In spring 2006, Massachusetts enacted legis-lation to ensure universal health insurance cov-erage to all residents. The legislation was a hybridof ideas from across the political spectrum, pro-moted by a moderately conservative Republicangovernor with national political aspirations, andpassed by a liberal Democratic state House andSenate. Groups from across the political spec-trum supported the plan, from the HeritageFoundation on the right to Families USA on theleft, although the plan had detractors fromacross the political spectrum as well.

This study briefly describes the basic struc-ture of the Massachusetts plan and identifies thegood, the bad, and the ugly. Although the legis-lation, as Stuart Altman put it, “is not a typicalMassachusetts-Taxachusetts, oh-just-crazy-liber-al plan,” there is enough “bad” and “ugly” in themix to raise serious concerns, particularly whenthe desire to overregulate the health insurance

market appears to be hard-wired into Massa-chusetts policymakers’ DNA.

If we want to make health insurance moreaffordable and avoid the “bad” and the “ugly” ofthe Massachusetts plan, Congress—or, barringthat, individual states—should consider a “regula-tory federalism” approach. Under such anapproach, insurers and insurance purchaserswould be required to subject themselves to thelaws and regulations of a single state but allowedto select the state. As with corporate charters, thissystem would allow employers and insurers toselect the regulatory regime that most efficientlyand cost-effectively matches the needs of their riskpools. The ability of purchasers and insurers toexit from the state’s regulatory oversight (takingtheir premium taxes with them) would temperopportunistic behavior by legislators and regula-tors, including the temptation to impose ineffi-cient mandates and otherwise overregulate.

The Massachusetts Health PlanThe Good, the Bad, and the Ugly

by David A. Hyman

_____________________________________________________________________________________________________

David A. Hyman is a professor of law and medicine at the University of Illinois and an adjunct scholar at the CatoInstitute. He is the author of Medicare Meets Mephistopheles. This paper is adapted from an article publishedby the Kansas Law Review.

Executive Summary

No. 595 June 28, 2007

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Introduction

Massachusetts is notorious for its left-wingpoliticians and wacky social policies. It is“viewed by the rest of America as a sort ofMarxist redoubt with great seafood.”1 Even itsown residents call it “Taxachusetts.” That said,the Massachusetts health plan enacted in2006, as Stuart Altman neatly put it, “is not atypical Massachusetts-Taxachusetts, oh-just-crazy-liberal plan.”2 Instead, the plan repre-sents a hybrid approach, incorporating ideasfrom across the political spectrum.3 The planwas promoted by a moderately conservativeRepublican governor with national politicalaspirations and enacted by a liberal Demo-cratic House and Senate. Groups from acrossthe political spectrum, from the HeritageFoundation4 on the right to Families USA5 onthe left, supported the plan. To be sure, theplan has detractors across the political spec-trum as well.6

It is illuminating to view the Massachusettshealth plan in light of the classic western TheGood, The Bad, and the Ugly.7 I begin by outlin-ing the basic details of the Massachusettshealth plan. Then I turn to the “good,” the“bad,” and the “ugly” of the plan. I conclude bydiscussing an approach to state-based healthcare reform more promising than what waswrought in Massachusetts.

What’s It All About?

Depending on who’s counting, between 7.2percent and 10.7 percent of the Massachusettspopulation lacks health insurance.8 To addressthis problem, the Massachusetts health planincorporates an array of elements, the mostcritical of which are as follows:

1. An individual mandate; 2. An employer mandate (“pay-or-play”),

and a requirement that employers cre-ate what is called a Section 125 cafeteriaplan;

3. A “Connector” through which unin-

sured residents can purchase healthinsurance; and

4. Subsidies for those with incomes up tothree times the federal poverty level.

A brief description of each provision follows.9

Those wishing more detail can consult othersources, including the Commonwealth’s offi-cial website for the Connector.10

The individual mandate requires all resi-dents of Massachusetts who are 18 or older topurchase health insurance. The Common-wealth sanctions those who do not purchasesuch insurance via the state income tax. In2007, the penalty is the loss of the personalincome tax exemption—roughly $220 for anindividual and $440 for a family. In 2008 andthereafter, the penalty (imposed on those forwhom coverage is deemed “affordable”) is setat half the monthly cost of the lowest-costhealth insurance plan within a region for eachmonth without coverage. The ConnectorBoard is responsible for setting the definitionof “affordable” and determining which poli-cies meet coverage requirements.

