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Most political deadlines in recent years have been made to be broken. Nevertheless, state governors and legislatures are facing another one this week for the key building block of Obamacare. The Department of Health and Human Services (HHS) has set November 16 as the date for states to indicate more explicitly whether they plan to set up a “state-based” health benefits exchange in time for initial HHS approval by January 1, 2013. If so, they then must demonstrate sufficient implementation progress to be ready to go for operations one year later.
States’ other choices include cooperating with the federal government in implementing an exchange or leaving exchange operations entirely to Washington. But the basic decision comes down to: In or Out? Supine or Prone?
Since enactment of the Affordable Care Act (ACA) in 2010, many state officials have balked at participating in its model for “state-run” exchanges, which appeared to resemble part of a top-down bureaucratic plan to take more control of state insurance markets, rather than a less centralized, market-driven alternative. Several dozen state governors and state legislatures either opposed outright the creation of ACA-compliant exchanges or urged a cautious, go-slow approach to further implementation until more details were provided (or the Supreme Court decided to overturn the health law as unconstitutional). At this point, it still appears that a large majority of states will not meet the ACA’s initial deadline of January 1, 2013.
The version of exchanges envisioned in the ACA is a classic example of a limited, but potentially good, idea mutating into a politically-driven gateway to overregulation, income redistribution, and increased dependence on Washington. Health insurance exchanges are not new ideas. But they find only soft support in concept and garner little political consensus in practice.
The policy parameters involving the role and power of an insurance exchange include whether it is voluntary or mandatory. Does it have an exclusive franchise, or must it compete for customers? Over what geographic territory and for which market segments does it operate? Does it exercise substantial market power as a purchaser or even more political power as a regulator? Does it try to pool similar risks or cross-subsidize very different ones? Does it limit or expand choices of carriers, plans, and benefits? The more you want to try to do, the more regulatory complexity you have.
The ACA designed its version of state exchanges to play a much greater, and more controversial, role. The real goal appears to be to construct a roach motel of centralized regulation, where private plans and their enrollees might check in but are not allowed to check out.
At this point, developing functional health benefits exchanges under the ACA faces major obstacles:
1. Most states will either refuse to set up their own exchanges or prove unable to do so for political or technical reasons.
2. The administrative challenges in orchestrating necessary data streams from multiple sources (to determine applicants’ eligibility for federal subsidies), creating essentially “new” insurance markets, and handling a potential surge in demand for such coverage remain daunting and unprecedented.
3. Serious legal questions about the actual statutory authority of federally run exchanges to administer premium subsidies remain unresolved, and they are likely to dilute the power of any arguments that states must set up their own exchanges to avoid losing control over a federally run exchange in their state.
If state governors opposing Obamacare are not ready to run a white flag up the pole after last week’s election results and sign up as junior partners, what should they do? Option one is to simply stand back and hope that federally run exchanges will be unsuccessful and collapse for a combination of political, legal, and administrative reasons. This passive-aggressive stance is most politically appealing in states where opposition to Obamacare continues to run strong. It allows Republican policymakers to default to modified “Pottery Barn Rules” — “If you break it, you own it” (and we won’t fix it for you). They also can insist that HHS failed to provide them enough information and guidance on how state exchanges must operate, while reserving the option to complain about too much federal micromanagement if and when HHS actually does so.
Of course, this arms-length strategy fails to address what other types of health insurance reforms might still be needed within states, particularly if and when the ACA’s edifice wrecks prematurely. Will Obamacare opponents finally start thinking about tomorrow, on the other side of today’s fiscal cliffs and electoral setbacks?
The less-likely option two might involve approving different versions of their own state-based “exchanges” that would operate under more market-friendly rules not likely to comply with the Obama administration’s regulatory guidance. They would serve more as market facilitators of new coverage options (for state residents seeking individual coverage and for small businesses looking for alternatives to traditional group coverage), rather than as administrators of an expanded quasi-public insurance program destined to resemble Medicaid. Flexibility, choice, and open competition would be more important tools than standardization, selective contracting, and compulsion. Such exchange-like mechanisms would involve willing consumers, private providers, and employer sponsors as partners rather than as subjects.
State-based alternatives to ACA exchanges would rely much more on developing and disseminating consumer-empowering, impartial information about coverage options, rather than on enacting and enforcing choice-limiting regulation. They would maintain the difference between providing a single shopping point for convenience and requiring an exclusive destination for political control.
Nevertheless, political suspicion remains widespread in many states that the temptation for regulatory overreach in exchange-like mechanisms cannot be kept in check. Hence, any government-supported vehicles to improve connections to coverage and taxpayer subsidies for individuals and small firms should be provided only as a “competitive” option within the larger insurance marketplace. They should not preempt further growth of nonexclusive private exchanges as either competitors or replacements for state-sponsored ones. If any new mechanisms can serve a useful role and provide competitive advantages, consumers will choose voluntarily to purchase insurance through them. Willing buyers, rather than political brokers, can redesign their local insurance markets by voting with their own money.
In the meantime, intermediate option three also remains for states. It would resist implementation of federally facilitated exchanges while improving their bargaining leverage to insist on pro-competitive state-designed alternatives. States should consider intervening as co-plaintiffs in the lawsuit brought by the State of Oklahoma that challenges the validity of an IRS rule that allows federal exchanges to distribute premium assistance tax credits to its future enrollees. The conflict between the authority granted to federal exchanges under the statutory text of the ACA and the power asserted under the IRS rule adopted last May is significant and worthy of vigorous examination in court. A federal government response to the amended complaint is due on November 19. If the IRS rule is overturned, states regain the high ground and it’s a whole new ballgame for rewriting the federal-state balance of power under the ACA.
Tom Miller writes about the uncertain future of federal health exchanges in “Firing Warning Shots with Blank Bullets.” as well as in “When Obamacare Fails: The Playbook for Market-Based Reform” (forthcoming).
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