The Obamacare Anti-Federalists

by John Daniel Davidson
The federal government has too much control over the welfare state.

As Obamacare sputters along, liberals are growing increasingly frustrated that it isn’t working the way it was supposed to. First, the Supreme Court ruled that Medicaid expansion was optional, and then half the states opted not to expand. Even more states (36 so far) opted not to set up health-insurance exchanges and just let the feds do it themselves. Then last month the D.C. Circuit Court ruled that the law doesn’t allow subsidies to be disbursed through federal exchanges.

For many on the left, the culprits here are the intransigent states that refuse to go along with the Obamacare scheme. At a conceptual level, the real culprit is therefore federalism — the Constitution’s separation of state and federal powers. As Slate’s Jamelle Bouie lamented last week, states have “too much discretion in administering the welfare state.” He claims that some state leaders — like Mississippi governor Phil Bryant — don’t really even want to have safety-net programs and therefore can’t be trusted to run them. Programs like Medicaid, he says, should be taken out of the hands of the states and turned over entirely to bureaucrats in Washington.

Bouie has it exactly wrong. Our erstwhile federalist system no longer allows states any effective means of resisting federal policy schemes — and almost no meaningful discretion in administering social welfare programs. Bouie cites a recent Atlantic piece by Mario Loyola and Richard Epstein that explains in great detail why this is so and how it came to be. But instead of refuting their claims, he dismisses the argument as “exaggerated,” citing only that states have some discretion in deciding how generous their Medicaid programs will be (e.g., more people are eligible for Medicaid coverage and welfare assistance in California than in Mississippi), and saying that this is reason enough to do away with federalism when it comes to social welfare.

But Bouie doesn’t give enough credence to his cause. Whether or not he realizes it, federalism has already been largely cast aside in the operation of jointly funded federal-state programs. Under the guise of so-called “cooperative federalism,” Washington has been able to impose its will on states across a number of policy areas, through programs like Medicaid, Common Core, the Clean Air Act, and the federal highway system. As Loyola and Epstein explain:

Federal “assistance” to the states currently accounts for 30 percent of state budgets, on average. Since the early 1980s, the federal government has transferred about 15 percent of its budget to the states, which is almost as much as the federal deficit in an average year. Why does the federal government borrow so much money, only to transfer it to the states? Do the states really need that much help?

They don’t. States have their own taxing authority. The real reason for federal “assistance” lies in the conditions that come attached to it, which allow the feds to dictate state policies and even what the states do with large chunks of their own money. The result is a massive increase in real federal control and real federal spending — entirely behind the scenes.

This process began with the New Deal and has slowly grown over time. President Lyndon Johnson understood that the vast social-welfare programs of the Great Society couldn’t simply be implemented and administered from Washington. States would have to be deputized — a process he euphemistically called “creative federalism” — if welfare programs were going to work “at the point of impact.” Johnson wrote:

If Federal assistance programs to State and local governments are to achieve their goals, more is needed than money alone. Effective organization, management and administration are required at each level of government. These programs must be carried out jointly; therefore, they should be worked out and planned in a cooperative spirit with those chief officials of State, county and local governments who are answerable to their citizens.

For practical reasons, Washington needed — and still needs — the offices of state governments to administer federal programs, in part because the programs are not basic or simple at all but byzantine and abstruse. The “cooperative spirit” touted by Johnson has turned out to be a chimera. State and local officials have so little control over programs like Medicaid that they cannot really be held accountable by voters, who, as Loyola and Epstein explain, are really “just deciding which local officials get to implement the dictates of distant and insulated federal bureaucrats.”

Bouie singles out Medicaid as an example of why states can’t be trusted to administer social welfare programs. He’s upset that Mississippi and Alabama don’t offer Medicaid coverage to childless, able-bodied adults. There, he sees evidence that such states would not build a health-insurance program for the poor absent federal action, which in turn means not that states have too little control over the program but that they have far too much. Apart from the unprovable conviction that southern leaders wouldn’t take care of their needy without federal control, this argument ignores the way Medicaid actually works.

