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Beyond Defeat or Defiance

Thursday, December 27, 2012

Redefining state-based health reform under Obamacare.

This month, the post-election rollout of the Obama administration’s plans to implement insurance exchanges under the Affordable Care Act (ACA) in time for January 1, 2014 enrollment was met with substantial state government opposition, more questions than answers, and warning signs of a train wreck ahead. A clear majority of states (32) are not fully on board with running their own ACA-compliant exchanges. At least 20 of those states would rather leave the daunting implementation process entirely in the hands of federal officials.

This strong state resistance to enlisting as junior partners, or sorcerer’s apprentices, in building the key regulatory architecture for Obamacare’s plans to expand subsidized health insurance coverage surprised the law’s advocates. To some degree, it represents a continuation of bitter divisions over the still-unpopular health law. It’s also good short-term politics for Republican state officials looking to avoid the blame for its ongoing complications and contradictions.

But one way or another, taxpayer subsidies for new ACA coverage for at least several million Americans will start flowing out of Washington in 2014. The results of the 2012 election, as well as last June’s Supreme Court decision upholding the health law as constitutional, mean that Obamacare’s plans for even more doses of health care subsidies, regulations, and mandates cannot be fully stopped. However, changing the terms of how this happens and reshaping the future nature of our health system remain possible. 

Obamacare critics will need a broader strategy to regain the high ground in reframing the next round of exchange implementation debate. They must offer more than disengaged defiance, yet avoid succumbing to defeatist accommodation. The case against ACA-style exchanges will be strengthened if opponents begin to explain more clearly what they want to do to improve insurance choices and health outcomes, and why the Obama administration’s implementation plans stand in the way.  

A health exchange is not a new idea, but rather just an amorphous term for a mechanism to reorganize at least a portion of health insurance markets to (hopefully) expand consumer choices and improve their value through increased competition. However, the ACA adopted this approach not simply to help willing buyers and sellers get together more effectively. The law’s drafters had a much more ambitious political agenda to expand the federal government’s regulatory control over private health insurance, facilitate substantial income redistribution through new premium assistance subsidies, and establish greater voter loyalty from constituencies increasingly dependent on government-brokered channels for health care. The new health law’s architecture adopted only the appearance, but not the reality, of private sector delivery and state government administration in order to carry out and disguise most of this radical takeover plan. 

A clear majority of states are not fully on board with running their own ACA-compliant exchanges.

ACA’s exchanges were assigned other key roles beyond insurance regulation and subsidy distribution. They also will enforce mandates for employers to provide ACA-approved coverage and for individuals to purchase it, and they will limit competition from private market alternatives. Most of all, exchanges are supposed to facilitate one-stop shopping for income-based health coverage subsidies, by integrating all eligibility determinations and then directing  payments to the appropriate health insurer (but with maximum emphasis on expanding enrollment in Medicaid). This “no wrong door” objective also could provide a broader future gateway to a wider assortment of means-tested government benefits on the shelves of the federal welfare state’s stores. With more opportunities to cross-sell to new and repeat customers, can auto-enrollment for voter registration of grateful beneficiaries be far behind? Meet the 21st century’s health-benefits version of Tammany Hall.

Dozens of state governors have complained primarily about the uncertainties, costs, and complexities involved in implementing state-based health exchanges for the first time. The Obama administration undoubtedly held back more detailed and controversial regulatory guidance until after the November 2012 election to avoid early political blowback. Yet even the recent wave of hundreds and hundreds of pages of regulations issued over the last month has failed to answer the important questions of state policymakers. (It takes a large village of government lawyers to make the mysterious even more inscrutable.) And the timetable to meet already unrealistic 2014 deadlines has become even shorter.

The overall problem stems from the combined effects of a sweeping health care law that matched grandiose political ambitions to transform many established health insurance practices with the tools of badly drafted language, deceptive marketing, desperate deal making, untested mechanisms, and unchecked bureaucratic discretion. In other words, “Progressivism” through the rule of politicized experts, without much popular support or practical judgment. Obamacare remains all about forcing most Americans either into doing what they don’t want to do or cannot do without worse consequences.

To a large extent, both sides in most of the federal-state standoffs over participation in ACA-exchange implementation are bluffing in a game of political chicken. The Obama administration says it will be prepared to establish exchanges run by the federal government in holdout states. Although it might be able to field sketchy versions of federal exchanges by January 2014, those mechanisms’ ability to coordinate necessary flows of integrated data for eligibility and payment operations, let alone to provide adequate customer service, remains questionable. Moreover, the political managers at the White House and the Department of Health and Human Services need more than the infrastructure and experience of state-level officials to pull off an unprecedented nationwide rollout over the next two years. They also want state governments to serve as political heat shields to absorb most of the blame and burden for what is likely to go wrong. If Obamacare increasingly loses its thin veneer of state participation in extending ostensibly “private” insurance to more uninsured Americans, it risks being tagged as a botched version of a full-scale federal takeover of health care.

State opponents of ACA-style exchanges have three options. The first two are tactical but insufficiently strategic.

Political managers at the White House and the Department of Health and Human Services need more than the infrastructure and experience of state-level officials to pull off an unprecedented nationwide rollout over the next two years.