The “pay-or-play” mandate requires thatemployers who have 11 or more employeesand who do not make a “fair and reasonable”contribution to their employees’ health insur-ance must pay an annual fee to the state. Anemployer makes a “fair and reasonable” con-tribution when it offers (A) a group healthplan and is willing to pay at least a third of thecost of coverage under the plan, or (B) a grouphealth plan in which at least 25 percent of fulltime employees are enrolled and the employermakes a contribution. If those conditions arenot satisfied, the employer must pay a fee (the“fair share contribution”), currently capped at$295 per employee per year.11

The law also requires employers to create a“cafeteria plan,” which enables employees topurchase health insurance on a pre-tax basis.Under current law, an individual who obtainshealth insurance through his employer cando so with pre-tax dollars. Those who obtaincoverage in other ways must do so with after-tax dollars, even if they are unable to pur-chase coverage through their employer, and

2

Groups fromacross the politi-

cal spectrum, from the Heritage

Foundation onthe right to

Families USA onthe left, supported

the plan.

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even if they are unemployed.12 This peculiarstructure is the source of considerable hori-zontal and vertical inequity.13 The Massa-chusetts plan attempts to level the playingfield, since participation in a cafeteria planallows participants to receive health insur-ance (and other qualified benefits) on a pre-tax basis. Employers that do not offer a cafe-teria plan face a “free rider surcharge” that istriggered if the state pays more than $50,000for care provided to a firm’s employees in anygiven year.

Health insurance may be purchasedthrough a “Connector,” which is designed toreplace and supplement the old individualand small group health insurance markets bycreating a health insurance exchange. Themerger of the individual and small groupmarkets, and a temporary moratorium onadditional mandates means that someMassachusetts residents will be able toobtain coverage at lower prices than was pre-viously the case.14 However, all the existingmandates were retained, and premiums forthose already covered in the small group mar-ket are likely to increase by 2–8 percent.15 Theexistence of the Connector is also likely tobroaden the range of choices available tomany individuals, pool the associated risk,and increase the portability of health insur-ance coverage.

The plan provides sliding scale subsidiesto individuals with incomes of up to 300 per-cent of the federal poverty level (FPL), andindividuals with incomes less than 100 per-cent of the FPL will not have to pay any pre-miums. In practice, that means that subsidiescan be provided well up the income scale, asthree times the FPL for a family of four is$60,000.

“The Good”

The Return of the States The most important “good” of the Massa-

chusetts plan is the reemergence of the statesas significant policy-setting entities. Aftereight decades of treating the states as embar-

rassing impediments to the glorious sweep offederal power, the left has suddenly embracedfederalism. (To be sure, they have only doneso because they have been unable to enacttheir preferred policies for the nation as awhole, and they are likely to drop the state-based approach like a hot potato if they canget their way on the federal level—but betterlate than never, regardless.) Since many stateshave balanced-budget requirements, andnone can print money, it will be interesting tosee how these state-based reform strategiesare modified when the fiscal reality of theirplans slaps reformers in the face. Apart fromthe Medicaid program, which allows states toexternalize at least 50 percent (and, depend-ing on the state, as much as 80 percent) ofthe cost of Medicaid-based reforms,16 stateshave limited ability to externalize their costs.Though the Medicaid costs internalized byeach state are far less than the actual costs,they are still enough to sink the more ambi-tious plans and to push states to adopt otherstates’ successes and avoid other states’ fail-ures. Perhaps the return of the states willmark the return of fiscal rectitude and small(state) government. Hope springs eternal.

Spreading the Tax PreferenceAfter years of languishing in political

obscurity, fixing the tax preference for employ-er-provided health insurance has surfaced inthe past few years as a policy initiative. Thattax preference has provoked criticism fromacross the political spectrum, although thereis considerable disagreement on the best wayto fix the problem.17 The President’s AdvisoryPanel on Federal Tax Reform recently recom-mended that individuals be allowed to pur-chase health insurance with pre-tax dollars upto a specified amount,18 and President Bushhas proposed a standard deduction for healthinsurance that would both expand the taxbreak to all taxpayers and limit the size of thetax break for each taxpayer.19 In the absence ofa political constituency for eliminating thepreference entirely,20 expanding the pool ofpeople receiving a tax break, as Massachusettsdid, is an improvement.

3

The most important“good” of theMassachusettsplan is thereemergence ofthe states as significant policy-setting entities.

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Shifting the FocusPast debates over the uninsured have

emphasized the expansion of governmentalprograms and the funding of safety net insti-tutions. By focusing instead on making it easi-er for the uninsured to obtain their own privatehealth insurance, Massachusetts has brokenfree of that paradigm. Stated differently,Massachusetts is now effectively “subsidizingpeople, not providers.”21 The combination ofbroadened use of pre-tax dollars for those cur-rently without employment-based insuranceand subsidies for those least able to afford cov-erage has the potential to expand coveragewhile avoiding some of the public choice prob-lems associated with the expansion of govern-mental programs to address the same prob-lem.

“The Bad”

Pay-or-Play: Preempted or Just Counter-Productive?

