Magazine | March 25, 2013, Issue

The Obamacare Long Game

To conservatives nationwide, New Jersey governor Chris Christie went from rock star to pariah in just four months. His slide began when he physically embraced President Obama days before the November election and went out of his way to praise the administration’s reaction to Hurricane Sandy and criticize Republicans for questioning Congress’s exorbitant relief bill. The slide continued in late February with Christie’s announcement that New Jersey, with his support, would expand Medicaid under the Affordable Care Act. He was the eighth Republican governor to endorse such an expansion.

Major changes of political reputation aren’t unprecedented. But they usually flow from gaffes or scandals. Christie’s public acts were surprising, and he has confidently defended them. After learning that the American Conservative Union wouldn’t be inviting him to the Conservative Political Action Conference this year, for example, Christie laughed it off: “It’s not like I’m lacking for invitations to speak.”

But Christie’s Medicaid expansion shouldn’t be thought of solely in political terms. Christie’s decision, like that of other Republican governors such as Rick Snyder in Michigan and Rick Scott in Florida, wasn’t simply a ploy to win reelection or to gain respect from the liberal media. It was a policy decision. Christie and the others thought they were doing the best they could given short deadlines and a hostile presidential administration. In fact, they misread the situation and miscalculated the costs. There was no hurry to say yes or no. With Obamacare, the president needs cooperative state officials more than they need him.

The governors’ mistakes aren’t hard to explain. Their administrations were subjected to months of furious lobbying by hospitals and other interests that will receive the new Medicaid funds. They were also furnished several competing predictions about Obamacare’s legal and fiscal future. These actuarial studies were, in truth, little more than guesswork. They rested on many unknown variables. How will the law’s taxes, regulations, and subsidies really affect employer-based health plans? Can the law’s rickety financial structure of Medicare cuts, Medicaid expansions, and “evidence-based care” savings survive? Perhaps most important of all, who will be president in four years?

As I write, the landscape for Obamacare implementation looks something like this. Just over half the states, most but not all with Republican governors and legislatures, will say no to running insurance exchanges (essentially, marketplaces in which private companies sell plans that comply with Obamacare’s requirements and state policies). They will let the federal government try to set up the exchanges itself by the October deadline (delays are likely). At the same time, just over half the states, most but not all with Democratic governors and legislatures, will say yes to expanding Medicaid coverage to all citizens with household incomes up to 138 percent of the poverty line, regardless of disability or family status. (This is a significant policy change: In many states, even desperately poor people aren’t eligible for Medicaid unless they are parents or disabled.)

Some governors went with the president on one decision and against him on the other. For example, Republican governors Jan Brewer in Arizona and Jack Dalrymple in North Dakota opted for Medicaid expansion but not state-run exchanges, as did Democratic governors Jay Nixon in Missouri and Steve Bullock in Montana. On the other hand, Republican governors Butch Otter in Idaho and Terry Branstad in Iowa chose to refuse Medicaid expansion, at least for now, while opting for a state role in running their exchanges.

Arkansas governor Mike Beebe, a Democrat facing a newly Republican legislature, managed to thread an even smaller needle. Under his plan, Arkansas wouldset up its insurance exchange in partnership with Washington and then accept Medicaid-expansion dollars — which he would then use not to expand Medicaid itself but to buy private plans for new beneficiaries on the state’s exchange. Republican governor Scott Walker has also charted a unique course. Not only will Wisconsin default to a federal exchange, but Walker has proposed shrinking his state’s Medicaid caseload in response to Obamacare, allowing former Medicaid recipients above the poverty line to enter the insurance exchange (with federal tax credits) and then using a portion of Wisconsin’s savings to enroll some truly poor people in Medicaid under the pre-Obamacare rules.

#page#Confused yet? It gets worse. Keep in mind that most ofthese are only proposed responses to Obamacare. In many cases, state legislatures have yet to act on them. Some legislatures will say no. Plus, some Republican governors whom Obamacare supporters are currently touting as converts, such as Ohio’s John Kasich and Virginia’s Bob McDonnell, have made their support for Medicaid expansion conditional on cost containment and federal funding guarantees. And Florida governor Rick Scott’s much-touted announcement for Medicaid expansion came at the same time that the Obama administration announced plans to let him expand his state’s Medicaid managed-care pilot program, which many fiscal conservatives praise as a model for reducing costs.

