Fleshing out health care federalism

Article Highlights

  • A federalist agenda for health policy should be more than a thin disguise for lazy thinking and a lack of substantive solutions

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  • HIPAA protection against for Americans in the individual market would limit taxpayer costs and improve private operations

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  • ACA-compatible exchanges prefer a roach motel of regulation and income redistribution to consumer choice and open competition

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  • It will take quite a few more shovels to bury ACA provisions and dig a way out to a market-based solution

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Are we all health care federalists now?  No more so than when we once were "all Keynesians now," in the words of President Richard Nixon, and Milton Friedman, over 40 years ago. 

Nevertheless, leading members of both political parties have tried to duck under their leaky umbrellas of rhetorical federalism when facing the monsoon of challenges posed by Obamacare.

Republican presidential candidates and congressional leaders typically say they would delegate most health policy matters to the states. This reinforces their embrace of older constitutional limits on the powers of the national government. It also provides a buffer against the centralizing power grabs of their nanny-state adversaries. Fifty different states can experiment in health policy without blowing up the entire national laboratory.

However, such federalist rhetoric rings hollow if it's little more than a political punt that ducks the heavy lifting of serious health reform. Simply providing a blank check through block grants may please Republican governors seeking new sources of walking-around money with few strings attached. But relying on current Republican control of most state houses to block Obamacare indefinitely but offer no clear alternative combines political myopia with short-term opportunism.

Relying on current Republican control of most state houses to block Obamacare indefinitely but offer no clear alternative combines political myopia with short-term opportunism.

A federalist agenda for health policy should be more than a thin disguise for lazy thinking and the lack of substantive solutions.

The Affordable Care Act (ACA) does provide a competing version of one-way federalism for President Obama and his Democratic allies. It really presents little more than a thin veneer of federal-state partnership, in which the most difficult and uncertain tasks (implementation of new health benefits exchanges, administration of vastly expanded Medicaid coverage, operation of pre-existing condition insurance plans, and regulation of fully insured health plans) are delegated initially to state officials. In each case, however, state officials are kept on a relatively short leash and must operate within a narrow sphere of federal policy guidance. The main job for states will be to take the political heat from local constituents while following orders as branch offices of Obamacare's central command headquarters.

A commitment to real federalism should focus on several key state-based policy reforms that would decentralize decisions, retarget taxpayer resources, and insist on accountability. Enacting them would protect access to insurance coverage for those with serious pre-existing conditions, encourage more choice and competition in health insurance, and restructure Medicaid on a lower-calorie diet. Here's a more forceful agenda for Healthy Federalism:

Fund state-run high-risk pools that won't spring leaks

The problem of coverage for pre-existing health conditions remains relatively small and limited to the individual market, despite exaggerated claims used to advance passage of the ACA. Nevertheless, too many people still remain at risk of falling through the cracks of protective measures already provided by HIPAA, COBRA, and state-run high risk pools.

The short-term version of "pre-existing condition plans" under the ACA were poorly designed and found few takers. Its rules were a significant departure from the practices of previous state-based pools.

A more robustly financed model of state-administered pools operating under more realistic parameters would  protect those whose health conditions make their access to private insurance coverage either unavailable or prohibitively unaffordable. Sustainable pools that work should set higher caps on premiums charged above standard rates, provide supplemental income-based coverage subsidies, and rely on modestly generous 100-percent federal funding under a capped annual appropriation during its initial years of operation (before switching to shared federal-state funding later).

Extending current HIPAA protection against new health-based underwriting for workers with continuous insurance coverage to other Americans switching to, or already covered in, the individual market would limit the taxpayer costs of this necessary safety net and improve the overall operation of private insurance markets. Americans who stay in continuous coverage should not be penalized for developing costly health conditions, but solving the overall problem of pre-existing condition converage does not require a massive transformation of the health care system.

