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Shifting health care reform onto the states makes sense, but the Republican plan botches the job

House Speaker Paul Ryan, at podium, introduces the American Health Care Act
House Speaker Paul Ryan introduces the American Health Care Act
Chip Somodevilla / Getty

You’ve heard it time and again: The Affordable Care Act was a federal takeover of the health care system, an overweening piece of legislation that President Barack Obama shoved down the throats of a balky public on a party-line vote. For years, Republicans have deployed themes of federal arrogance and overreach to underwrite their attacks on health reform.

Now the Republicans have an alternative, the American Health Care Act. Part of its appeal, they say, is that it returns authority to the states. Speaker of the House Paul Ryan’s earlier template for the legislation makes the case concisely: The states “should be empowered to make the right tradeoffs between consumer protections and individual choice, not regulators in Washington.”

Ryan’s assertion raises an implicit challenge, one that Republicans themselves have not wholly thought through: Why bother with national health reform at all? At the core of our federal system is the principle that the states should retain control over their own affairs unless there’s good reason for Washington’s involvement. Yet the ACA is a federal statute, and the progressive push for health reform has had a doggedly national focus. Even the Republican “replacement” stops well short of total devolution to the states. Why?

The question is more challenging than health reform’s supporters generally acknowledge. There’s a kernel of truth to the claim that Obamacare needlessly impinged on state prerogatives. But the question does have an answer. Because of underappreciated legal constraints on their ability to tax and spend, the states can’t go it alone. The federal government really does have to take the lead.

A more refined understanding of the need for federal action serves as a rebuke to those who claim Congress can just wash its hands of health reform. And it offers a yardstick against which to measure the new American Health Care Act, which would leave intact the very obstacles that have long prevented the states from tackling reform on their own. Unless Republicans change their approach, their talk about federalism should be seen for what it is: empty rhetoric that masks a refusal to allow any level of government to achieve near-universal coverage.

State-by-state reform might have more effectively built public support for change

Strictly as a strategic matter, the campaign for national health reform needs some defending. On at least a half-dozen occasions during the 20th century, federal reform efforts had gone down in flames. Massachusetts’s coverage expansion in 2006 seemed to offer a more promising path: Maybe supporters of reform should rack up some wins in the states before tackling the issue at the national level.

By way of comparison, consider the march to same-sex marriage. When the Supreme Court invalidated state bans on same-sex marriage in Obergefell v. Hodges, fully 35 states already allowed it. Before Obamacare, in contrast, only two deep-blue states had significantly expanded coverage, Massachusetts and Hawaii. Judged solely on that metric, the progressive commitment to a national solution seemed premature.

Nor was there a self-evident functional case for federal intervention. It makes a lot of sense for the federal government to act, for example, when states can impose costs — “externalities,” in the economic jargon — onto other states. Federal environmental laws, for example, aim to prevent states from sending their air or water pollution to their neighbors.

But concerns about externalities can’t justify health reform. If New York declines to adopt near-universal coverage, that doesn’t hurt Connecticut or New Jersey. The country can tolerate a patchwork of state insurance rules. Indeed, because the federal government has generally stayed out of the business of regulating insurance, it already does.

Nor are states locked in a race to the bottom that prevents them from embracing health reform. We might see such a race develop if, for example, a state’s adoption of a coverage expansion led sick people to flock to the state. If that happened, no state would want to be the first mover, even if most of the states would prefer to expand coverage.

But the data tells us that sick people rarely move in response to coverage expansions. In a 2014 study, two Harvard researchers examined migration patterns in response to Medicaid expansions in four states. They found “no evidence of significant migration effects.” A similar 2016 study estimates “that the migration effect of Medicaid is very close to zero,” a finding echoed in other research.

Other arguments for federal intervention also fare poorly. In some circumstances, national action is thought necessary to prevent states from discriminating against historically disadvantaged minority groups. Think here of the Voting Rights Act, which is supposed to stop states from jerry-rigging their voting rules to dilute the political power of blacks or Latinos.

Is there a civil rights case for federal oversight of health care?

It’s hard — not impossible, but hard — to see health reform as analogous to a civil rights statute. Yes, members of minority groups benefit disproportionately from coverage expansions. And yes, states might resist expansions partly because of insensitivity to minorities’ interests. But the same can be said in many other policy domains. Take education, for example. Many states can (and do) rely on property taxes to finance local schools. Wealthier communities get well-funded schools; minority communities, not so much.

Appalling as that might be, it’s not generally thought sufficient reason for a federal takeover of public schools. Outside the enclave of federally protected rights, the risk that states might behave badly has generally not been thought an adequate justification for national action. If it were, lingering discrimination would be reason enough to oust the states of their authority to tax and spend, spelling the end of federalism in any meaningful sense of the word.

When it comes to financing health care, the states are hamstrung

So why do we need federal health reform? Here’s the answer: money.

During a recession, the federal government can run a budget deficit. Most economists think that’s a good thing because federal spending can stimulate the economy and bolster the safety net. States don’t have that luxury: They’ve all got to balance their budgets every year. (Vermont is the lone exception.)

When a recession comes, state tax revenues take a hit at precisely the moment that lots of people lose their jobs and their insurance. (Indeed, revenues take a hit because of the job losses.) To cover the newly uninsured, states will have to spend more, requiring the imposition of new taxes or cuts to other state spending, either of which will exacerbate the recession. Coverage expansions thus commit states to an economic policy that could harm them during downturns.

