BOSTON — Lawmakers have approved a sweeping health care reform package that dramatically expands coverage for the state's uninsured, a bill that backers hope will become a model for the rest of the nation.

The plan would use a combination of financial incentives and penalties to expand access to health care over the next three years and extend coverage to the state's estimated 500,000 uninsured.

"It's only fitting that Massachusetts would set forward and produce the most comprehensive, all-encompassing health care reform bill in the country," said House Speaker Salvatore DiMasi, a Democrat.

If all goes as planned, poor people will be offered free or heavily subsidized coverage; those who can afford insurance but refuse to get it will face increasing tax penalties until they obtain coverage; and those already insured will see a modest drop in their premiums.

On Tuesday, the House approved the bill on a 154-2 vote and the Senate endorsed it 37-0. A final procedural vote is needed in both chambers of the Democratic-controlled legislature before the bill can head to the desk of Gov. Mitt Romney.

Romney spokesman Eric Fehrnstrom said the governor, a potential Republican candidate for president in 2008, would sign the bill but would make some changes that wouldn't "affect the main purpose."

The only other state to come close to the Massachusetts plan is Maine, which passed a law in 2003 to dramatically expand health care. That plan relies largely on voluntary compliance.

"What Massachusetts is doing, who they are covering, how they're crafting it, especially the individual requirement, that's all unique," said Laura Tobler, a health policy analyst for the National Conference of State Legislatures.

The measure does not call for new taxes but would require businesses that do not offer insurance to pay a $295 annual fee per employee.

The cost was put at $316 million in the first year, and more than a $1 billion by the third year, with much of that money coming from federal reimbursements and existing state spending, officials said.

The bill requires all residents to be insured beginning July 1, 2007, either by purchasing insurance directly or obtaining it through their employer.

The plan hinges in part on two key sections: the $295-per-employee business assessment and a so-called "individual mandate," requiring every citizen who can afford it to obtain health insurance or face increasing tax penalties.

Liberals typically support employer mandates, while conservatives generally back individual responsibility.

"The novelty of what's happened in this building is that instead of saying, `Let's do neither,' leaders are saying, `Let's do both,'" said John McDonough of Health Care for All. "This will have a ripple effect across the country."

The state's poorest _ single adults making $9,500 or less a year _ will have access to health coverage with no premiums or deductibles.

Those living at up to 300 percent of the federal poverty level, or about $48,000 for a family of three, will be able to get health coverage on a sliding scale, also with no deductibles.

The vast majority of Massachusetts residents who are already insured could see a modest easing of their premiums.

Individuals deemed able but unwilling to purchase health care could face fines of more than $1,000 a year by the state if they don't get insurance.

Romney pushed vigorously for the individual mandate and called the legislation "something historic, truly landmark, a once-in-a-generation opportunity."

John McDonough of Health Care for All called the bill "promising."

"If it can be achieved as outlined, it would be an enormous step forward for Massachusetts," he said.

One goal of the bill is to protect $385 million pledged by the federal government over each of the next two years if the state can show it is on a path to reducing its number of uninsured.

The U.S. Department of Health and Human Services has threatened to withhold the money if the state does not have a plan up and running by July 1.

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