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Finding sufficient and sustainable funding for comprehensive reform has been a challenge for every state. The same will be true for the federal government. States have taken several different approaches that may be instructive.

Provider Taxes: A number of states have had provider taxes in place for some time. For example, 43 states have some kind of provider tax, and 30 states taxed more than one category of providers.[i] A majority of these taxes were used to increase provider reimbursement levels, but a few states also used them to expand health coverage. Minnesota, for example, established a tax on health care providers in 1992 that has proved to be a reliable source of funding for their coverage efforts. This assessment on providers is broad-based, as opposed to a premium tax, in that it taxes everyone who uses health care, including those who are self-insured. Funds collected through this mechanism have risen with health care inflation, a key consideration as health care inflation has continuously outpaced general inflation.
During the California reform effort, the final bill included a provider tax on hospital services, but not on physician services. Hospitals agreed to this assessment because they found that—in general—hospitals would recoup the cost of the tax through reductions in uncompensated care. (Physicians, who are not required to serve the uninsured in the same way that hospitals are, would see uneven benefits from expanded coverage based on the number of uninsured patients they see.) In this way, a hospital provider tax is a useful mechanism for the state to recoup some of the savings to the health system that will result from reform. For more information on provider taxes, see Can a Sales Tax on Medical Services Help Fund State Coverage Expansions?
Redirect Money Currently in the System: Peter Orzag, when he was director of the Congressional Budget Office, stated that, “a variety of credible evidencesuggests that health care contains the largest inefficienciesin our economy. As much as $700 billion a year in health careservices are delivered in the United States that do not improvehealth outcomes."[ii] For this reason, it would seem attractive to attempt to fund coverage expansions by redirecting money in the current system. The problem with this approach is that funding for coverage expansions is needed immediately, while the savings garnered through delivery system reform can often only be realized in the longer term. In addition, it is difficult to quantify these savings and then funnel them back into paying for coverage.
Maine attempted to fund their coverage subsidy through a Savings Offset Payment (SOP), which was designed to capture and redistribute savings in the health care system resulting from multiple reform initiatives under the Dirigo Health Reform Act. These included limits on annual capital investments and savings to providers from reduced uncompensated care. While it was enacted with more than two-thirds support in 2003, in practice the SOP proved to be politically controversial—especially regarding the methodology by which cost savings are calculated—resulting in a court challenge in 2007. Although Maine’s Supreme Court upheld the SOP, nearly all parties have agreed for some time that a new funding source was needed to ensure the continued viability of the Dirigo reforms.[iii]
States that have pursued efforts aimed at lowering the growth of health care spending over time have had some success. Minnesota Governor Tim Pawlenty set a goal in 2007 of reducing health care costs by 20 percent (from projected spending based on current rates of growth) by 2011. This emphasis on cost containment can be seen in Minnesota’s 2008 health reform law. The law contains a provision that requires the measurement and assessment of the cost savings effectiveness of the reforms. If certain cost containment targets are met, the repayment of a transfer of funds from Minnesota’s provider tax fund to its general fund is triggered.
The state is working toward that goal with several initiatives:
  • Administrative simplification, which requires all payers and providers to conduct routine administrative transactions electronically by the end of 2009 and requires payers to use a single statewide implementation guide for claims interpretation;
  • Requiring electronic prescribing for all prescriptions by 2011 and electronic health records (EHRs) by 2015 for all providers;
  • Standardized statewide quality measurement of all providers and a transparent ranking of state health care providers based on cost and quality of care, using a newly established all-payer database;
  • Transformation of the payment system in the state through a statewide quality incentive payment system and payment for baskets of care; and,
  • Public health initiatives and funding to reduce the disease burden in the state over time, with a particular focus on those diseases linked to obesity and tobacco use.
One source of current spending that is being tapped by states is safety net spending. While few states have a large, well-funded uncompensated care pool like Massachusetts, most do have some disproportionate share hospital (DSH) funding that can be redirected into coverage expansion. In California’s plan, they sought to recoup funds that were being spent by counties on indigent care. States and the federal government should use caution in tapping safety net funding, however. Safety net providers—especially those providing care in underserved areas—may need transitional funding as they make the shift from caring for those without insurance to the newly insured. In addition, extra resources may still be needed to maintain services for hard-to-serve populations. Finally, no coverage expansion is likely to reach everyone, so consideration must be given to continuing to provide health care for residual populations who may remain uninsured.
Sin taxes: Finally, many states have used tobacco taxes to fund their coverage expansions. This has proven to be a popular funding source with state legislatures because it promises to also achieve the public health goal of reducing smoking, especially among younger smokers. The concern about this funding source is that revenues are likely to decline over time while health care spending is likely to grow. States have also considered taxing soda, wine, and beer. Other unhealthy foods—like candy or snacks—could be next. But such taxes are not without their critics. In both Oregon and Maine, these so-called “sin” taxes failed in public ballot initiatives—Oregon failed to pass a tobacco tax to fund their children’s health program and Maine’s beverage tax was repealed when put to a public vote.
Shared Responsibility: The Massachusetts reform is the most notable example of a state that explicitly aimed to have each group that would benefit from the reform contribute to funding it. Individuals are required to purchase insurance if they can afford it.
Businesses are assessed a fee if they do not offer insurance to their employees. Government also pays a portion. Of course, Massachusetts is also an exception in that the state already had significant funds available in the form of their uncompensated care pool.
A potential downside of this approach is that “shared responsibility” also may mean “shared pain.” It may result in more opponents to a reform proposal than advocates, particularly if the necessary financial resources being spread to various stakeholders are large. California and New Mexico also used the language of “shared responsibility” as a principle to guide their ultimately unsuccessful efforts to fund comprehensive reform.
Continue reading on: Sustained Effort


[i] Wicks, E. “Can a Sales Tax on Medical Services Help Fund State Coverage Expansions?” State Coverage Initiatives Issue Brief, AcademyHealth, July 2008.
[ii] Address delivered to the annual meeting of the Retirement Research Consortium, August 7, 2008. Accessed October 10, 2008.
[iii] Lipson, D.J. et al. “Leading the Way? Maine’s Initial Experience in Expanding Coverage Through Dirigo Health Reforms,” The Commonwealth Fund, December, 2007..