Bouie claims that Medicaid rules are “basic, and amount to a simple agreement to provide health insurance to the poor.” Obviously, he hasn’t had the misfortune of inspecting the mechanics of Medicaid up close. Here’s what happens: Each state must submit a “state plan” to the Centers for Medicare and Medicaid Services (the federal bureaucracy that runs Medicaid) that outlines the various facets of the program in that state. It’s not a simple, jaunty document. Even in states with comparatively lean Medicaid programs, the state plan is maddeningly complex. Texas’s basic state plan for 2014 is about 90 pages long, but comes with 1,115 pages of attachments that describe all the things the Texas Medicaid program does.

But that’s the just the beginning. The real meat of Medicaid regulations come from CMS. For example, here’s a 548-page CMS document that outlines specific rules for long-term-care facilities (nursing homes and residential homes for people with intellectual disabilities), which are typically funded with Medicare and Medicaid funds. The federal rules cover everything imaginable in such a facility: linens, toilets, storage of drugs, frequency of meals, nutrition, hydration, naso-gastric tubes. The list goes on. As CMS explains, these provisions “serve as the basis for survey activities for the purpose of determining whether a facility meets the requirements for participation in Medicare and Medicaid.”

In other words, regulations for these facilities — and many others — are not written by state lawmakers but by federal bureaucrats at CMS. It is left to state agencies to ensure that every single Medicaid provider meets every federal (and state) requirement — a massive undertaking that leaves state agencies with very little room to innovate or experiment. States have no ability to amend or sidestep federal rules without getting a waiver from CMS, a process that can take years. This is why Loyola and Epstein say that Medicaid isn’t “a federal matching-grant for state health care programs targeted at the needy. In fact it is the opposite: a way to rope states into match-funding a federal program.”

Take California. No state has been more eager to expand Medicaid under the ACA and embrace its voluminous rules and regulations. By some measures, the enthusiasm has paid off. The uninsured rate has declined considerably in California, while in states like Mississippi it has increased. But the most common source of new coverage in California — about 25 percent — comes from people enrolling in Medicaid. To Bouie and other liberals, that’s not a bad thing at all. At least these people are covered now, right?

But being “covered” by Medicaid doesn’t mean you’ll be able to get health care — especially not in California, where in June state officials reported a backlog of 600,000 Medicaid applications. Once the applications are processed, new enrollees will soon discover how difficult it is to find a doctor who accepts Medi-Cal (California’s Medicaid program). Last year, state lawmakers cut Medi-Cal provider rates by 10 percent, even as they added nearly 2 million to the program through the ACA’s Medicaid expansion. In June, Governor Jerry Brown signed a new budget that kept those Medicaid cuts in place.

Why cut provider rates? Because federal rules leave states with no other tool to control Medicaid spending. This in turn creates another problem. Medicaid now pays so little compared to Medicare or private insurance that many doctors in California are dropping out of the program altogether. This scarcity plagues Medicaid programs in every state. In the upcoming fiscal year, California will spend more than $75 billion in state and federal dollars on the program, which is projected to cover 11.5 million people (almost a third of the state’s population). When you have that many people without adequate access to doctors — including specialists, who are even less likely to accept Medicaid — can you really say that you have a “generous” safety-net program?

If you’re going to argue, as Bouie does, that we should forget about federalism and embrace federal control of states when it comes to social welfare, it matters whether the scheme produces good outcomes. In Medicaid, we already have such a scheme — and the outcomes are not good. Clinical studies have consistently shown that Medicaid patients fare worse than other groups — including, in some cases, the uninsured — on an array of health indicators.

Some states have ideas about how to improve the program. Some want to incentivize Medicaid patients to seek out preventative care by penalizing unnecessary ER use. Others want to give Medicaid patients direct control over the funds that pay for their care so they’ll be more judicious in their use. Still others want to convert the entire program into a subsidy program for private insurance, along the lines of an ACA exchange. But none of this is possible under federal Medicaid rules. Experiments, like the much-touted Arkansas “private option” for Medicaid expansion, are experiments in name only. The feds will allow states cosmetic changes to Medicaid, but little else. The same could be said for a host of other jointly funded programs.

Bouie says he wants states merely to be field offices for federal welfare programs because, after all, Washington “does a pretty good job of cutting checks.” If only that’s all Washington did. States are already field offices for Washington, tasked with implementing the minutiae of federal regulations on programs that should be run by states. To claim otherwise is to misunderstand the way government now functions and to ignore the dangers of an ever-expanding and unaccountable regulatory regime in Washington.

— John Daniel Davidson is a senior policy analyst for the Center for Health Care Policy at the Texas Public Policy Foundation.

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