The pay-or-play provision faces a signifi-cant legal risk of preemption.22 The federalEmployee Retirement Income Security Act,also known as ERISA, generally bars thestates from regulating the health benefitsofferings of employers who self-fund theirhealth plans. States that want a “pay-or-play”provision without risk of ERISA preemptionneed to go to Congress and get an exemption.If that approach was good enough forHawaii, which for many years has been theonly state with an employer mandate, it isgood enough for the rest of the states.

Unsatisfied with this approach, pay-or-playadvocates have sought to amend ERISA togive the U.S. Department of Labor the author-ity to waive ERISA preemption and therebyallow states to experiment with additional reg-ulations. Advocates of this approach empha-size that they merely seek to force employersnot currently providing insurance either to doso, or to pay for the costs purportedly imposedon the state Medicaid program if they do not.Yet in their more candid moments they willadmit their broader goals include direct regu-

lation of the terms of coverage offered by self-funded employers, and the imposition of pre-mium taxes on the amounts spent by theseemployers to provide coverage to theiremployees. But for the firewall created byERISA, “pay-or-play” would soon degenerateinto “pay or pay.”

As if that wasn’t bad enough, pay-or-playis based on the same theory as a minimumwage law. If employers aren’t paying enoughin wages (or providing health coverage fortheir employees), the government can justforce them to increase those wages (or pay forcoverage). Everyone will be made better off,and no one will be made worse off. We canvote ourselves rich!

Of course, it doesn’t work that way. Thepredictable adaptive responses by employerswill include laying off (or not hiring) employ-ees, and shifting to part-time employeesbecause the cost of the minimum compensa-tion package of full-time employees (wagesplus “pay-or-play”) exceeds their value to theenterprise. Indeed, a “pay-or-play” mandate islikely to be much more harmful than anincrease in the minimum wage, since thecosts imposed on employers on the “play”side of the equation will be tied to the rate ofhealth care inflation, instead of the rate ofgeneral inflation.

That said, the current Massachusetts “pay-or-play” structure isn’t nearly as counter-pro-ductive as the one Massachusetts passed in1985. That version, which was never imple-mented, would have required employers withsix or more employees to provide health insur-ance and pay 80 percent of the premium, or betaxed $1,680 per employee—roughly $2,900 in2007 dollars. The cost of the “pay” and “play”options in the current statute are much lower.Moreover, the “pay” option may be cheapenough that employers will simply take $5 perweek out of the raises they were otherwisegoing to give workers, instead of relocating,firing their least productive employees, orswitching to part-timers.

At the same time, it seems unlikely thatemployers currently offering coverage willdrop coverage because they suddenly decide

4

There is little orno evidence thatpay-or-play will

achieve universalcoverage.

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they prefer the “pay” option. That’s the goodpart of the bad news. The bad part of the badnews is that the “pay” option is so cheap, it isunlikely to induce employers to offer coveragethat are not already doing so. The worst partof the bad news is that some legislators arenow keen to increase the cost of the “play”option—by deeming an employer to be incompliance “only if 50 percent of its employ-ees sign up for health coverage, or if the com-pany contributes 50 percent toward an indi-vidual premium,”23 which will suddenly makethe “pay” option even more appealing.

Finally, there is little or no evidence thatpay-or-play will achieve universal coverage.Consider Hawaii, the only state with such amandate. Almost 30 years after the mandatewas enacted, 10 percent of Hawaiians are unin-sured—a percentage that is either higher thanor comparable to that of Massachusetts.24 Thefact that Hawaii, with several thousand milesof ocean separating it from the nearest alterna-tive location for businesses to relocate, couldn’tget to universal coverage using an employermandate suggests that pay-or-play isn’t goingto solve Massachusetts’s problem.

Will an Individual Mandate Work?Many health care reformers want every-

one to be insured. An individual mandatecertainly sounds like the most direct route tothat goal. The sanctions for noncompliance,however, are far too low to encourage thepurchase of coverage, even if one ignores thedifficulties with enforcement.25 The sanc-tions only apply to individuals who file taxreturns, and even for those individuals, thesanction is far below the cost of obtaininghealth coverage. The most optimistic esti-mate for the cost of coverage through theConnector was $200 per month, meaningthat the plan will threaten taxpayers with afine of $200 (first year) or $1,200 (subse-quent years) if they fail to incur a cost of$2,400. If more recent cost estimates are to bebelieved (more on this below), the plan willthreaten taxpayers with a fine of $200 in thefirst year, or $1,500 in subsequent years, ifthey fail to incur a cost of $3,000 or more.

Any bets on the likelihood of this set ofpenalties increasing the level of coverage inMassachusetts?

