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May 2008

Maine Passes Funding Package for DirigoChoice Health Plan

On April 16, Maine Governor John E. Baldacci signed into law a bill aimed, among a range of other reforms, at changing the financing for the DirigoChoice Health Plan, the center piece of the 2003 Dirigo Health Reform Act. DirigoChoice provides an affordable health insurance option to small businesses, the self-employed, and eligible individuals without access to employer-sponsored insurance, offering discounts on monthly payments and reductions in deductible and out-of-pocket costs on a sliding scale to enrollees with incomes below 300 percent of the Federal Poverty Level (FPL).

The bill replaces DirigoChoice’s original financing mechanism—the Savings Offset Payment (SOP) with revenue from increased taxes on beer, wine, and soda and a flat surcharge on insurers. This was a compromise between Governor Baldacci’s 2007 proposal to fund DirigoChoice using revenues from a proposed employer pay or play, an individual mandate on higher income Mainers, and a hospital surcharge and the Democratic leadership’s proposal this year to increase the state cigarette tax by 50 cents per pack (from $2.00 to $2.50) and also implement the insurer surcharge that was included in the enacted bill. The majority of these proposals had been recommended by a Blue Ribbon Commission—which included representation from health care providers, consumers, insurers, employers, and others—that met throughout the fall of 2006 to make recommendations to strengthen the DirigoChoice program.

As a unique effort to finance a comprehensive state reform, the SOP was designed to capture and redistribute savings in the health care system resulting from multiple initiatives under the Dirigo Health Reform Act:

  • The “Capital Investment Fund,” an annual limit on capital investment under the state’s Certificate of Needs program;
  • Rate regulation in the small-group insurance market;
  • Voluntary targets on hospital expenditures;
  • The infusion of new state funds to match Medicaid for increases in physician and hospital payments to reduce cost shifting; and
  • Uncompensated care cost savings resulting from insuring the previously uninsured.   

The SOP could be assessed only if and when an independent review determined savings, and the assessment could not exceed those savings and was capped at 4 percent of paid claims.   

While it was enacted with more than 2/3 support in 2003, in practice the SOP proved to be 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 agree that a new funding source was needed to ensure the continued viability of DirigoChoice. 

Further, the savings determined by the Superintendent of Insurance through the adjudicatory process each year has been lower than the DirigoHealth Agency’s estimates of savings resulting in reduced revenue for the DirigoChoice subsidies.

The recently enacted financing change has two key features:

  • New beverage taxes:
    • The tax on malt beverages will rise from 25 cents to 54 cents per gallon, resulting in an approximate increase of 3 cents per 12 ounce can of beer.
    • The tax on wine will rise from 30 cents to 65 cents per gallon, resulting in an approximate increase of 7 cents per bottle of wine. 
    • A tax of $4 per gallon will be assessed for syrup used to make soda, while bottled sodas and sodas made from powder will be taxed at 42 cents per gallon, resulting in an approximate increase of 8 cents per 12 ounce can of soda.
  • A 1.8 percent tax will be assessed on all claims paid by health insurance companies and self-insured businesses, which is less than the average assessment under the two SOPs paid to date.

According to legislative fiscal analysis, malt beverage and wine taxes are expected to raise $7.5 million in the first year, while soda taxes are expected to provide $9.2 million.  The assessment on insurers will initially raise $33 million, increasing to $37 million in 2010 and $38 million in 2011.

The new taxes fund both DirigoChoice and long-debated insurance market reforms, with 18.8 percent of the pooled revenue supporting a reinsurance plan to provide rate relief in the individual market. 

While replacing the SOP and financing market reform, the new funding package has generated criticism as well. A petition to repeal the new taxes has been submitted to the Maine Secretary of State by a coalition of beverage associations, restaurant owners, grocers, and other parties in the business community.  For this “People’s Veto” to appear on the November ballot, organizers must collect more than 55,000 signatures by July 18.  Democratic legislative leaders have said they will not consider DirigoChoice funding again in a special session if the petition collects the necessary signatures and they have launched an aggressive campaign to oppose the veto.

The struggle over the SOP highlights not only the critical role that political will plays in passing and maintaining state health care reform, but the great challenges states face in finding new and sustainable financing mechanisms. Maine took the bold step and put into practice a concept that has been considered for a very long time. In light of the veto, the DirigoHealth Agency is continuing to use the SOP for its financing. Should the People’s Veto gain enough signatures to appear on the ballot and be successful in November, the SOP will continue as the financing vehicle for the program. Whatever the outcome, the experience of Maine will provide lessons for other states working toward health care reform.