Beacon Hill Institute

BHIPolicy Stud y dy
Septe ember20 011

The onom eEco micEff ffectsof Ma chuse Health re assac ettsH hCar Ref form

David dG.Tuerc ck,PhD PaulB Bachman, ,MSIE Micha aelHead,MSEP

THEBEACONHILL INSTITUTE E L EATSUFFOL UNIVERS LK SITY 8Ashb burtonPlac ce Boston n,MA02108 8 Tel617 75738750, Fax61799 944279 Web:www Email l:bhi@beaco onhill.org,W w.beaconhil ll.org
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Executive Summary
In 2006, Massachusetts enacted landmark health care reform (HCR) legislation that promised to extend health care coverage to all citizens while significantly lowering costs.Thelaw,knownas Chapter58oftheActsof2006 ,includesmandatesrequiring allresidentswiththefinancialmeanstoobtainhealthinsuranceandallemployerswith 11ormoreemployeestocontributetowardstheiremployeeshealthinsurance.Italso expandsMedicaidtocovermoreindividualsandestablishesahealthinsurancesubsidy program. Additionally, it creates, an exchange, the Massachusetts Health Insurance Connector to help individuals who do not qualify for Medicaid to purchase competitivelypricedhealthplans. Nowthatthelawhasbeeninplaceformorethanfouryears,wecanassessitsimpact on the economy of Massachusetts. In a previous study, the Beacon Hill Institute estimatedtheeffectoftheHealthCareReform(HCR)onstateandfederalgovernments and the private health insurance markets, including employee contributions to their privateinsuranceplans.1Thestudyfoundthat,onaverage,HCRhasdriventotalhealth insurancecostsupby$4.3billion. Since HCR was passed, premiums for single plans have increased by $81.13 per year, whilefamilyplanshaveincreasedby$246.55peryearovertheprevioustrend.Someof thesecostsarepassedontoemployees,intheformofhigherpremiumcontributionsor lowerwages.Therestofthecostsarepaidbycompanies,intheformofhigherlabor costs. These growing costs have absorbed a larger portion of state resources. In the private sector, the same resources could have been used to fund investment, job creation and consumer spending, which would have yielded better economic performance. In the publicsector,statelocalgovernmentscouldhavesavedmoneythroughreducedhealth insurancepremiumsandreducedspending,thusalsoreducingtheneedforrecentsales andpropertytaxincreases. In this report, the Beacon Hill Institute (BHI) uses its Computable General Equilibrium(CGE)modeltoanalyzethedynamiceffectsofMassachusettsHCR.The purposeoftheBHImodel,calledSTAMP(StateTaxAnalysisModelingProgram),isto identifythetheseeconomiceffectsofpolicychangesandunderstandhowtheyoperate

Beacon Hill Institute at Suffolk University, The High Price of Massachusetts Health Care Reform, (July 2011) http://www.beaconhill.org/BHIStudies/HCR-2011/PR-HealthCareReform2011-0627.htm.

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throughastateseconomy.2UsingtheSTAMPmodel,wefindthattheChapter58has hamperedthestateeconomy.Table1containstheresults.
Table1:EconomicEffects Average TotalEmployment 18,313 Investment($m) 25.06 DisposableIncome($b) 2.48 DisposableIncomeperCapita($) 376 Low 15,551 21.28 2.10 319 High 21,422 29.33 2.90 441

Thestateeconomycreated18,313fewerjobsin2010thanitwouldhavehadHCRnot been in place. Keeping people employed under the health care reform law also hurt profitmargins,causingfirmstoreduceinvestmentinMassachusetts.Weestimatethat investmentinMassachusettswasfrom$21.28millionand$29.32millionlowerin2010 as a result of HCR. The job losses have crimped income and wage growth in Massachusetts.Real(priceadjusted)disposableincomeis,onaverage,$2.48billionor $376dollarsperpersonlowerin2010thanitwouldhavebeenwithoutHCR.

