A major criticism leveled at the health reform law is that it doesn’t do enough to control costs. Yet experience with a similar breed of health reform in Massachusetts indicates that the cost control issue will come to the fore sooner rather than later.

Recent stories have reinforced my conviction about this:

Massachusetts health plans have sued the state and stopped issuing new policies to small businesses and individuals after the vast majority of their 8 to 32 percent rate increase requests were denied by the Division of Insurance.

Some individuals are gaming the system by buying insurance for a few months when they need it, then dropping coverage. These customers are very unprofitable for the health plans.

Towns are worrying that they will be affected by the tax on “Cadillac” health plans, because the benefits they provide are so generous.

State legislators and the Governor are seriously considering caps on pricing by doctors and hospitals and replacing fee-for-service payments with global capitation.

I choose to look at these items in a positive light:

For a long while, health plans in Massachusetts and elsewhere have mainly just passed along cost increases. They haven’t been terribly effective at holding costs down, and in fact with the backlash against managed care their employer customers haven’t really pushed that hard. Higher premiums aren’t bad for insurers since they boost revenues and makes it easier to justify administrative expenses that are growing in dollar terms but stable as a percentage of revenues. Health insurance costs have finally reached the breaking point for individuals and small businesses, but with a mandate in place customers are required to buy anyway. The state can’t just sit still –but neither can insurers offer policies at a big loss. Something has to give.

The reason for the gaming is that penalties for not buying insurance are too low. This gaming drives the costs up for everyone else, which is part of the reason insurers have asked for such big rate increases. For policies like guaranteed issue and community rating to have a chance of working, everyone needs to be in the insurance pool. My guess is penalties will be raised.

Towns have a big, big problem on their hands with enormous health care premiums for town employees. These costs are going to bankrupt the towns and kill off essential services if they aren’t addressed soon. Apparently Framingham has dozens of employees enrolled in family plans with premiums of $40,000! I’m hopeful that the threat of even more massive spending will help break the logjam that exists today.

As mentioned above, health plans haven’t done much to control costs, and the state is on the verge of stepping in. If that happens to a significant degree, health plans will have to find some way to differentiate themselves. Managing utilization is an obvious way to go. If they can’t manage that then I think the days of traditional health plans in Massachusetts will be numbered.

We’ll see how these issues are resolved. No doubt it will be messy. But I think there’s a real chance that effective cost control solutions will be put in place in Massachusetts within three years. And that bodes well for the US as a whole.

David E. Williams is co-founder of MedPharma Partners and blogs at the Health Business Blog.

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