This is what I call the countercyclical trap, and it’s the single biggest obstacle to state-level reform. Here, Massachusetts is the exception that proves the rule. When it expanded coverage, it had one of the lowest rates of the uninsured in the country, which reduced the size of any new fiscal obligations. And, with Sen. Ted Kennedy’s help, Massachusetts cut a sweetheart deal with the Bush administration to get an extra $1 billion in Medicaid funding to support Gov. Mitt Romney’s vision for conservative health reform. Massachusetts could thus manage — barely — to expand coverage. Other states without its advantages can’t afford to.

The problem runs deeper. A state that’s looking to expand coverage can always ask its taxpayers to foot the bill. But many of those taxpayers will complain, with some justice, that it’s unfair to ask them to bear the whole burden. If you get health coverage through your job, you already face a reduction in take-home pay commensurate with the value of that coverage. Your friend who works at a similar job but doesn’t get health coverage is paid somewhat better. Should you both be taxed equally in order to subsidize insurance for the higher-income worker?

From the state’s perspective, it’s both easier and more equitable to adopt a law penalizing businesses that fail to offer insurance. These pay-or-play laws have a clear political logic: Employers should live up to their end of the social bargain. They have a certain economic logic, too — an employee who starts getting coverage because of a pay-or-play law will see an offsetting wage reduction. That employee will thus “pay” for his own coverage, reducing the need for broad-based tax increases.

The trouble is that the Employee Retirement Income Security Act of 1974, or ERISA, disallows state laws that “relate to” the design of employee-benefit plans, including health insurance. Although there’s some legal ambiguity, ERISA means that the states probably can’t adopt pay-or-play laws.

Here, Hawaii’s experience is instructive. Its scheme for near-universal coverage depends on a robust pay-or-play law. That law is still on the books only because Hawaii got Congress to adopt a special exemption from ERISA. Without a similar carve-out, the other 49 states will find it hard to achieve near-universal coverage.

The compromise: Washington provides the money, states the policies

Because of the countercyclical trap and ERISA, federal money must be the lifeblood of health reform. At the same time, however, the weakness of the other justifications for national intervention implies a rough division of responsibility: The feds should finance the bulk of any coverage expansion, but the states should be allowed to adopt their own distinctive approaches to health reform.

To a large extent, the ACA honors that division of responsibility. Its subsidies and the Medicaid expansion are financed almost entirely with federal money. The states retain authority to regulate their insurance markets and were given the option of establishing their own health care exchanges. The Obama administration also proved willing to grant broad waivers to states seeking exemptions from Medicaid’s rules.

In some respects, however, the ACA is stricter than it needs to be. Take, for example, the rule requiring insurance plans to cover all the “essential health benefits.” It sets a comprehensive baseline package protect consumers, but it also makes insurance more expensive, which can put it out of reach of some of the very people who need it most. The tradeoffs are genuinely hard.

Why not let states to choose their own essential benefits package? You shouldn’t reject the idea just because you think some states will make stupid choices. The point of federalism is that states get to make their own choices, stupid or not, unless there’s a good reason for federal intervention. As the Yale professors Jerry Mashaw and Ted Marmor argued 20 years ago, “[t]here is no agreed-upon ‘best’ health insurance (or medical care) system that a state could offer.” What if a policy that seems stupid turns out not to be so stupid after all?

The same goes for many of the ACA’s insurance reforms: age banding, coverage of preventive services, even the individual mandate. To be sure, the federal government must establish guardrails to prevent the sale of junk insurance and to assure that states have a plan for achieving near-universal coverage. But there’s a lot to like about giving states more flexibility.

The ACHA doesn’t do the job right

Republicans may talk the talk of devolving health care policy to the states, but that’s not what the American Health Care Act does. Instead, it starves health reform of the funding upon which it depends.

Most significantly, Republicans intend to phase out the Medicaid expansion and to impose a hard cap on federal contributions. If a recession forces a state to exceed its cap in a given year, any overruns will come out of its Medicaid payments the following year. With that kind of shortfall, the states will have to make savage Medicaid cuts to make ends meet.

Republicans also want to slash the subsidies that make insurance affordable in the private market. Under the ACA, no one making less than four times the poverty level has to devote more than 10 percent of her income toward private coverage; most pay much less. The American Health Care Act would erase that affordability guarantee and, instead, extend age-based subsidies that would be much too meager for most people to afford coverage.

If federal money is withdrawn, states will be stuck. Because of the countercyclical trap and ERISA, they won’t be able to enact and sustain coverage expansions on their own. The end result will not be the diversity that federalism celebrates. It will be a uniformly crappy system that leaves millions of the sick and poor without coverage.

It doesn’t have to be this way. A group of Republican senators led by Bill Cassidy (R-LA) and Susan Collins (R-ME) has floated an alternative, the Patient Freedom Act of 2017, that retains the ACA’s funding streams while giving the states more room to choose how to use that money. That’s a model that deserves serious attention from both Republicans and Democrats. It might enable partisans on both sides move past the rancorous debate over the ACA.

For now, however, the Republicans seem intent on dismantling coverage gains across the entire United States. Their proposals trade on the rhetoric of states’ rights, but they would have the perverse effect of inhibiting state power. That’s bad for federalism — and bad for the country.

Nicholas Bagley is a professor at the University of Michigan Law School. This piece was adapted from his essay, “Federalism and the End of Obamacare,” in the Yale Law Journal Forum.

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