The easiest response is the current passive-aggressive bluff adopted by a number of governors and state legislators. First, complain that the rules for exchanges arrived too late, remain too unclear, and will cost states too much. Then, expect that exchange implementation will run behind schedule, go badly, and leave Washington politicos to take the blame (instead of state officials). Or, come back into the fold later and more quietly, if necessary. But this tactic leaves state opponents hoping for the worst (again), while offering little or nothing as an alternative to whatever meager expansion of subsidized coverage might still be achieved through federally run exchanges and a dozen or more state-run exchanges elsewhere. The state budgetary cost argument against exchanges also is rather thin. Even federally facilitated exchanges will have to rely on charging their customers more in premiums (with added user fees) to meet administrative costs. Whether or not those costs will reduce the comparative advantages of subsidized exchange coverage is a different issue.

A more surgical response is to support the litigation strategy of the state of Oklahoma, which is challenging in federal court the validity of an Internal Revenue Service rule that authorizes federally run exchanges to distribute the ACA’s premium assistance tax credits to their enrollees. The legislative text of the health law passed by Congress in March 2010 is quite clear on this point: only health benefits exchanges “established by a state” are authorized to provide such tax credits. But the Obama administration is relying on more creative interpretations of the law’s legislative history, along with IRS rule making that violated the legal norms of the Administrative Procedure Act, to provide federal exchanges with the tools to threaten non-participating states with a takeover of a large chunk of their state-regulated insurance markets. Last September, Oklahoma’s attorney general amended a previous lawsuit in order to directly challenge the IRS rule issued last May. A motion to dismiss this complaint is currently before a federal district court, but a full decision on the merits is likely forthcoming in the first quarter of 2013. If the state’s challenge succeeds, it would only apply directly in Oklahoma but nevertheless could send a signal throughout the country that federal exchanges operate on shaky legal foundations and are subject to challenge elsewhere. (It also would undermine effective enforcement of the employer mandate to provide ACA-qualified health coverage, at least in states that decline to administer their own ACA-compliant exchanges.)

However, even early success on this legal front would only derail, but not replace, most of the ACA-approved version of exchange-based insurance coverage. Many voters still would lack a persuasive rationale for why just saying “no” involves larger principles or offers the prospect of a more attractive future policy alternative for improved access to insurance coverage for millions of uninsured or ill-served Americans. Moreover, most of the new federal rules for insurance regulation under the ACA (for example, guaranteed issue, modified community rating, risk adjustment, essential health benefits, and specified actuarial tiers of benefit packages) will apply to the vast majority of fully-insured, state-regulated health plans anyway, as most of these plans will no longer have grandfathered exemptions as of 2014. 

Obamacare critics will need a broader strategy to regain the high ground in reframing the next round of exchange implementation debate.

Hence, the more strategic approach for state opponents is to challenge Obama administration officials to revise, or openly acknowledge and defend, their more extreme extensions of exchange regulations beyond the basic text of the law itself. State opponents of the forthcoming exchange regime should declare what they favor instead, as a matter of both principle and practicality. For example, they should insist on alternative coverage expansion mechanisms at the state level that are not focused on ensuring that every eligibility determination maximizes Medicaid enrollment above all else; they should also insist that these mechanisms do not further blur the line between facilitating access to private insurance and increasing dependency on an unreformed and unsustainable government entitlement program instead. They should insist that rule making for ACA exchanges operate through more formal and final legal channels, instead of through ambiguous and shape-shifting interim guidance or evasive answers to frequently asked questions. State opponents should decline to be tax-collecting branch offices for the federal welfare state’s new insurance mandates, and they should oppose federal reinsurance schemes designed to redistribute health plans’ revenue across different states’ markets.

They should insist that their version of exchange-based coverage expansion rely on supporting more choice and competition for willing buyers and sellers of diverse private insurance products. Most of all, they should present an alternative approach to health insurance reform that is much simpler, more consumer-friendly, scaled back to work in practice, and built upon existing state capabilities and institutions.

Last week, the state of Utah essentially presented this sort of challenge to federal officials, in insisting that its own implemented version of health exchanges should be declared fully compliant with the ACA’s statutory requirements. If other states similarly decide to say what they are for, and not just what they are against, they can force federal officials to come out of the shadows and try to defend their unworkable and unpopular regulatory overreaches or return to the negotiating table with states and their constituents as equal partners. Then, the lumbering ACA train to expanded health insurance access won’t grind to a halt or derail in a wreck, but instead could travel down a safer and more sustainable set of tracks. 

Thomas P. Miller is a resident fellow at the American Enterprise Institute. He is the author of “When Obamacare Fails: The Playbook for Market-Based Reform.”

FURTHER READING: Miller also writes “Handicapping Obamacare’s Day in Court,” “When Obamacare Fails: The Playbook for Market-Based Reform,” and “Six Picks for Post-Election Health Policy.” Michael R. Strain explains “How to Repeal and Replace: From a Tax to Tax Credits.” James C. Capretta discusses “Constructing an Alternative to Obamacare: Key Details for a Practical Replacement Program.” Scott Gottlieb contributes “Health Insurance Exchanges: A Race to the Bottom.

Image by Dianna Ingram / Bergman Group

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