Health Care: Real Reform, Not Phony Federalism

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Which politicians do you trust more to micromanage your health care: federal or state? That’s the false choice presented by two versions of “federalism” intended to divide responsibility for health policy between the national government and the states.

One version is the Republicans’ “leave it to the states” model, which translates to “We don’t know how to fix health care, either, but let’s hope for a miracle.” Democrats, on the other hand, talk about empowering states, but the effect of their plan in the Affordable Care Act (ACA) is to keep states on a tight leash, give them the dirty work, and let them take the blame.

We can do better, with a serious commitment to patient-centered health policy that is more decentralized, competitive, and accountable.

If the Supreme Court this June overturns some, or all, of the ACA, a more state-based approach to putting the health reform pieces back together could start to provide better answers. Any such plan should focus on five key state-based reforms that help put consumers and patients back in charge.

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

Americans agree that we must protect those whose health conditions make their access to private insurance coverage either unavailable or unaffordable. But the short-term version of pre-existing condition plans under the ACA was poorly designed and found few takers. A better model of state-administered pools should operate under more realistic parameters. Sustainable pools should charge premiums that are capped at levels above standard rates (perhaps 50 percent higher), 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).

A related reform would extend longstanding 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. This would limit the taxpayer costs of the new high-risk pools and improve the overall operation of private insurance markets.

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. Seeking better regulation does not mean "no" regulation at all. Instead, it relies on consumer-driven choice to limit geography-based regulatory monopolies. The best political route to such regulatory competition and cooperation across state lines involves facilitation of interstate compacts.

Take Medicaid off steroids

Our long-term goal should be to coax more Medicaid beneficiaries into private insurance coverage by offering defined contribution subsidies that flow directly to them and their chosen insurer. However, doing so will either cost more money, or cover fewer people than the ACA pretends to do at cut-rate prices.

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. To gain necessary operating freedom, 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. But assembling better virtual marketplaces for all willing buyers and sellers doesn’t mean building ACA-compatible “exchanges” that prefer 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.

Acknowledge, but 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. Problems like the fragmented structure of U.S. health care regulation, states’ deep dependence on federal assistance, and the federal tax subsidy rules for private health insurance remain outside state control. They were rearranged, but not resolved, by the ACA.

Moreover, state-based health policy reform won’t get off the ground until many ACA provisions that tighten the federal noose over health care are repealed and replaced. But 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.

When 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 will have a fighting chance at restoring healthy federalism.

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