Now comes the tough part: after broadening access to health care, can Massachusetts tackle soaring costs?

In October 2013, with hoopla and serious stumbles, the Obama administration passed a mile-stone in its signature Affordable Care Act: opening the “exchanges” that enable people to shop for health insurance coverage within their states. The ACA is modeled on Massachusetts’s groundbreaking 2006 universal coverage law, passed under Governor Mitt Romney. Like the Massachusetts law, the ACA both requires and enables every citizen to be covered by health insurance or face a tax penalty.

But in Massachusetts, getting everyone covered was always seen as merely the first step in reforming health care. In 2012, the Commonwealth quietly passed a law that tackled the next essential step: holding down costs while improving quality. Authored by a state legislator who was studying at the Kennedy School, in close consultation with three Kennedy School professors, the Bay State’s Act Improving the Quality of Health Care and Reducing Costs Through Increased Transparency, Efficiency and Innovation—or, as the law is known to insiders, Chapter 224—may point the way for the rest of the nation as well.

Rising costs, documented waste and an advisory group at the Kennedy School

The law’s author was Massachusetts State Representative Steven Walsh MC/MPA 2012, who since 2002 has represented the city of Lynn and the town of Nahant, a former industrial center. In 2010, Massachusetts speaker of the house, Robert DeLeo, gave Walsh the job of writing the next health-care reform law. Governor Deval Patrick and State Senate President Therese Murray urgently backed reform. “You rarely get the big three players in state government to agree on what their top priority for a session is,” says Walsh. “We felt that it was if not now, never.”

That’s because health care was eating up all the state’s resources. “From 1990 we had to cut every other program that had been important to us,” Walsh explains. “We had cut education, the environment, social services, public safety. The state budget was growing out of control—but it was only growing in one area.” In 2013, the Commonwealth had a total budget of $33 billion; health care was consuming almost half that—$14.5 billion.

What’s more, as Massachusetts citizens’ health insurance premiums kept going up, Commonwealth revenues were failing to increase as much as they should. Health insurance is untaxed income, explains Kennedy School economics and public policy professor Amitabh Chandra. Any employer “is essentially indifferent between giving me higher wages while giving me less generous health insurance coverage and giving me lower wages while giving me more generous health insurance coverage,” he says. For those of us who are insured, it means that we take home lower wages.” And it means the state collects lower taxes. By 2012, Massachusetts as a whole was spending $66 billion on health care. If that rate of increase had continued, explains Walsh, by 2020, health care would eat up more than one-fifth of the gross state product.

Nor was the Commonwealth healthier as a result. According to experts, including the authoritative Institute of Medicine, fully one-third of health-care spending is sheer waste, paying for redundancies, unnecessary tests, excess services, administrative overhead, over-pricing, and fraud, not better in health outcomes.

So what was to be done? Over two years, Walsh’s staff visited 64 out of the Commonwealth’s 69 hospitals, held public hearings in all five regions of the state, and undertook thousands of daily meetings with patients, physicians, providers, and payers to try to figure that out. But Walsh also had a secret weapon. From 2010 to 2012, he was enrolled in the Mid-Career Master in Public Administration (MC/MPA) program at the Kennedy School as a Jerome L. Rappaport, Sr./Boston Urban Fellow. His goal: to tap Harvard’s incredibly knowledgeable academics. “Candidly, that’s why I was here: for the relationships and the network,” he explains. At a Rappaport luncheon, Kennedy School professor Jeffrey Liebman, who had worked with the Obama administration to create the ACA, mentioned that he wanted to get involved in local projects. Walsh asked him for a meeting, and Liebman brought along a couple of colleagues. “That became the kitchen cabinet of the health-care reform bill,” says Walsh, marveling at the caliber of his advisors. “Three Kennedy School professors—Jeffrey Liebman, Amitabh Chandra, and David Cutler—and I met every Monday for the better part of two years. Where else would I ever find that level of consulting?”

Using policy levers to point the way while remaining neutral about exactly how to get there

Everyone in Massachusetts health care—not just those in government—agreed that there was a problem. As David Cutler, another of the ACA’s key authors, put it, even the local 800-pound gorilla— Partners Healthcare, a system founded and dominated by the world-renowned (and high-priced) Harvard teaching hospitals Massachusetts General and Brigham & Women’s—knew that health care was just too costly. “A lot of the senior people at Partners are also on, say, their town councils,” Cutler explains. “They have to cut the school budget and lay off teachers because health-care costs are up. They know that isn’t right.” Nor could they argue that the cost increases were reasonable; they were the Harvard doctors and experts who’d authored the reports and Journal of the American Medical Association articles criticizing medical spending. “So they came to the table with the attitude that ‘we know something has to be done,’” Cutler says. “‘Don’t regulate us, but give us the tools and help us do it.’”

That collaborative attitude helped shape the law, which offers guidelines and goals (and in some cases, regulatory reforms) in several interlocking areas, with each gear necessary to push the other parts forward.

Goal: end “fee for service” within three years

The law asks that by the end of three years, any provider receiving Medicaid (which covers 15 percent of the state’s patients) have replaced “fee for service” to the greatest extent possible for at least 80 percent of its billing. It doesn’t tell providers how to change their payment systems. It simply enjoins them to move away from “do more, get paid more,” as Cutler describes the current system, in which insurers pay doctors and hospitals for each test, procedure, and service they perform—without asking whether every one of those billing codes contributes to the patient’s health. Presumably, practitioners won’t want two different billing systems; if the new one is efficient and effective, they’ll expand it to everyone.

