The Agenda

The CARE Act and the Future of American Federalism

I was delighted to read NR’s editorial on the Patient CARE Act, which hits exactly the right note. In the Weekly Standard, James Capretta delves into one of the proposal’s central provisions:

The plan would solve the pre-existing condition problem, which is real but not nearly as widespread as the president would like Americans to believe it is, in a manner that is something like the opposite of the Obamacare approach.  The irony of Obamacare is that it makes insurance less desirable as a product by requiring insurers to sell it to anyone who comes in the door, regardless of their health status.  This means consumers have far less incentive to get coverage when they are healthy because they know they can sign up when they are sick without penalty.  The Obamacare solution is to try to compel enrollment through the individual mandate tax.

The Burr-Coburn-Hatch approach makes insurance attractive by attaching a new and unambiguous right to continuous insurance enrollment: anyone who stays insured will be allowed to move between insurance platforms without facing higher premiums based on their health status. This right, already operative when Americans move between employer groups, is not in place when Americans move from employer plans to the individual market (the 1996 law that smoothed the transition between employer plans was also supposed to improve the situation for transitions from job-based plans to the individual market, but it did not work for a number of reasons). Senators Burr, Coburn, and Hatch propose to clear away the current obstacles and ensure those with continuous insurance can buy a product in the individual market without facing higher premiums based on pre-existing health conditions.

In the summer of 2010, Capretta co-authored a National Affairs article on “How to Cover Pre-existing Conditions” with Tom Miller, and the CARE Act closely adheres to their approach. For example, Capretta and Miller emphasized the importance of protecting workers leaving job-based plans for the individual market, and the CARE Act does that. It also imposes limits on underwriting for those who make that transition, in line with Capretta and Miller’s recommendations.

But I’m particularly interested in how the CARE Act might reshape American federalism. Michael Greve is a scathing critic of the decades-long transformation of American federalism from a system designed to encourage competition across states to one in which governments at all levels collude (or, to put it more generously, “cooperate”) with each other, often to the detriment of private citizens. The following is drawn from a Reuters Opinion column:

Under a fiscal federalism cartel, states don’t fund their own programs under competitive conditions. Instead, they rely on Congress to tax households nationwide and then dole out the money to state and local governments. In effect, Congress seduces state and local governments with seemingly “free” money that comes with lots of strings attached.

The Medicaid program is the most important of these joint federal-state initiatives. Founded in 1965 to provide medical care for the poor, Medicaid is run by state governments, but the states receive 50 percent to 83 percent of the funding from the federal government. (The size of the federal contribution varies according to states’ wealth.) The bigger the federal contribution, the “cheaper” the Medicaid program from the perspective of a state government. Under the ACA’s Medicaid expansion, participating states will be required to increase eligibility to include all households that earn up to 133 percent of the poverty threshold. In return for accepting this expansion of Medicaid, the federal government will pick up 100 percent of the cost of covering these newly eligible enrollees. Eventually, this federal contribution will decline to 90 percent. But from the perspective of state governments, this expansion will be “free,” or close to it.

To most state governments, this looks like an excellent deal. Low-income households will gain coverage while federal taxpayers, as opposed to state and local taxpayers, will foot the bill. Given that Medicaid spending now exceeds K-12 spending as a share of state budgets,what’s surprising is that some governors remain opposed.

As Greve has explained, however, the “cooperative” nature of the Medicaid program has greatly encouraged spending growth. States that would be unwilling to spend 25 percent or more of their budgets on Medicaid if they had to tax their own citizens for the entire cost of the program are happy to do so if every dollar they spend is matched by a dollar or more of federal spending, as spending less would mean failing to collect “free” money.

The Affordable Care Act goes even further in this direction. Douglas Holtz-Eakin of the American Action Forum has likened the Obamacare exchanges to a “second Medicaid program,” as states regulate insurance markets while the federal government provides 100 percent of the financing for premium subsidies. States that implement costly insurance regulations will thus be insulated from the consequences of doing so. And the Obamacare Medicaid expansion, in its original design, was meant to minimize variation across state governments, a classic instance of cartel logic. The Supreme Court’s decision to invoke an “anti-leveraging principle” has given states somewhat more room to maneuver, but the prospect of “free money” remains very attractive.

The CARE Act, like Obamacare, allows states to take the lead on insurance regulations. Yet it also moves us in the direction of a less fragmented health system. The Obamacare Medicaid expansion was meant to provide as much as half of the law’s coverage expansion, and the goal of expanding coverage to all poor and near-poor households through Medicaid was to contain costs. The CARE Act, in contrast, gives all Medicaid-eligible individuals the right to access a health tax benefit that they can use to purchase private insurance coverage. Medicaid, meanwhile, is transitioned into a per capita payment that states can use in a variety of different ways to meet the demand for medical care. Capretta explains:

A major problem of American health care is that Medicaid is not integrated with mainstream insurance for working families. So someone on Medicaid who gets a better paying job often will lose his current insurance and may not get new coverage through his place of work. The Burr-Coburn-Hatch plan would give states much greater flexibility to use Medicaid as a supplement to the federal tax credit for insurance. This would allow lower income households to buy from the same coverage options as middle class households, and thus get the better provider networks that those insurance plans offer and to keep the same insurance as they move into better paying jobs.

So rather than have a four-tranche system (Medicare, Medicaid, employer-sponsored insurance, and the exchanges), we could be moving towards a three-tranche system built around Medicare, employer-sponsored insurance, and a reformed individual insurance market that would include low-income as well as high-income individuals. Medicaid is so deeply embedded in state budgets that it would be extremely difficult to dislodge. But the CARE Act points to a future in which the job that is now done by Medicaid is effectively federalized in the form of a premium contribution that states can top-up as they choose. While some may fear that this will lead states to neglect their duties — a fear the CARE Act addresses by not phasing out the Medicaid program — it might also enable states to deploy resources more intelligently.

I should stress that Greve is not a believer in block grants:

Or suppose we follow the recommendation—again, of all Republican candidates, as well as Congressman Ryan’s budget plan—to restore federalism by turning Medicaid and other federal programs into block grants: instead of being ordered about by fede ral bureaucrats, states will get to design and run the programs in accordance with their needs and at much lower cost, or so we are told. That looks sensible to sensible voters in sens ible states—Indiana, Utah, South Carolina. Idaho, for that matter. But a national policy that allows good states to do good things also allows bad states to to ba d things. California, which all by itself is much bigger than all good states combined, will hand the block-granted money to its unions, toss the most destitute Medicaid recipients into th e street, and then complain about federal “mandates.” Two Washington Post columns later, the funding will be increased. But who will call the bluff— President Perry, who ran on the states’ rights platform and, specifically, on block-granting Medicaid? The Republican majority in Congres s? California legislat ors? Not a chance. Meanwhile, what should your governor or senators do? Support a “states’ rights” scheme that allows California to ruin the nation—or, to forestall that result, insist on rigid federal rules that then constrain perfectly sensible, cost-effective policies in Idaho? Damned if you do, damned if you don’t. You are going to get a bigger, more in trusive, less efficient government either way.

But when we think of the CARE Act premium subsidies as the kernel of a federal premium support program, and its Medicaid reform as a bridge towards allowing state governments to compete to build the best model for providing quality care, it is easier to see its virtues.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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