Foradescriptionaboutthemodelsee http://www.beaconhill.org/STAMP_Web_Brochure/STAMP_EconofSTAMP.html.
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Introduction
OnApril12,2006GovernorMittRomneysignedtheMassachusettshealthcarereform lawAnActProvidingAccesstoAffordable,Quality,AccountableHealthCare.Atthe time, proponents, including Governor Romney, claimed that the law would not only expand coverage to all Massachusetts residents but would also reduce health care costs.3 In March 2010, President Obama signed The Patient Protection and Affordable Care Actintolaw,which,accordingtoatleastoneaccount,isessentiallyidenticaltothe Massachusetts law.4 As the name suggests, the President and his supporters consistently claimed, at the time, that the law will lower health care costs, guarantee morehealthcarechoices,andenhancethequalityofhealthcare.5Theperformanceof theMassachusettseconomyunderthelawhasimplicationsfortheeffectsofthefederal lawonthenationaleconomy. Inthisstudy,TheBeaconHillInstitutebuildsupontheworkofapreviousstudythat estimated the aggregate cost of health care reform in Massachusetts as inputs to simulatetheeffectsofHCRonthestateeconomy.BHIutilizedtheInstitutesStateTax Analysis Modeling Program (STAMP) for Massachusetts (MASTAMP). STAMP is a ComputableGeneralEquilibrium(CGE)model,whichassessestheeffectsofchangesin awidevarietyofstatepublicpoliciesonkeyeconomicindicators.Themodelapplies sound economic theory to the determination of the effects of tax changes on employment,investmentandincomes.

Health Care Reform in Massachusetts

The Massachusetts Health Care Reform (HCR) law was a bold attempt to attain universal health insurance coverage and reduce health care costs. The law was the culmination of three decades of the state of Massachusetts intervening in the state healthcaremarkets.

JosephRago,TheMassachusettsHealthCareTrainWreck:ThefutureofObamaCareisunfolding here:Runawayspending,pricecontrols,evenlimitsoncareandmedicallicensing,WallStreetJournal http://online.wsj.com/article/SB10001424052748704324304575306861120760580.html,July7,2010. 4Ibid. 5U.S.DepartmentofHealthandHumanServices,Healthcare.gov.UnderstandingtheAffordableCare Act,http://www.healthcare.gov/law/introduction/index.html(accessedSeptember29,2010).

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InApril2006,MassachusettsGovernorMittRomneysignedintolawAnActProviding AccesstoAffordable,Quality,AccountableHealthCaredesignedtoachieveuniversal accesstohealthinsuranceforallMassachusettsresidents. Keycomponentsare: anindividualmandate,requiringallresidentswiththefinancialmeanstoobtain healthinsurance; an employer mandate requiring all employers with 11 or more employees to make a fair and reasonable contribution towards their employees health insurance; anexpansionofMedicaidandcreationofahealthinsurancesubsidyprogramfor residentswithincomeupto300%ofthefederalpovertylevel;and the creation of a quasipublic authority the Massachusetts Health Insurance Connector (Connector) that would serve as an insurance exchange and wouldmergetheindividualandsmallgrouphealthinsurancemarkets,serveas a mechanism to allow individuals to purchase health insurance on a pretax basis, and provide a sealofapproval to health insurance products that the Connectordeemedtobeofgoodvaluetoconsumers. anextensionoftheMedicaidDemonstrationWaiver. At the time,supporters of theMassachusettsreformplan argued that it would enable all residents to obtain high quality health insurance, ease the financial burden on hospitals for providing care to the uninsured, lower the cost of health insurance and eliminate joblock by providing portability of insurance through the Connector. A key concept that proponents used to generate support was that of shared responsibility.Tobeeffective,saidsupportersofthenewlaw,anyhealthcarereform proposal requires individuals and families, employers and government to share the burden of expanding coverage. As this study will show, this view of shared responsibilityhaseconomicconsequences.