But what payment system should the industry use? There the law is neutral. One idea, Chandra explains, is “bundled payments,” whereby a health-care provider gets a fixed amount of money to take care of a particular medical condition. For instance, your doctor might get a lump sum for repairing your hip fracture—instead of separate payments for each office visit, MRI, anesthesia, surgical procedure, specialist visit, and physical therapy session necessary for that repair. Rates may differ on the basis of how sick the patient is: A shattered hip in an elderly diabetic will be more complex and costly than a hairline fracture in a healthy high school student. But instead of getting paid for doing more, the medical group will bill for overall care—giving it an incentive to evaluate and decide the most effective and cost-efficient way to treat you.

Or payers and practitioners might move toward such innovations as episodic payments, accountable care organizations, coordinated care organizations, patient-centered medical homes, or something else entirely. “We didn’t pretend to be smarter than the experts in the market,” says Walsh. Rather, the message is this: “Continue to innovate, continue to create things that work for you and patients, and create a system that rewards us for being well and not sick.”

There are no penalties, requirements, or absolutes about how to get it done. That’s because every stakeholder was involved and committed—but wanted room to experiment and information to do it right. “The idea is that you don’t lead with a big stick if what you’re looking for is information,” says Walsh—information that can help refine the law and make it more successful. “We did not think penalties would be helpful in the first three to five years.”

Goal: cap spending

The new law sets clear targets, asking payers and providers to hold any increases in health-care costs at 3.6 percent during the first year, and to keep them equal to or less than the growth rate of the state’s potential gross product in years after. This target also has no penalties—and yet so far, insurers and providers are really working to meet it. “It’s very surprising,” says Cutler. “It violates every rule of economics. Economics says never have a law without consequences, because people learn that it’s fine to violate the law, and they will violate more laws.” But because all the stakeholders were already motivated to change, the target helps “nudge” them into doing so, he suggests. Setting a target enables insurers to point to it as they negotiate prices with hospitals and medical practices. Those providers, meanwhile, can point to the number to push their physicians to rein in and evaluate their behavior.

“This is where there’s a place for public policy,” says Chandra. “One advantage of government is, often, not to regulate but to just set standards.”

Goal: disclosure and transparency

Chapter 224 assumes that if consumers actually knew in advance how much each test or treatment cost—and knew, as well, how comparatively effective it was—we would make smarter decisions about our health-care dollars. “If you went grocery shopping, and a gallon of milk on this corner was $3.29 and on the other corner was $3,468, and you had no idea why and it’s the same milk, of course you’d choose the $3.29 gallon,” says Walsh. “But the consumer has never been given that choice in health care.” If we did have those choices, he believes, market pressure would improve both costs and care.

And so the law instructs providers and insurers to inform patients in advance about what that rotator cuff surgery or low-risk birth will cost. Once the state comes up with some common metrics, they’ll also be required to report on quality, reliability, and effectiveness.

Oversight: a neutral commission to oversee, analyze, and assist

But what kind of quality metrics should those be? How will anyone know which parts of the law are working and how the others could be fixed? What data and analysis do various players need to succeed? What new laws, regulations, and requirements may be necessary after all? To answer those questions and more, Chapter 224 sets up an advisory Health Policy Commission, made up of 13 members with that many different perspectives on health care. “In Kennedy School fashion,” explains Cutler, who sits on the HPC, the commission’s goal is “to provide public goods that people want but that are not otherwise being provided: gathering data, designing systems, overseeing what’s going on, looking for opportunities to save money while maintaining quality.” The various stake-holders asked for such a body as the law was being written—and asked specifically that it be technocratic rather than political, aimed at finding and delivering accurate information that would help them reach the law’s goals. If the HPC finds that some participants aren’t meeting the goals just because they don’t want to, it can recommend that the legislature pass new statutes with sharper regulations and penalties.

Tools: electronic medical malpractice reform, consumer protection, and more

Supporting those major innovations are some other tools that will help the whole run more smoothly. For instance, the bill requires that by 2017, all provider, payer, and physician systems be able to communicate electronically. That will enable shared electronic medical records, which should improve patient safety while also lowering costs—because an emergency room will already know what your doctor’s office knows and won’t have to run every possible test. And it will help the health-care industry clarify costs and simplify billing. Other reforms include an office of consumer protection and education so that you can appeal if you believe that your health-care provider or payer is unfairly denying care to protect profits; new medical malpractice rules; expanded scopes of practice for physicians’ assistants and nurse practitioners, to help bring down costs while adding health-care resources in remote parts of the state; and state funds for community hospitals and others that need help making all this happen.

Walsh credits his Kennedy School time with giving him not just the advisors he needed to help write a superlatively informed bill but also the skills to manage so many stakeholders. “The Kennedy School asks you to accept the premise that there is more than one solution to every problem,” he says. Having to work on group projects in every class meant “you learn how other people think, what other people need, what others’ priorities are”—which was essential when he had to consider how far he could push billion-dollar stakeholders before they balked.

One year in, of course, it’s too early to tell how well the law is doing. But so far the Kennedy School participants are excited about its rollout. Watch its progress carefully: A bill like this might soon be coming to a Congress near you.

E.J. Graff is a senior consulting editor and senior fellow at the Schuster Institute for Investigative Journalism at Brandeis University.

Get smart & reliable public policy insights right in your inbox.