In "Unhealthy in Massachusetts" (NRO, 1/26) Sally Pipes roundly trashes Massachusetts Governor Mitt Romney's health plan. However, her "just say no" critique reveals a near complete misunderstanding of the governor's innovative approach.

In reality, those who want to create a consumer-based health system and deregulate health insurance should view Romney's plan as one of the most promising strategies out there. I know, because I've been part of the Heritage Foundation team advising the governor and his staff on the design, which builds on some of my work with officials in other states.

The overall design has two basic parts: reforming the state's insurance market structure and reforming its uncompensated-care payment system.

Over the past 70 years a combination of industry practices and federal and state government regulations have produced a fragmented, balkanized health-insurance market, one with different regulations and practices in the large-group, small-group, and non-group submarkets.

The solution offered by the Left has been to standardize coverage and benefits. In practice, that ends up looking like Henry Ford's auto market - only one or two car models (all painted black), but obtainable from lots of independent dealers.

The Romney approach is the inverse of the Henry Ford model. Call it the "CarMax" model - lots of different kinds of cars to choose from, all obtainable through one giant dealership.

The basic insight behind a state health-insurance exchange is that markets sometimes work more efficiently and effectively with a single administrative structure to facilitate diverse economic activity. That's exactly what stock exchanges do for the buying and selling of securities. Like a stock or commodity exchange, Romney's health-insurance exchange would be a clearinghouse but never a product regulator.

The exchange would be a single place where a small employer could send its workers to buy coverage, paid for with a defined contribution from the employer. For workers, it would be a "marketplace" in which to choose the plans that best suited them and which they could keep as they moved from job to job. Furthermore, the exchange is designed to ensure that premium payments by both employers and workers can be made on a pre-tax basis.

Such an exchange offers numerous advantages. For example, a two-earner couple could combine contributions from their respective employers to buy and keep the plan they want, instead of being forced to choose one employer's plan while forgoing the subsidy offered by the other employer. Similarly, a worker with two part-time jobs could combine pro-rated contributions from each employer to buy coverage, while the government would have a single place to send subsidies for those who need extra help.

In short, the exchange is designed to work around the limitations of current federal law to achieve, in a single state, the basic objectives of conservative health reform - consumer choice of plans, true coverage portability, and the functional equivalent of individual health-insurance tax credits to help pay for coverage.

Also, contrary to Pipes's assertion, the state government wouldn't design the coverage offered through the exchange. Rather, the exchange would be open to any willing insurer interested in offering a plan that complies with Massachusetts' law. While his proposal does provide some regulatory flexibility to enable insurers to offer cheaper plans through the exchange, Romney knew from the start he didn't have the votes for a full repeal of Massachusetts's community rating and mandated-benefit laws. In a less-liberal-dominated state, more deregulation would certainly be possible.

Costing Taxpayers Less

Where Romney really builds on the concept of a state-insurance exchange is in the Medicaid reforms he included his proposal. His administration found that the reason some 100,000 Medicaid eligible residents were not enrolled wasn't because they "simply hadn't made the effort." Rather, it was because hospitals often got paid better rates by the state's uncompensated care pool than by Medicaid for treating those patients. Thus they had an incentive not to enroll those individuals in Medicaid when they showed up in emergency rooms. Of course, the total cost to taxpayers would actually be much less if they were enrolled in Medicaid, and thus getting most of their care in clinics and doctors offices instead of hospitals.

The Romney administration fixed that by putting Medicaid eligibility determinations back in the hands of the state Medicaid program. Then they seized on the opportunity presented by the impending (June 2006) expiration of the state's Medicaid waiver, to tackle covering uninsured individuals who are ineligible for Medicaid. That waiver currently pumps $385 million a year in Federal Medicaid money into the state's uncompensated care pool, which in turn pays it out to hospitals treating the uninsured. But the Feds told the state that they wouldn't approve a waiver extension absent a state plan to achieve better results with the money.

Romney's solution was to propose converting what is really a "hospital safety net" into premium assistance for the low-income (but not Medicaid eligible) uninsured. Of course, if you're going to now subsidize thousands of people, instead of just a handful of hospitals, having a one-stop-shop health-insurance exchange sure makes for an administratively simpler and cheaper way to match up all the various combinations of people, plans and payments. It also means that as those folks work their way up the income ladder and lose the subsidies, they still have portable health insurance coverage. Federal Medicaid officials liked the approach.

As Tip O'Neill used to say, "All politics is local," and faced with the choice of Romney's plan versus losing a big chunk of federal money, savvier Massachusetts Democrats lined up behind their Republican governor's proposal - albeit, with varying degrees of enthusiasm.

Flirting with Libertarians in Massachusetts

Finally, there is the element of Romney's proposal that gives Pipes's and many other conservatives the most trouble - the "personal responsibility" provisions, or what could be called an individual mandate to buy health insurance. Romney's argument is that mandating coverage in the currently fragmented and overly expensive insurance market would be wrong and counterproductive. But, if the market is reorganized to make coverage universally available and portable, deregulated at least enough to make it affordable for the middle class, and subsidized enough to make it affordable for the low-income, then there are no more reasonable excuses for anyone not buying health insurance.

Furthermore, to allow people to go without health insurance, and then when they do fall ill expect someone else to pay the tab for their treatment is a de facto mandate on providers and taxpayers. Romney proposes to take that option off the table, leaving only two choices: Either buy insurance or pay for your own care. Not an unreasonable position, and one that is clearly consistent with conservative values.

But beyond that, the Romney administration got downright Libertarian in figuring how to make it work. Under Romney's plan anyone opting to not buy insurance would be required to deposit $10,000 in an (interest-bearing) escrow account with the state. If they didn't pay their medical bills, the providers stuck with their bad debts could apply for that money. But what if they won't buy insurance and refuse to put $10,000 in escrow with the state? The answer is that they aren't allowed to claim the personal exemption tax-break on their state income tax, and any tax refunds due them are deposited into the escrow account until the $10,000 limit is reached.

Having first proposed the creation of more and better health-insurance choices and more rational and efficient subsidies, Romney essentially says, "You will be free to choose, but your choices will have consequences."

A conference committee of the Massachusetts legislature is now hammering out the details of the final legislation. Given that Massachusetts has a legislature in which Democrats outnumber Republicans by about five to one, the fact that Romney's proposal has gotten this far is itself a testament to the power of good ideas - as well as to the political skills of one particular governor and his team.

Edmund F. Haislmaier is a visiting research fellow in the Center for Health Policy Studies at The Heritage Foundation.