Even if the sanction is considerably higher,it is hard to believe an individual mandate willmaterially increase coverage. Consider auto-mobile liability insurance, where virtually allstates impose an individual mandate and backit up with stiff sanctions (e.g., suspension oflicense, significant fines, and jail time).Automobile insurance is cheaper than healthinsurance.26 Yet 14.2 percent of motorists inthe United States are uninsured, as are 6 per-cent of motorists in Massachusetts.27 As Figure1 demonstrates, the state-by-state patterns forthose without auto insurance bear an uncom-fortable similarity to the patterns for thosewithout health insurance.28 Indeed, the lack ofauto insurance is so common that many dri-vers voluntarily buy coverage against a collisionwith an uninsured motorist, and more than adozen states require such coverage.

If an individual mandate doesn’t workwith auto insurance, why should we expect itto work with health insurance?

“The Ugly”

Out-year Costs? What Out-year Costs? Massachusetts officials project the health

plan will cost approximately $1.4 billion peryear over three years and budgeted noamounts for the fourth year and beyond.29

According to the Kaiser Commission onMedicaid and the Uninsured, “The state antic-ipates that no additional funding will be need-ed beyond three years.”30 Massachusetts plansto raise the $1.4 billion with a limited amountof new funding (derived from general revenueand employer contributions), but most of themoney will come from diverting old funding(federal Medicaid payments previously ear-marked for safety net providers and paymentsby employers to the state uncompensated carepool).31 Have you ever heard of a governmentprogram that spent $1.4 billion per year forthe first three years, and then delivered thesame benefits in the fourth year with no addi-

5

If an individualmandate doesn’twork with autoinsurance, whyshould we expectit to work withhealth insurance?

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tional funding? Particularly when spendingwill likely exceed revenue in the third year byalmost $170 million?32 Me neither.

Admittedly, though the out-year financesare ugly, they could be worse. The Massa-chusetts plan requires no special federal fund-ing above and beyond the $385 million Massa-chusetts was already receiving each year in“excess” Medicaid payments to the state’suncompensated care pool.33 Other states areseeking sizeable amounts of new federal fund-ing to cover their coverage initiatives, andCalifornia is seeking to externalize a substantialmajority of the costs of its reform proposal.34

Finally, the out-year costs are likely to belarge because the Massachusetts plan doesnothing to control the cost of health care—and health care in Massachusetts is alreadypricey because of the heavy reliance on teach-ing hospitals and academic medical centers.

Let’s regulate! A big part of the reason many people don’t

have health insurance is that it is too expen-

sive.35 A big part of the reason why healthinsurance is too expensive is because of regula-tion, whether benefit mandates, guaranteedissue, community rating, or restrictions onoffering “last year’s medicine at last year’sprices.”36 Although Massachusetts eliminatedsome regulations that made the individualand small group markets more expensive thanthey needed to be, the Connector still retainsmuch of the command-and-control approachto health insurance that helped cause theproblem in the first place. Consider a small,but telling example. All policies offeredthrough the Connector have to cover treat-ment for infertility, including expensive in-vitro fertilization services.37 It is hard to con-ceive—pun intended—of the circumstanceswhere that decision makes any sense whatso-ever, apart from its appeal to the naked self-interest of those providing such services.38

When regulators internalize the costs oftheir decisions, they suddenly become moresensitive to the associated trade-offs. For exam-ple, South Carolina passed a law that prohibit-

6

The Connectorstill retains muchof the command-

and-controlapproach to

health insurancethat helped cause

the uninsuredproblem in the

first place.

Figure 1Estimated Percentage of Uninsured Motorists by State, 2004

Source: Insurance Research Council.

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ed building on certain beachfront property ongrounds that the prohibition was necessary forpublic safety. The Supreme Court held this lawto constitute a taking.39 After the SupremeCourt’s opinion, the bureaucracy charged withenforcing the law—the South Carolina CoastalCouncil, or SCCC—settled the case by purchas-ing the two lots in question for $425,000 perlot plus interest and legal fees. During the yearsof litigation, the SCCC had consistentlyclaimed that there was a “threat to life andproperty” if the beachfront lots were builtupon. Once it actually owned the lots, howev-er, the bureaucracy underwent a “neck-snap-ping, intellectual about-face,” and concludedthat it was “reasonable and prudent” for hous-es to be built on the lots.40 The SCCC ulti-mately sold both lots to a developer, eventhough a neighbor had offered $315,000 forone of the lots, along with a promise not tobuild on it. Thus, as an owner of the property,the SCCC was unwilling to take a loss to keepone lot unimproved. But as a regulator, it hadbeen perfectly happy to impose a cost morethan 10 times as great on the original owner tokeep both lots vacant.41

In the health care setting, efforts to ban“drive-through deliveries” demonstrate a simi-lar pattern. Prior to the passage of the federalNewborns’ and Mothers’ Protection Act, 28states had prohibited insurers from requiringrapid post-partum discharges. Yet 18 of thosestates excluded Medicaid from the scope ofthese statutes, and 19 excluded state employ-ees. The only thing these patient populationshave in common is that states bear a signifi-cant percentage of the cost of providing healthcare coverage to both of them. Thus, “moststate legislatures displayed concern for theplight of women and infants ‘victimized’ bydrive-through deliveries only as long as stategovernments did not have to foot the bill to fixthe problem.”42