There’s a reason why governors and legislatures have gone off in various directions. With both insurance exchanges and Medicaid expansion, there are many moving parts to consider. If you are a conservative politician who espouses devolution of power to states and keeping a lid on state budgets, Obamacare’s provisions hold some attraction. You may see running an exchange as superior to ceding control over your health-insurance market to Washington (although this hope has proven to be largely a mirage, given recent federal regulatory filings). And it may seem fiscally prudent to draw billions of dollars in new federal Medicaid funds, which not only displace state spending on the uninsured but also bring in additional tax revenues from the medical providers that receive them. These arguments look even more persuasive if you know that one of the most powerful lobbies in your state, the one representing private health insurers, will support a state-run exchange, and another powerful lobby, that representing hospitals, will support a Medicaid expansion.

However, the attraction of these options depends heavily on one’s time horizon and expectations. In announcing his plans for Medicaid expansion, Chris Christie referred to Obamacare as “the law of the land.” It is — for now. If the law survives intact, states will eventually have to figure out the least costly way to live with it. But most Republican leaders, and even some Democrats, have concluded this isn’t the most realistic scenario. Obamacare has never been popular with the public, and it is likely to become less so as health premiums skyrocket and long lines form at doctors’ offices, pharmacies, and emergency rooms. (Contrary to popular belief, Medicaid coverage increases the use of ERs rather than reducing it.) If the federal courts agree with the state of Oklahoma that Obamacare’s mandates and taxes apply only when states set up their own exchanges, then defaulting to a federal exchange will shield state residents from these harmful effects and force Congress to rewrite broad swaths of the Affordable Care Act. In that case, we’ll have a new and better “law of the land.”

As for Medicaid expansion, Obamacare assumes that future Congresses and presidents will implement offsetting Medicare cuts far larger than the 2 percent that President Obama objected to in the recent federal budget sequester. It also assumes the perpetuation of an odd division of labor between Washington and the states: Washington will pay virtually all of the cost of covering less-needy new Medicaid recipients while compelling states to continue shouldering a substantial share of the cost of serving those who are already using the program, including children, the disabled, and the desperately poor. Will that division of labor really make sense to anyone in five or ten years, particularly as the pressure to reduce federal budget deficits continues to grow?

Furthermore, states assume low rates of what is called “crowd out,” in which individuals capable of securing private insurance enroll in government plans instead. But in past Medicaid expansions, significant numbers of individuals have either dropped their private insurance to get the “free” health care they were now entitled to or else stayed on Medicaid when they would otherwise have become ineligible and found private coverage. Both decisions led to higher-than-projected Medicaid enrollment and cost. These past expansions have had crowd-out rates of 50 percent or higher — that is, of the people who received Medicaid because of the expansion, more than half would have had private insurance otherwise.

#page#Obamacare proponents argue that, overwhelmingly, the people who will be affected by the new expansion are those who would lack insurance otherwise. This is incorrect. According to U.S. Census estimates, if you subtract those already on Medicaid or other government health plans, then about 40 percent of the remaining individuals below the poverty line, and 50 percent or more of those just above the poverty line, currently have some kind of private coverage. Not all will abandon their insurance plans for Medicaid or will work for employers who decide to drop costly health plans in favor of a less-expensive Obamacare tax. But many probably will, further raising the Medicaid expansion’s price. Will a future president and Congress just eat the difference, or will they push more funding responsibility down to states? Experience argues for the latter. When Congress enacted the Education for All Handicapped Children Act in 1975, for example, it promised that federal funding for special education would eventually rise to 40 percent of the cost. It never happened. The federal share is currently less than half that amount.

State decisions about Obamacare reflect an expectation about what the system will look like by the end of the decade. Governors and legislatures who think the health-care debate is over may just be trying to cut the best deal they can. That’s premature. There was never a reason for Governor Christie or other governors to act rashly. Obama-administration officials desperately want states to run exchanges and expand Medicaid. They’ll feel the same way two or three years from now. For governors, the right answer on both issues in 2013 is “not now.”

If legal, fiscal, and political pressures compel President Obama, his congressional allies, or his successor to rethink Obamacare’s design — the kind of thinking that already seems evident in the imperfect but interesting deals negotiated with Arkansas and Florida — governors who surrendered early will try desperately to correct their hasty decisions. And they will look foolish doing so.

Mr. Hood is the president of the John Locke Foundation, a public-policy think tank in Raleigh, N.C. He is the author, most recently, of Our Best Foot Forward.

John Hood is a syndicated columnist and the president of the John William Pope Foundation, a North Carolina–based grantmaker.

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