The State and Federal Dance on Health Reform

March 7, 2011

The Affordable Care Act is a complicated law, in part because it builds off the current health care system to achieve some far reaching goals: significantly expanded access to care and control over the rate of cost increase. Though some describe the Act as a federal takeover of health care, in fact, much of the law is to be carried out in the states, with considerable state discretion over the design of many provisions.

One point of discretion that they don’t have, however, is on who/how people are covered, at least before 2017.

The Affordable Care Act specifies who is covered and through what mechanism. That is, all those below 133 percent of poverty must be covered by Medicaid and most of those with higher incomes who are not yet Medicare-eligible must be covered by an employer or purchase health insurance on their own. States are allowed to opt out of these provisions in 2017 if they can demonstrate they can cover, in a different way, at least as many people as would be covered by the Affordable Care Act.

Additionally, effective with the signing of the law on March 23, 2010, Congress prohibited states from reducing Medicaid coverage – or making it more difficult to enroll – in the run up to the 2014 expansion (except for individuals with incomes higher than 133 percent of poverty that states were covering on a voluntary basis). Similarly, states cannot cut coverage for children in the Children’s Health Insurance Program (CHIP) through 2019, when children with CHIP get rolled into the health reform provisions.

Of course, Congress passed these provisions last year, when many believed the economy would improve sooner and to a greater degree than it has to date. The language was also passed before the last election, when many state legislatures and governors’ offices changed hands.

In addition to the budget challenges they face due to broader trends in the economy, many new governors and legislators ran on tax cutting platforms. For every state today, Medicaid is among the top spending components of the state budget, and even though the Medicaid expansion in 2014 will be funded to a significant level by the federal government, there will be some increase in costs to states as Medicaid expands over time.

There is quite a debate over the cost of that expansion. Within a 10 year time horizon, Republicans on the Senate Finance and House Energy and Commerce panels estimate the cost at $118 billion, while the Congressional Budget Office’s score marks the cost at almost half that amount. Looking at a five year horizon, the Urban Institute, the Lewin Group, and the Medicare actuary actually show a net savings to states.

Of course, all of these projections are entirely variable depending their underlying assumptions, and those assumptions can be affected by philosophy as well. That is, whether or not one supports the Affordable Care Act may influence which projections one believes.

So, it is not surprising that in January, 33 governors/governors-elect – all members of the Republican Governors Association – sent a letter to federal leaders asking that the mandates on states be revisited.

Specifically, many of these governors would like Medicaid converted from an entitlement program to a block grant (similar to what happened in welfare reform in 1996). Those who are in support of the Affordable Care Act are entirely opposed to this change, convinced that many who are poor will lose coverage as a result, and the Obama administration has said that it will not support such a change.

At the National Governors Association in the first week of March, however, President Obama did offer an olive branch, suggesting that the opt out provision for states could be moved up from 2017 to 2014 as long as states could show that they would cover at least as many people under their own programs as would be covered under the Affordable Care Act. However, within hours after the President indicated his support for more flexibility in the law, many opponents of the law were calling this approach “dead on arrival.”

So, where will all this end up? Clearly the states are – and must be – big players in making health reform successful. If the current debate among state leaders is any indication, however, the state/federal relationship will be sorely challenged in many states over the next several years.