Even if regulators do not internalize theircosts, concern about feasibility and publicacceptability can force regulators to becomemore modest about both their means and ends.For example, the Connector board initially pro-posed to restrict policies with high deductibles

and out-of-pocket limits. Requiring more com-prehensive coverage had the predictable effectof increasing the expected cost of qualified cov-erage well beyond what Gov. Romney and othersupporters had promised. According to theBoston Globe:

The Connector’s policy committeedecided in November that the mini-mum plans should provide compre-hensive coverage, including prescrip-tion drugs, and hired an actuary tomodel a minimal plan. It came backwith a $260 average [monthly] premi-um and a fairly high deductible, whichapplied to hospital benefits. But whenthe board sought bids from insurers,many came in substantially higher. Asummary prepared by board staffshowed monthly premiums rangingfrom $250 for a 28-year-old to $500 fora 56-year-old, which one board mem-ber averaged to about $380.43

The Globe later reported:

Advocates for the uninsured werestunned at the price, considerably high-er than the $200 estimated by MittRomney when he was governor and firstproposed universal coverage. A spokes-men for insurers said the requirementswere too prescriptive and could under-mine the goal of universal coverage.44

With the monthly premiums proposed byinsurers much higher than expected—indeedhigher than was politically feasible given theindividual mandate—the Connector Boardbegan reconsidering its requirements. Bowingto the fiscal and political realities, in April 2007the Connector Board exempted 20 percent ofthe uninsured from the individual mandateand increased the subsidies to low-income res-idents who were not exempt.45 Tellingly, thebackers of the Massachusetts plan are nolonger promising universal coverage.46

What can we learn from this sequence ofevents? Regulation may be necessary to deal

7

The backers of the Massa-chusetts plan are no longerpromising universal coverage.

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with some specific forms of market failure,but it should be enacted only after due con-sideration of comparative institutional imper-fections and the “nirvana fallacy.” WhatHarold Demsetz wrote over 30 years ago stillapplies to today’s health care debates:

The view that now pervades much pub-lic policy economics implicitly presentsthe relevant choice as between an idealnorm and an existing ‘imperfect’ insti-tutional arrangement. This nirvanaapproach differs considerably from acomparative institution approach inwhich the relevant choice is betweenalternative real institutional arrange-ments.47

Massachusetts appears to be incapable oflearning this lesson.

Conclusion

The Massachusetts health plan is a bipar-tisan success story, although as Sen. TedKennedy wryly noted at the signing ceremo-ny, “when you come to a celebration of a sign-ing and Mitt Romney and Ted Kennedy andthe Heritage Foundation are all together, it’sclear one of us didn’t read the bill.”48

Why did reform take the shape it did inMassachusetts? Massachusetts began withthree important advantages in addressing theproblems of the uninsured. Compared to theother 49 states, Massachusetts is richer, with asmaller percentage of its population unin-sured, and it was already receiving $385 mil-lion per year in “extra” Medicaid funding.49

Simultaneously, Massachusetts labors underthe disadvantage that, compared to 48 of theother 49 states, the health care delivery systemin its principal city is overwhelmingly basedon an expensive infrastructure of teachinghospitals and academic medical centers. Thatis an important factor explaining why healthcare in Massachusetts is so expensive—and thefact that it is so expensive helps explain why asignificant percentage of the population is

uninsured. Thus, the delivery-side dynamicscompound the regulatory inefficiencies notedpreviously. The Massachusetts health planrepresents an attempt to reconcile theseinconsistencies and provide affordable pri-vate-sector coverage to those currently with-out health insurance—an effort spurred by thepresidential ambitions of its then-governor,and the imminent loss of its “extra” Medicaidfunding.

Will the Massachusetts health plan work?Only time will tell, but there is enough “bad”and “ugly” in the mix to raise serious con-cerns—particularly when the desire to over-regulate the health insurance market appearsto be hard-wired into Massachusetts policy-makers’ DNA.

Where, then, should other states go fromhere? Regulatory federalism offers one intrigu-ing possibility that turbo-charges the model ofthe states as laboratories of democracy.50

Congress should sweep away the state-imposed trade barriers that forbid individualsand employers from purchasing health insur-ance from a state other than their own. Barringsuch federal action, individual states shouldunilaterally remove their own restrictions onresidents purchasing coverage from otherstates. Doing so would require states to com-pete for premium tax revenue by providing themost desirable set of health insurance regula-tions.51

Eliminating state-specific monopolies forthe regulation of health insurance and movingtoward a corporate law model would trans-form the market. It would also relieve the pres-sure on Congress to enact state-specific ERISAwaivers or to regulate health insurance directly.Employers and insurers would be required tosubject themselves to the laws and regulationsof a single state, but allowed to select the state.As with corporate charters, this system wouldcreate a market for regulatory oversight, andwould allow employers and insurers to selectthe regulatory regime that functions most effi-ciently and cost-effectively matches the needsand preferences of their risk pools. The abilityof consumers, employers, and insurers to exitfrom the state’s regulatory oversight (taking

8

Barring federalaction, individual

states should unilaterally

remove their ownrestrictions on

residents purchas-ing coverage from

other states.

