Politics & Policy

Beware Feds Bearing Gifts


Critics of Wisconsin governor Scott Walker are mystified that the state is suing the federal government for a few tens of million dollars under an insurer tax in Obamacare, while turning down hundreds of millions under the law’s Medicaid expansion. The Milwaukee Journal Sentinel recently reported that the comparison is “not lost on advocates who support the law.”

Actually, a lot of the comparison is lost on them, and that’s too bad. It would considerably improve our national conversation if supporters of Obamacare had a better understanding of why the law’s critics dislike it so much. Here is one reason: The intermingling of federal and state finances is rife with opportunities for the federal government to coerce states into doing things they don’t want to do, in areas where their autonomy is supposed to be protected by the Constitution. And Obamacare is particularly rife with examples of such coercion, of which the insurer tax and Medicaid expansion are only two.

When Nancy Pelosi, then speaker of the House, was asked whether the proposed Obamacare bill might not be unconstitutional, she famously asked, “Are you serious?” Well, yes, we are. The Supreme Court has many times insisted that that the powers of the federal government are limited and that the separation of state and federal powers is a vital protection of our Constitution.

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As Justice Antonin Scalia wrote in Printz v. United States (1997), states “must remain independent and autonomous within their proper sphere of authority.” As Sandra Day O’Connor wrote in New York v. United States (1992), “accountability is . . . diminished when, due to federal coercion, elected state officials cannot regulate in accordance with the views of the local electorate in matters not pre-empted by federal regulation.” In Bond v. United States (2011), Justice Anthony Kennedy wrote that the division of government power into federal and state spheres “protects the liberty of the individual from arbitrary power.” The principle of state autonomy matters.


Why States Have Turned Down Medicaid Expansion

Hence, it should have come as no surprise in 2012 that the Supreme Court struck down a major element of Obamacare because it passed the point at which pressure turns into coercion. The federal government spent most of the last century trying to find out just how far the Supreme Court would let it go in its incremental takeover of state governments, and it finally found the answer in Obamacare’s requirement that states expand Medicaid. The provision threatened the states with the loss of all funds under the original Medicaid program (about 10 percent of the average state’s budget) if they did not expand the program to cover an entirely new population, in effect accepting an entirely new program.

Forcing the states to accept an entirely new program or lose the largest single source of funds in the state budget was, in Chief Justice John Roberts’s memorable phrase, a “gun to the head.” When Medicaid was originally created in 1965, it was sold to the public as a federal match for state health-care programs. It was actually something else — a forced state match of a federal health-care program — but the Supreme Court nonetheless sustained the original Medicaid against charges of coercion.

Ideology cannot explain why politicians in some 22 states have refused tens of billions of dollars of free money.

With Obamacare, however, the federal government finally went too far. The Supreme Court ruled that the Medicaid expansion could be optional but not mandatory. Since the Medicaid expansion still came with its own substantial federal subsidy, which states would lose if they didn’t take the deal, states were still under considerable pressure to play ball. But Medicaid programs were notoriously prone to cost overruns, and with an expansion of the size contemplated by Obamacare, any cost overruns could be catastrophic for the state budget, even with federal subsidies. And then there is the unsustainable federal debt, which virtually guarantees that the federal subsidies will not always be there. The deal was so unattractive that nearly half the states have refused to take it, forgoing the return of billions of their own tax dollars — a considerable penalty.

In Wisconsin, Governor Scott Walker implemented an imaginative solution that considerably expanded the state’s insurance rolls, while preserving the state’s autonomy. According to the Kaiser Family Foundation, Wisconsin is the only state in the nation that managed to refuse Medicaid expansion without creating any gap in coverage. That’s because Walker’s predecessor, Jim Doyle, had expanded Medicaid beyond what even Obamacare required, to cover everyone earning less than 200 percent of the federal poverty level.  

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Predictably, just four months after Doyle expanded the program, Wisconsin ran out of funds and suspended enrollment. Tens of thousands of Wisconsin residents who were eligible to enroll in Medicaid — by law — were unable to enroll and left to fend for themselves. That was the situation Walker confronted on becoming governor. So rather than accept federal funds for Medicaid expansion under the ACA, Walker devised a hybrid.

He reduced Medicaid eligibility to 100 percent of federal poverty and moved everyone earning above that threshold to the federal health-insurance exchange, where they could buy private coverage with a federal subsidy. In the end, Walker’s plan made private coverage available to 62,776 Wisconsinites who had previously been in the state’s Medicaid program, while opening up spots in the Medicaid program to more than 97,000 adults earning less than the federal poverty level.

