed to help address rising health insurance costs for small businesses. It hasn’t — and small businesses are paying the price.

The Commonwealth Connector, an independent authority meant to act as an insurance plan clearinghouse, was established to provide real choices and information needed to evaluate options. In theory, an informed and robust marketplace would bend the cost curve and get more of the working poor and lower middle class insured.

The theory is right, but the implementation has failed in two important ways.

First, the Connector focused all its energy on providing nearly free products to the indigent. In contrast, the Connector’s board seemed almost uninterested in market-rate products for small business employees.

The Connector revenues come from selling plans, and selling nearly free products was the path of least resistance. Unsurprisingly, 90 percent of the Connector’s operating revenue has come from the fee it earns for state-subsidized plans.

The lack of focus on small businesses is evident. The Connector took three years to make information about provider networks and participating primary care providers for small businesses available on its website. It took over two years to launch a small employer pilot program; in more than a year it attracted just 65 businesses and has now been replaced by a new program that offers only seven plans.

Implementation also fell short when the Connector chose to build a top-down bureaucracy rather than leverage the broker and private market community. The quasi-governmental Connector has a $40 million annual budget and 45 employees earning annual salaries that average $100,000. Its board is heavily weighted toward government officials and unions.

Paternalistic fears about “confusing’’ people have led the Connector to overregulate and minimize consumer choice. Instead of engaging the private market by providing unique products, it has rejected or failed to renew products, resulting in offerings that simply duplicate ones already privately available.

This bureaucratic setup cannot provide choices that contain costs to employees and owners of small businesses — nor help address today’s double-digit increases in small business rates.

Utah, the only other state with a health care exchange, demonstrates that there was another path forward.

Utah’s Health Insurance Exchange was started with a $600,000 appropriation and has no board and just two employees. The Exchange provides a technology backbone that enables private entities — brokers and businesses — to take advantage of consumer-based options.

Consistent with the Exchange’s mission to promote small business growth, it is part of the Governor’s Office of Economic Development. Private sector partners provide a significant amount of unpaid policy advice on what businesses and employees need.

Fewer than 1,500 small business employees receive coverage through the Connector. In Utah, with a far smaller population, about 55,000 small business employees have purchased health insurance through the Exchange. It offers 66 plans from a number of carriers, including the largest ones in the state.

The focus on business growth and input from the private market has helped promote other reforms. In its first year, the Exchange developed a database that compares the cost of care across all providers; four years after its establishment, the Connector still hasn’t developed a similar tool. Unlike Massachusetts, Utah has also passed tort and medical malpractice reform.

We applaud the Connector’s success in insuring the indigent. But it has failed to provide small businesses with affordable, diverse choices.

Small business owners cannot afford 25 percent annual hikes to already astronomical health insurance premiums, especially in this economic climate. Price controls will do nothing to control underlying forces that drive health insurance premium increases. And unless Massachusetts does the hard work of getting costs under control, Patrick could be remembered as the guy who tried to prop up the levy as the floodwaters surged in.

Jim Stergios is executive director and Amy Lischko is senior fellow on health care at Pioneer Institute.

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