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their premium taxes with them) would temperopportunistic behavior by legislators and regu-lators. A race to the bottom would be unlikelybecause the state’s residents would be the firstto be affected.

In keeping with the cinematic frameworkof this paper, in the film Groundhog Day BillMurray is forced to live the same day over andover again. The debate over the uninsured hashad a similar feel for several decades, much asElizabeth Perkins lamented in the film Big:

All the same people having all the samediscussion. It’s like they cloned someparty in 1983 and kept spinning it outagain and again and again.51

If nothing else, Massachusetts has shaken upthe monotony of debates over the uninsured,tempting one toward Bill Murray’s conclusionat the very end of Groundhog Day: “Anythingdifferent is good.”53

Notes1. Noel C. Paul, “Massachusetts Conservatives,”New Republic, July 20, 2004, online edition.

2. Quoted in Pam Belluck, “Massachusetts SetsHealth Plan for Nearly All,” New York Times, April5, 2006.

3. Marilyn Werner Serafini, “The Mass.-ter Plan,”National Journal, June 9, 2006, online edition. The leg-islative history for the plan is found at “Health CareAccess and Affordability Conference CommitteeReport” (Affordability Report), April 3, 2006, www.mass.gov/legis/summary.pdf#search=percent22Massachusettspercent20Healthpercent20Carepercent20Billpercent22. Other useful sources on the planinclude a series of web articles in Health Affairs. JohnE. McDonough et al., “The Third Wave of Massa-chusetts Health Care Access Reform,” Health Affairs25 (2006): 420; John Holahan and Linda Blumberg,“Massachusetts Health Care Reform: A Look at theIssues,” Health Affairs 25 (2006): 432; Elizabeth A.McGlynn and Jeffrey Wasserman, “MassachusettsHealth Reform: Beauty is in the Eye of theBeholder,” Health Affairs 25 (2006): 447; Tom Miller,“Massachusetts: More Mirage than Miracle,” HealthAffairs 25 (2006): 450; Nancy Turnbull, “The Massa-chusetts Model: An Artful Balance,” Health Affairs 25(2006): 453. Finally, the Policy Council held a paneldiscussion on health care reform in Massachusetts,

keynoted by Gov. Mitt Romney on September 21,2006. A transcript of “Health Care Reform: TheMassachusetts Model” is available at http://policycouncil.nationaljournal.com/EN/ForumBriefs/200610/ed17dec0-a64d-42c7-8317-4c62af1357cc.htm.

4. Edmund F. Haislmaier, “The Significance ofMassachusetts Health Reform,” Heritage Found-ation WebMemo no. 1035, April 11, 2006; Robert E.Moffit and Nina Owcharenko, “Understanding KeyParts of the Massachusetts Health Plan,” HeritageFoundation WebMemo no. 1045, April 20, 2006.

5. Families USA, “Massachusetts Becomes FirstState to Achieve Near-Universal Health Coverage,”press release, April 18, 2006.

6. Arnold Kling, “Bill of Health,” Wall Street Journal,April 7, 2006; Sally C. Pipes, “Massachusetts WillFail,” USA Today, April, 9, 2006; Michael Tanner,“No Miracle in Massachusetts: Why GovernorRomney’s Health Care Reform Won’t Work,” CatoInstitute Briefing Paper no. 97, June 6, 2006; J. P.Wieske, “Massachusetts’ Health Care Reform Plan:Too Many Sticks; Not Enough Carrots,” Councilfor Affordable Health Insurance’s Great StateDebate on Health Care Reform, May 2006. At theother end of the political spectrum, see SteffieWoolhandler and David Himmelstein, “Massa-chusetts Health Reform Bill: A False Promise ofUniversal Coverage,” Physicians for a NationalHealth Program, Resources, April 5, 2006. See alsoSerafini: “On the left, the AFL-CIO predicts thatmany low-income people won’t be able to affordgood insurance, and will get skimpy plans.”

7. See also Michael D. Tanner, “Health CareReform: The Good, The Bad, and the Ugly,” CatoInstitute Policy Analysis no. 184, November 24,1992 (using a similar typology to consider thestate of health reform proposals in 1992).