The Economic Effects

Although some important generalizations may be drawn, it is important to keep in mind how theeffectsofstatelevelandnationallevel HCR policiesmight differ. One importantdifferenceistheabilitytomigrateortovotewithonesfeet,Whenstates orthenationalgovernmentadoptpoliciesthatraisecosts,localemployersareputata disadvantage and many opt to relocate to other jurisdictions. For firms with a global focusthatmightmeanmovingoperationsoutofthecountry. TheBeaconHillInstituteatSuffolkUniversity/September2011 5

When policies adopted at the state level impose costly mandates, companies and workerscanrespondbymovingacrossstatelines. The ability of firms and workers to migrate in response to such policies causes short term jobs losses and longterm reductions in wages and living standards. With these cautionarynotesinmindweexaminehowastatebasedhealthreformmeasureshave affectedMassachusetts. As we have shown in our previous study, the Massachusetts HCR law has imposed new health care costs on state and federal governments and on private firms and employees. Some of these cost increases do not directly affect the Massachusetts economy,forexamplemostofthefederalMedicaidandMedicaredollarsspentinthe state derive from the rest of the country. Therefore, we consider only the cost to the state government and private firms and employees and exclude increase costs of MedicareandthefederalportionofMedicaid.Asaresultofthehigherpricescharged for health care the health care sector gains at the expense of other economic sectors, includingbusiness,householdsandgovernment,thatpurchasehealthcare. WesimulatedtheeffectsthattheestimatedpricechangeshaveontheCommonwealths economy using the Institutes competitive general equilibrium model called MassachusettsSTAMP.

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 Table 2 presents the changes to the different economic indicators in levels and percentagescausedbyimplementingHCRlaw.
Table2:EconomicEffectsofHealthCareReforminMassachusetts Average Low TotalEmployment 18,310 15,550 percentagechange 0.58 0.49 Investment($m) 25.06 21.28 percentagechange 0.07 0.06 DisposableIncome($b) 2.48 2.10 percentagechange 0.82 0.67 DisposableIncomeperCapita($) 376 319 percentagechange 0.83 0.70 High 21,420 0.68 29.32 0.08 2.90 0.96 441 0.97

HCRhasdiminishedtheabilityoftheMassachusettseconomytogrow.Massachusetts isemployingbetween15,550and21,420fewerpeoplethanitwouldhavewithoutHCR, foranaverageestimatedlossof18,310.Inaddition,disposableincomef$2.10billionto $2.90 billion lower and disposable income per capita is $319 to $441 lower than it otherwisewouldhavebeen. Predictably, some firms react first by cutting back on production and then by cutting payrolls.Othersrelocatetoalowercost(outofstate)productionsites.Andyetothers, no longer able to compete, simply shut their doors. The higher cost of employing people comes at the expense of profit margins and decreasing overall the competitivenessofMassachusettsbusinesses.Weestimatethattheamountinvestment inMassachusettsthatdidnottakeplaceasaresultofHCRwasbetween$21.28million and$29.32millionin2010.

Conclusion

In 2006, the Commonwealth of Massachusetts enacted a longsoughtafter health care reformlaw.Advocatespromisedthatthelawwouldshrinktherollsoftheuninsured and reduce health care costs. But the reform has failed to reduce health care costs. Insteadithaspushedhealthcarecostincreasesabovetheprereformgrowthtrendand abovethegrowthrateexperiencedintherestofthecountry. The added costs have consequences for the families and businesses that are forced to reallocatemorescarceresourcestowardhealthcare.Thisreallocationhasconsequences for the Massachusetts economy. Increased spending on healthcare does not make the TheBeaconHillInstituteatSuffolkUniversity/September2011 7

economy more productive, but rather drains resources away from the kind of investmentsthatwouldmakeworkersandthestateeconomymoreproductive.