Encourage competitive federalism in state-based health insurance regulation   

Interstate competition between different "brands" of state regulation would empower consumers with better choices, impose market discipline on regulatory outliers, and reduce the regulatory cost wedge embedded in higher insurance premiums. But seeking better regulation does not mean "no" regulation. The balancing act involves replacing geography-based regulatory monopolies with consumer-driven choices, while ensuring sufficient safeguards to prevent strategic game-playing by opportunistic states or insurers.

Interstate regulatory competition would provide an escape valve from arbitrary or discriminatory regulatory policies at either the state or federal levels.  Key design requirements include clear regulatory primacy, domicile-based regulatory choice, incentives and responsibilities for the primary state regulator, thorough disclosure and informed consent, and multi-state solvency arrangements.

The best political route to such regulatory competition and cooperation across state lines involves facilitation of interstate compacts 

 Take Medicaid off steroids

The long-term goal is to mainstream more Medicaid beneficiaries into private insurance coverage with defined contribution subsidies that flow directly to them and their chosen insurer. A different mix of Medicaid reform policies at the state level also might need to include covering FEWER people, leaving more details of health spending decisions to beneficiaries, paying providers for the full costs of care, and measuring its delivered quality more accurately.

The long-term goal is to mainstream more Medicaid beneficiaries into private insurance coverage with defined contribution subsidies that flow directly to them and their chosen insurer.

In the near term, Medicaid reform should offer states greater flexibility in restructuring their Medicaid programs in return for a more fixed budget of federal taxpayer subsidies (upfront funding for a fixed period of time). But loosely defined block grants alone, or even capped allotments to individual states through the current federal funding formula, will not necessarily solve problems of insufficient choice, competition, and incentives to improve health care delivery. States need to gain necessary operating freedom from current federal barriers to state reform like an uncertain waiver process and requirements for comparability provisions for covered services, unrestricted choice of providers, and maintenance of effort,

The federal government should offer them greater flexibility in determining eligibility categories, reimbursement rates, service delivery options, benefit packages, cost sharing, and health promotion.  But - in return -- states should agree to be accountable for their performance relative to a limited set of negotiated outcome measures and benchmarks.     

 Build more functional health care markets

States can help connect the health information and taxpayer subsidy wires to improve decentralized health care decisions without overloading the political circuits. That means primarily outsourcing to private vendors the task of assembling better virtual marketplaces for all willing buyers and sellers. It doesn't mean building ACA-compatible exchanges that prefer a roach motel of heavy regulation and income redistribution to consumer-driven choice and open competition. State government officials should serve as honest brokers in helping to aggregate and distribute useful information; not as political auctioneers for rent-seeking special interests and advocacy groups. They should start with more tangible measurement and reporting of the relative costs of routine and frequent health care services, actual out-of-pocket costs consumers are likely to face, and how patients evaluate their own care experience with different providers. 

State health care regulation then could focus more on providing useful information to consumers instead of mandating or limiting their choices.

 Acknowledge, but then transcend, the limits of state-level power

Important federal policy barriers to competition and choice in regional and local markets still have to be lowered, if not eliminated. The fragmented structure of U.S. health care regulation was not improved by the latest byzantine maze created by the new health law. States are deeply dependent on federal assistance (particularly for Medicaid costs) due to longstanding political, legal, and economic barriers to broadening their revenue base or borrowing more funds. States cannot independently change the federal tax subsidy rules for private health insurance. Nor can they successfully impose insurance benefits mandates, funding contributions, and pricing restrictions on self-insured employer plans.

Most of all, it will take quite a few more shovels; first to bury the many ACA provisions that tighten the federal noose over health care and then to dig a way out to a market-based solution that relies on state-level policy innovation in key areas.

If state policymakers ignore the underlying drivers of health care costs or try to manage too many politically complex and  personal health decisions,  they will fail as badly as similar efforts by federal policymakers have. Struggling merely to maintain their own slices of power in managing health care from state capitals rather than from Washington is uninspiring and inadequate.

But if state leaders remember that their primary role is to defend the freedom of their citizens to be the ultimate decision makers in personal health care matters, the rest of us have a fighting chance at restoring healthy federalism.

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Thomas P.

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