8. See Affordability Report (estimating that 550,000people or 8.6 percent of the Massachusetts popula-tion is uninsured); U.S. Census Bureau, Income,Poverty and Health Insurance Coverage in the United States:2005 (Washington: Government Printing Office,2006), p. 27 (estimating that 10.7 percent of Massa-chusetts population is uninsured); CommonwealthHealth Insurance Connector Authority Board ofDirector Meeting, June 7, 2006. (“In 2004, theCommonwealth’s household insurance survey esti-mated that there were 460,000 people [7.2 percent] inMassachusetts without health insurance”), www.mass.gov/Qhic/docs/HCRnarrativefinal.doc.s

9. The Massachusetts health plan also includesother components. See Affordability Report.

10. The official website of the Commonwealth

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Connector, www.mass.gov/?pageID=hichome page&L=1&L0=Home&sid=Qhic. See also Afford-ability Report.

11. Mass. Gen. Laws ch. 149, § 188(c)(1) (2007).This surcharge is expected to affect approximate-ly 8 percent of the 35,000 Massachusetts compa-nies with more than 10 employees and raise $26million. “Massachusetts Proposes MinimumStandard for Employer-Based Care under NewLaw,” BNA Health Care Daily Report, July 5, 2006.

12. David A. Hyman and Mark Hall, “Two Cheersfor Employment-Based Health Insurance,” YaleJournal of Health Policy, Law, and Ethics 2 (2001):23–57. See also Federal Trade Commission andDepartment of Justice, “Improving Health Care: ADose of Competition,” 2004, chapter 5, pp. 5–6,11–12; Paul Fronstin, “The Tax Treatment ofHealth Insurance and Employment-Based HealthBenefits,” EBRI Issue Brief no. 294, June 2006.

13. Hyman and Hall, pp. 23–57.

14. Affordability Report (projecting a 24 percentdrop in non group premium costs). See alsoHaislmaier (noting insurers can offer innovativecoverage options, including HSAs to those pur-chasing coverage through the Connector).

15. See Michael Tanner, “No Miracle in Massa-chusetts,” pp. 5–6; McDonough et al., pp. 420, 426.

16. And that’s before states try to bend the rules. Forexample, California Gov. Arnold Schwarzeneggerproposes to expand Medicaid but have taxpayers inother states pay for more than their allotted 50 per-cent of the costs, because his reliance on Medicaidprovider taxes allows him to pull down more feder-al dollars than California would put forward. SeeMichael F. Cannon, “Schwarzenegger’s Health-CareShakedown,” National Review, online edition, Jan-uary 22, 2007, www.cato.org/pub_display.php?pub_id=7169. The federal government has alreadytaken some steps to restrict the use of provider taxesto further externalize the state’s share of the costs ofthe Medicaid program to the federal fisc. It is likelythat a naked grab for more funding by a single statetrying to pay for coverage of non-Medicaid benefi-ciaries would trigger a more extreme response.

17. See David A. Hyman, “Getting the Haves toCome out Behind: Fixing the Distributive Injus-tices of American Health Care,” Law and Contem-porary Problems 69 (2006): 265 (cataloging differ-ent strategies for fixing the tax subsidy).

18. President’s Advisory Panel on Federal TaxReform, “Simple, Fair, and Pro-Growth: Proposalsto Fix America’s Tax System,” 2005, p. 70.

19. See 2007 State of the Union, www.whitehouse.

gov/news/releases/2007/01/20070123-2.html.

20. See Clark C. Havighurst, Health Care Choices(Washington: AEI Press, 1994), pp. 102–3 (“cap-ping the tax subsidy is a notion that only a policywonk could love, a meritorious policy idea withno natural political constituency”).

21. Haislmaier.

22. Retail Industry Leaders Association v. Fielder, 2007U.S. App. LEXIS 920 (4th Cir. 2007).

23. See Jeffrey Krasner, “Business Leader SuggestsHealth Law too Easy on Firms,” Boston Globe,February 2, 2007.

24. Belluck.

25. For more on the predictable difficulties withenforcing the Massachusetts plan, see MichaelTanner, “No Miracle in Massachusetts,” pp. 4–5.

26. This is true across the entire population, butage variation in pricing complicates matters.Health insurance for young adults is cheap (orwould be in the absence of community rating),whereas auto insurance for the young is quiteexpensive.

27. Insurance Research Council, “IRC EstimatesMore than 14 Percent of Drivers Are Uninsured,”news release, June 28, 2006.

28. Ibid.

29. See McDonough et al., p. 425.

30. See Kaiser Commission on Medicaid and theUninsured, “Key Facts: Massachusetts Health CareReform Plan,” April 2006, p. 2.

31. Ibid., p. 2.

32. Ibid., p. 2.

33. See Haislmaier; and Belluck.

34. See Robert Pear and Raymond Hernandez,“States and U.S. at Odds on Aid for Uninsured,”New York Times, February 12, 2007, p. A1; RicardoAlonso-Zaldivar, “Schwarzenegger’s HealthcareReform Proposal Could Conflict with Bush’s Aimto Balance Federal Budget,” Los Angeles Times,January 30, 2007; Cannon.