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Why didn’t Walker go all-in for expansion? For one thing, it isn’t cheap. The Congressional Budget Office has estimated that the federal government will spend more than $930 billion on Medicaid between 2014 and 2022, and in its most recent report found that Medicaid spending grew 16 percent last year after increasing by 14 percent in 2014, accounting for the largest increase of all federal health-care expenditures. As Governor Walker’s press secretary says in an e-mail:

If anyone thinks the federal government, which is currently $18 trillion in debt, will not renege on its future funding promises, they are not living in reality. The federal government cannot meet its current Medicaid obligations and in order to deal with this deficit, the Congressional Budget Office has offered Medicaid caps, and members of both parties have proposed decreasing federal funding for Medicaid programs as potential options.

Supporters of expansion say that because the federal government has agreed to cover 90 percent of the cost, states should just take the money. But it’s not that simple. States are still responsible for part of the cost, and since they must cover anyone who is eligible, it’s very hard for them to predict what those costs will be. More than a dozen states that expanded Medicaid in 2014 have seen enrollment and costs surpass estimates. In California, nearly three times as many people have enrolled under the expanded Medicaid as the state expected. In January, Governor Jerry Brown asked for an 8 percent increase in state spending to cover the cost of more than 13 million residents now on Medicaid. In 2013, enrollment was less than 8 million. Similarly painful overruns have happened in Colorado, Ohio, Illinois, Michigan, and nearly every other state that expanded the program.

Advocates who think the opposition to Obamacare is “ideological” or “locked into the politics,” are deluding themselves about the health-care law’s very serious flaws. Ideology cannot explain why politicians in some 22 states have refused tens of billions of dollars of free money. What explains it is that the money isn’t really free. On that contrary, it’s really expensive — not just in terms of the state’s own budget down the road, but also, at a more basic level, in terms of the state’s constitutional autonomy.


Why States Are Suing for That Tax Money Back

Section 9010 of Obamacare creates a tax on health-insurance providers, including managed-care organizations that play a prominent role in Medicaid programs. The tax is determined by the net premiums on various kinds of insurance plans. In the case of Medicaid managed-care providers, the problem is that states end up paying for the tax. In other words, Obamacare pays for itself partly by indirectly taxing state governments.

The shakedown here is so convoluted that it took states several years to realize what was happening.

The shakedown here is so convoluted that it took states several years to realize what was happening. Basically, federal law requires that state Medicaid programs pay managed care-organizations (MCOs) according to rates that are “actuarially sound.” That in turn requires an actuary’s certification that under the standards established by the American Academy of Actuaries, the payout (or “capitation”) rates are sufficient to cover all MCOs’ costs and insurance risks for the coming year. In March 2015, the Actuaries Standards Board (a private organization) decided that to be “actuarially sound,” the state capitation rates had to compensate the MCOs for all taxes — including the insurance providers’ tax. Abracadabra, state were suddenly on the hook for tens of millions of dollars in taxes, which they had to pay or risk that the providers would exit the market, and perhaps risk that the Medicaid program itself would be disqualified.

The Supreme Court has held that the federal government can pass a tax (or other law) that applies incidentally to state governments — as long as it applies generally to everyone and doesn’t violate the “dual sovereignty” of the states by interfering with the states’ core functions. So the federal minimum wage applies to state employees, and the federal government can impose payroll taxes that apply to state employees — because those measures apply to all employers, whether public or private. But the federal government can’t tax or regulate states as states by passing laws that apply principally (rather than incidentally) to them. It can’t pass a law that says: “A tax is hereby imposed on the budget of every state in the amount of x.” That, according to the Supreme Court, would violate the states’ reserved sovereignty.

The problem with the forced state reimbursement of the insurance-provider tax for Medicaid MCOs is that it forces states to subsidize the insurance providers in ways not contemplated in the Medicaid agreements. States had no notice of this expense, until a private board exercising powers delegated by Congress imposed it on them. Under federal rules, states are specifically commanded — as states — to pay this tax. And that is so close to being a tax on state government that it makes no difference, and it’s imposed by a private party, no less. 

#related#The amount of money involved in the MCO tax fiasco is not great. It has cost the Wisconsin only about $23 million so far. But there’s a principle at stake. And the law’s proponents act is if that principle — which is nothing less than the constitutionally guaranteed autonomy of the states — was a totally irrelevant bit of ideological fluff.

These dramatically differing perceptions of how constitutional government is supposed to work go a long ways toward explaining the sorry state of our national conversation. Let’s hope that more mutual understanding will bring a better conversation soon. In the meantime, to borrow a phrase, the myopia of Obamacare proponents is not lost on the law’s critics.

Mario Loyola is a contributing editor to National Review and a senior fellow at the Wisconsin Institute for Law and Liberty. John Daniel Davidson is director of the Center for Health Care Policy at the Texas Public Policy Foundation.

Mario Loyola — Contributing editor Mario Loyola is senior fellow and Director of the Center for Competitive Federalism at the Wisconsin Institute for Law and Liberty. He began his career in corporate ...

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