AUGUSTA -- A controversial way to fund the state's Dirigo health insurance program will be replaced under a bill that gained final Senate approval Monday.

Rep. Sharon Treat, D-Hallowell, sponsored L.D. 1264 on behalf of Gov. John Baldacci. The bill gets rid of a complicated funding mechanism that included a variable tax on paid claims that could go as high as 4 percent.

The new bill puts in place a 2.14 percent tax on paid claims that supporters say will bring stability to the program. The tax is paid by health insurance carriers but can be passed on to consumers through their premium payments.

The tax is estimated to generate $42 million a year for Dirigo.

"We've had these constant waiting lists of 2,000 people as we've had to cap membership because funding has been so irregular," said Treat, who serves as House chairwoman of the Insurance and Financial Services Committee.

How to pay for Dirigo has been the subject of controversy for years. Last year, lawmakers attempted to tax beverages to provide a stable funding source. Voters rejected that approach by people's veto in November 2008.

This time around, Treat and others said the change will bring a stable and timely funding source to the program, which has been criticized for underperforming since its inception in 2003.

The program has struggled, at least in part, because of the "savings offset payment," a formula used to calculate how much Dirigo saved the entire health care system. Those numbers were then used as a basis for requiring insurance carriers and others to make payments to support the program.

Each year, those calculations were challenged in court -- legal battles that cost the state more than $1 million.

Treat called that expenditure "a complete waste of taxpayer money" and said the money can now be used to improve the program.

Karynlee Harrington, executive director of DirigoHealth, said attention can now be focused on offering a better, lower-cost insurance product.

Also, she said she's hopeful more insurance companies will be interested in working with the state to offer coverage.

"We're going to stop the madness of fighting over financing," she said.

"Now we can have conversations of, how do we move this forward?"

The Senate voted 20-15 along party lines Monday to pass the bill, which Baldacci is expected to sign. Last week, the House gave it final approval with an 83-53 vote.

Sen. Earle McCormick, R-West Gardiner, a member of the insurance committee, said he voted against the bill because he preferred to phase out the tax over four years and transfer the funding for Dirigo to the state General Fund.

"It would have been put in the General Fund where we could have let it fight for priority," he said.

Dirigo currently enrolls 9,700 people, and because of a lack of funding, enrollment has been frozen for nearly two years. Through another Dirigo program, an additional 5,500 people are covered.

Harvard Pilgrim Health Care works with the state to offer the health insurance through Dirigo.

In addition to a funding change, the bill directs the Dirigo board to make changes to the program to make it more affordable in an effort to increase enrollment.

Treat said it's important to note that the funding change continues the tax at the current level, which means no one will pay any more than they are now to support Dirigo.

"The consumer interested in purchasing insurance and people on the program can be assured that it's going to continue into the future," she said.

Susan Cover -- 620-7015

scover@centralmaine.com