35. Hyman, “Getting the Haves to Come outBehind,” p. 265; Hyman and Hall, pp. 23–57.

36. Hyman, “Getting the Haves to Come outBehind,” p. 265 (“government action generallyfavors the concentrated interests of incumbent

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providers and hurts, rather than helps, consumers.”)

37. “Health Care Reform: The Massachusetts Model.”

38. This problem has repeatedly plagued theprocess of mandating benefits at the federal andstate levels. See generally David A. Hyman,“Regulating Managed Care: What’s Wrong with aPatient Bill of Rights,” Southern California LawReview 73 (2000): 221; Hyman, “Getting the Havesto Come out Behind.”

39. Lucas v. South Carolina Coastal Council, 505 U.S.1003 (1992).

40. See Gideon Kanner, “Not with a Bang, but aGiggle: The Settlement of the Lucas Case,” in DavidL. Callies, ed., Takings: Land-Development Conditionsand Regulatory Takings after Dolan and Lucas(Chicago: American Bar Association, 1996).

41. Ibid.

42. David A. Hyman, “Drive-Through Deliveries: IsConsumer Protection Just What the DoctorOrdered?” North Carolina Law Review 78 (1999): 5,25–26; See also David A. Hyman, “What LessonsShould We Learn from Drive-Through Deliveries?”Pediatrics 107, no. 2 (2001): 406.

43. Alice Dembner, “Universal Plan Can Cost Under$300, Insurers Say,” Boston Globe, February 5, 2007.

44. Alice Dembner, “Sticker Shock for StateHealth Care Plan,” Boston Globe, January 20, 2007.

45. Alice Dembner, “Health Plan May Exempt20% of the Uninsured,” Boston Globe, April 12,2007; Julie Appleby, “Mass. Health Plan FindsCost Is Too High for 20% of People,” USA Today,April 13, 2007.

46. Alice Dembner, “Health Plan May Exempt 20%.”

47. Harold Demsetz, “Information and Efficiency:Another Viewpoint,” Journal of Law and Economics12 (1969): 1

48. Quoted in “Health Care Reform: The Massa-chusetts Model.”

49. See Christopher Rowland, “Mass. Health PlanSeems Unlikely to be U.S. Model: Demographicsin State’s Favor,” Boston Globe, April 14, 2006;McDonough et al., p. 430.

50. See New State Ice Co. v. Liebmann, 285 U.S. 262(1932) (“it is one of the happy incidents of the fed-eral system that a single courageous State may, ifits citizens choose, serve as a laboratory; and trynovel social and economic experiments withoutrisk to the rest of the country”).

51. See Michael F. Cannon and Michael D. Tanner,Healthy Competition: What’s Holding Back Health Careand How to Free It (Washington: Cato Institute,2005), pp. 115–16.

52. 20th Century Fox, Big (1988).

53. Columbia Pictures, Groundhog Day (1993).

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OTHER STUDIES IN THE POLICY ANALYSIS SERIES

594. The Myth of the Rational Voter: Why Democracies Choose Bad Policiesby Bryan Caplan (May 29, 2007)

593. Federal Aid to the States: Historical Cause of Government Growth and Bureaucracy by Chris Edwards (May 22, 2007)

592. The Corporate Welfare State: How the Federal Government Subsidizes U.S. Businesses by Stephen Slivinski (May 14, 2007)

591. The Perfect Firestorm: Bringing Forest Service Wildfire Costs under Control by Randal O’Toole (April 30, 2007)

590. In Pursuit of Happiness Research: Is It Reliable? What Does It Imply for Policy? by Will Wilkinson (April 11, 2007)

589. Energy Alarmism: The Myths That Make Americans Worry about Oil by Eugene Gholz and Daryl G. Press (April 5, 2007)

588. Escaping the Trap: Why the United States Must Leave Iraq by Ted Galen Carpenter (February 14, 2007)

587. Why We Fight: How Public Schools Cause Social Conflict by Neal McCluskey (January 23, 2007)

586. Has U.S. Income Inequality Really Increased? by Alan Reynolds (January 8, 2007)

585. The Cato Education Market Index by Andrew J. Coulson with advisers James Gwartney, Neal McCluskey, John Merrifield, David Salisbury, and Richard Vedder (December 14, 2006)

569. Health Savings Accounts: Do the Critics Have a Point? by Michael F. Cannon (May 30, 2006)

565. Individual Mandates for Health Insurance: Slippery Slope to NationalHealth Care by Michael D. Tanner (April 5, 2006)

548. Medicaid’s Unseen Costs by Michael F. Cannon (August 18, 2005)

527. Health Care Regulation: A $169 Billion Hidden Tax by Christopher J. Conover (October 4, 2004)

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