Methodology
BHI hascreatedanumberofComputableGeneralEquilibrium(CGE)modelsthatare usefulinestimatingtheeconomiceffectspoliciesonstateeconomies.Thepurposeofthe BHI model, called STAMP (State Tax Analysis Modeling Program), is to identify the dynamiceconomiceffectsofavarietyofstatepolicychanges.6 STAMP is a fiveyear dynamic CGE model that has been programmed to simulate changesintaxes,costs(generalandsectorspecific)andothereconomicinputs.Assuch, itprovidesamathematicaldescriptionoftheeconomicrelationshipsamongproducers, households,governmentsandtherestoftheworld.Itisgeneralinthesensethatittakes into account all the important markets, such as the capital and labor markets. It is an equilibrium model because it assumes that demand equals supply in every market (goodsandservices,laborandcapital).Thisequilibriumisachievedbyallowingprices to adjust within the model. It is computable because STAMP can be used to generate numericsolutionstoconcretepolicyandtaxchanges. IncalculatingthecostofhealthcarereforminMassachusetts,tobeusedasaninputto STAMP, we identified two main costs. These costs were the total change in health insurance premiums and changes in state Medicaid and Health and Human services spending.7 Each of these cost estimates incorporated a high, low and expected cost change. The respective number for each were summed together, generating cost estimateranges,aswellasanexpectedcost,tobeinputtotheMASTAMPmodel. TomodeltheeconomiceffectsofMassachusettshealthcarereform,wemustdetermine howbesttoestimatetheresponsesofindividualsandbusinessestothepolicychanges. Themajorityofhealthinsuranceisboughtthroughanemployer,typicallyasabenefit in exchange for lower wages. To model this benefit in MASTAMP we input the

DetailedinformationabouttheSTAMPmodelcanbefoundat http://www.beaconhill.org/STAMP_Web_Brochure/STAMP_HowSTAMPworks.html. 7FormoredetailsaboutthesecostcalculationsseeTheHighPriceofHealthCareReform:at www.beaconhill.org.

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expected cost increases due to HCR as increases in the state personal income tax, representingtheincreasedcostofhiringandemployinglabor. TheSTAMPmodelsolvesaninitialbaselinescenario,withnopolicychanges.Withthe health insurance policy change input, the model then resolves while attempting to maximize households wellbeing, or utility. Part of this resolving process is firms determining how much capital to purchase, and how much labor to hire, while households and consumers determine how much labor to supply and how much to consume. The amount of capital and labor hired will depend, to a degree, on the level and structureofcostsfacedbyfirms.SinceHCRincreasesthecostoflabor,byraisingthe cost of supplying the requiredbenefitofhealth care,anddecreased pay,asa share of this cost is passed on via higher premiums, the amount of labor employed in equilibrium will decrease. The STAMP model takes all this into account, by determining,atthemargin,ifahouseholdwillsupplyanextrahourofwork,orifan employerwillhireanotherworker. Once the model resolves the differences, it supplies not only the baseline results to differenteconomicindicatorsbutalsowhatthesevalueswouldbewiththenewpolicy. Thesechanges,abaselinescenarioandonewiththehighercosts,giveusinsighttothe dynamiceffectsthathealthcarereformexertsontheCommonwealthofMassachusetts.

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AbouttheAuthors
DavidG.Tuerck,PhD,isExecutiveDirectoroftheBeaconHillInstituteforPublic PolicyResearchatSuffolkUniversitywherehealsoservesasChairmanandProfessor ofEconomics.HeholdsaPh.D.ineconomicsfromtheUniversityofVirginiaandhas writtenextensivelyonissuesoftaxationandpubliceconomics.

PaulBachman,MSEP,isDirectorofResearchatBHI.HemanagestheInstitutes researchprojects,includingitsSTAMPmodelandotherprojects.Hehaspublished studiesonstateandnationaltaxpolicyandonstatelaborpolicy.Healsoproducesthe institutesstaterevenueforecastsfortheMassachusettslegislature.HeholdsaMaster ofScienceinInternationalEconomicsfromSuffolkUniversity. Michael Head, MSEP, is an Economist at the BHI. He holds a Master of Science in EconomicPolicyfromSuffolkUniversity. TheauthorswouldliketothankFrankConte,DirectorofCommunicationsattheBeaconHill Institute,foreditorialassistance.

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THEBEACO ONHIL LLINST TITUTE E PUBLIC CPOLIC CYRES SEARCH H FORP Suffo olkUni iversity y
8As shburton nPlace Bost ton,MA A02108 Phone e:61757 738750F Fax:6179 9944279 9 bhi@ @beaconh hill.org htt tp://www w.beacon nhill.org g
TheBeaconHillInstitu T uteatSuffol lkUniversit ty/Septemb ber2011 11