Health-Care Reform: Will States Get Too Much Power?

For several months, Capitol Hill has been ground zero for the battle over President Obama's ambitious effort to reform the health-care system. But there are growing indications that if and when Congress actually manages to pass a bill, the real action may well be in the states, which could have a surprising degree of autonomy in determining how they implement the federal legislation, and whether it delivers on the promise of curbing soaring costs and providing coverage for the nearly 50 million uninsured. Though most everyone recognizes that the Federal Government can't impose a rigid approach, some critics say the crucial version of legislation that is expected to pass Senator Max Baucus' Finance Committee in the next week — it is widely considered the closest version to what will eventually reach the President's desk — may go too far in the other direction. "To leave a lot of these responsibilities to the states will create a patchwork mess," says Jacob Hacker, a political science professor and health-policy expert at Yale and a longtime champion of the public option. "It's a way of punting on crucial structural elements."

While governors are primarily focused on how their already hurting state budgets could be strained by the expansion of the Medicaid program that is proposed in all the health bills, there are other key responsibilities that could fall to them under the Baucus bill. Most important, the all-important exchanges — Web-accessible marketplaces in which individuals and small groups could compare and shop for private insurance — would be established state by state. By contrast, the House bill would create a national exchange. Instead of a national public insurance plan — the controversial "public option" that is included in both the Senate Health, Education, Labor and Finance Committee bill and the House bill — the Baucus bill calls for the establishment of state or multistate nonprofit health-insurance cooperatives.

The potential for such a lack of uniformity across the country has only recently become apparent. Just last week, during the markup of the bill, at least two amendments were tacked on to the legislation giving states further latitude. Senator Maria Cantwell of Washington drafted an amendment that would allow states the option of pooling residents earning 133% to 200% of the federal poverty level into a group outside the exchange. States would get money from federal subsidies that are available to these low-income earners — who wouldn't be poor enough to qualify for Medicaid even under the proposed expanded guideline — and use the funds to negotiate with private insurers for group plans.

Going one step further, Oregon Senator Ron Wyden got an amendment passed that would allow states to opt out of parts of federal health reform if they could "provide health-care coverage that is at least as comprehensive" as provided for in the Baucus bill and prove their state proposal "would lower health-care-spending growth, improve the delivery-system performance, provide affordable choices for all its citizens, expand protections against excessive out-of-pocket spending, provide coverage to the same number of uninsured and not increase the federal deficit." Another Finance Committee member, Delaware Senator Thomas Carper, is reportedly considering introducing a proposal on the Senate floor to allow states to run cooperatives, open up their benefits plans for state employees or even create state public options to compete with private insurers.

How much power federal health reform gives to states to manage exchanges — as envisioned in the Baucus bill — is a key element for controlling the cost of private health insurance for individuals and small businesses. "It's not whether they can or can't [establish an exchange]," says Alan Weil, executive director of the National Academy for State Health Policy, a nonpartisan, nonprofit organization. "It's whether they will do it in an active way. An insurance exchange could just be a website that posts products, and you could do that with two people and an IT person. But if the purpose of an exchange is to negotiate, assure capacity of insurance plans and collect information — that's a big new function that most states would not be set up to do." Baucus' bill would not have exchanges negotiate with insurers, but an amendment added to the bill does call for a "rating system for plans entering the state exchange based on relative quality and price." These ratings would be posted on exchange websites to allow consumers to compare prices and quality for similar plans.

Some states that have already tackled substantial health reform could be better positioned than others. Massachusetts, the only state to have enacted universal health-care reform, already has a working exchange and many of the insurance-market reforms called for in federal legislation (such as guaranteeing coverage to anyone who applies and prohibiting premium pricing based on health status). Cantwell based her amendment on a program that already exists in her home state of Washington; called Basic Health Plan, it pools non-Medicaid-eligible low-income residents, steering them into less costly managed-care plans. Critics point out that premiums for these low-income residents have still risen dramatically since the program launched in the early 1990s, but Cantwell and Baucus say they have been assured informally by the Congressional Budget Office that if states chose to pool residents in this way, the Federal Government would save money.

Earlier this year, the Connecticut legislature overrode a governor's veto to pass a comprehensive health-reform bill that aims to provide health insurance to 98% of its residents by 2014, in part through the creation of a statewide self-insured health plan. Derek Slap, a spokesman for the president of the state senate, says, "The hope is that it will dovetail very nicely with health reform nationally." Rhode Island, which has some of the most stringent insurance-market regulations in the country, already has guaranteed issue in the small group market (requiring insurers to accept all applicants) and strict limits on how insurance companies can set premium rates based on health status. "Changing the underwriting laws will be relatively easy for us," says Chris Koller, Rhode Island's insurance commissioner.

But other states, including many in the South and Midwest, have not attempted such bold reform, meaning they will probably be slower to adapt to potential new responsibilities. There is also a concern among some policy experts that state legislators, who could have a lot of control over reform implementation, are too beholden to local interest groups like small insurers and health systems. "There's no question that lobbyists win cheaper on the state level," says Len Nichols, a health economist at the New America Foundation. "With a set of [Arkansas] Razorbacks tickets for one weekend and they've got it."

Still, Nichols is among the policy experts who believe that since states already have responsibility for regulating health insurance in the individual and small-group market — the target of most insurance reforms in federal legislation — they will be well poised to enforce whatever new federal regulations are put in place. After all, compared to the relatively simple new rules on the table — insurers wouldn't be able to exclude treatments for pre-existing conditions and would have to sell insurance to anyone who applied for it — many current state insurance regulations are a mishmash of complex formulas and exclusions. "What's been impossible to effectively regulate are these complicated rating rules," says Rick Curtis, president of the Institute for Health Policy Solutions, a nonpartisan, nonprofit organization.

States also may be better at innovating on delivery and payment reform, working with local health-care providers to make care more efficient and affordable. "It's very hard for the feds to experiment," says Rhode Island's Koller. "What we can do much better is work with providers and work with the delivery system."

Much of the reason Baucus molded his bill to give states more control was to allay concerns of moderate Democrats (and Republican Olympia Snowe) that the Federal Government was inserting itself too deeply into the health-care system. But if the states aren't up to the task, those same politicians could find themselves blamed for health-care reform that doesn't deliver, with less tools than they might have had to fix it.