Can the States Sabotage Obamacare?

After surviving near-death experiences on Capitol Hill, in the Supreme Court, and during the presidential election, the Affordable Care Act is now confronted with unanticipated sabotage in conservative state capitols. The passive aggression of many Republican governors and state legislatures, who are balking at implementing key elements of the law, threatens to create severe political blowback against health care reform upon its launch in a little over a year while undermining the effectiveness of the legislation. Policy analysts always recognized that relying heavily on states to administer the act posed major challenges, but the unexpected depth and breadth of state-level resistance has created the real possibility of a fiasco come 2014.

Until recently, supporters of health care reform looked to the experience of Medicaid’s original implementation for reassurance that states will quickly fall in line to carry out major federal health care legislation. Within just two years after federal funds became available for Medicaid in 1966, 37 states agreed to participate, and all except Alaska and Arizona joined in after four years. The presumption among most Affordable Care Act supporters was that contemporary resistance to health care reform would similarly subside before too long as Republican governors and legislatures recognize that they and their constituents have too much to gain from embracing the law.

But the Affordable Care Act is a far more ambitious and complex piece of legislation than the original Medicaid law was, and its rollout is occurring under more inhospitable political conditions. Obamacare extends coverage to the uninsured through two main channels, both of which were intended by Congress to intimately involve the states. One of those is expansion of Medicaid, the state-administered insurance program for low-income Americans and nursing home residents that is jointly financed by the federal and state governments. The other main mechanism for extending coverage is through the creation of so-called insurance exchanges, which are governmentally organized and regulated marketplaces where uninsured Americans and small businesses can shop for health plans while paying premiums that will be partially covered by the federal government. Congress and the act’s designers expected that most states would be eager to develop and manage the exchanges to maintain greater control over how they operate, though the law also provided that the federal government could either step in where states declined to run the exchanges or set them up jointly with states that preferred a hybrid approach.

On both the Medicaid and insurance exchange fronts, unforeseen developments have greatly impeded progress. The Supreme Court erected the surprise Medicaid hurdle in Chief Justice John Roberts’ ruling upholding the constitutionality of the Affordable Care Act but allowing states to opt of the legislation’s requirement to extend Medicaid coverage to Americans with incomes up to 138 percent of the poverty level. That decision opened up an escape hatch that eight states with Republican governors have already jumped through and another five are leaning toward. Only twelve states have so far agreed to accept the broadened Medicaid eligibility levels, with four more leaning in favor. Fully 21 states remain completely up in the air about Medicaid expansion. Even though the federal government would pay for almost the entire cost of expanding Medicaid, and states would likely end up saving money due to reductions in what they currently owe to medical providers for non-Medicaid uncompensated care, it is plausible that more than half the states will be opting out when health care reform takes effect in 2014. Although the main explanation from the recalcitrant states has been that they simply can’t afford to take on any additional outlays, providing health insurance to the poor has never been a high priority in conservative parts of the country.

Even worse from the standpoint of feeding public hostility to the law are the roadblocks that have emerged to rolling out the insurance exchanges. In many respects, uninsured citizens will form their judgments of health care reform based on their experiences with those exchanges, much as taxpayer views about government are shaped by their interactions with motor vehicle departments, the Internal Revenue Service, and post offices. While exchanges have often been analogized to commercial websites like Expedia.com, they are far more elaborate operations requiring a regulatory apparatus to, for example, make determinations about which plans to include and exclude from the exchanges. Another central goal of the exchanges is to minimize “adverse selection,” which arises when certain plans, or the entire exchange, enrolls a relatively high-cost group of beneficiaries that leads to escalating premiums in those plans. Preventing and responding to adverse selection is an enormously difficult regulatory challenge that is essential to keeping the new system from unraveling. In addition, health insurance plans are inherently complicated, so developing user-friendly interfaces to clearly present options to consumers will be critical to minimizing aggravation and enabling people to make sensible choices. Moreover, the exchanges are the mechanisms by which consumers are supposed to be able to learn the amount of their government subsidies for premiums and whether they are eligible for Medicaid.

All of those responsibilities were expected to be daunting for the exchanges under the best of the circumstances. Optimists had predicted that governors would have a strong interest in creating and managing the exchanges effectively to receive credit from their constituents and avoid blame. But instead only 17 states have taken up the challenge so far, with 16 defaulting the responsibility to the federal government. Six have opted for the hybrid federal-state option, while the other 11 remain undecided with precious little time remaining to prepare for the October 1, 2013 deadline when open enrollment on the exchanges is required to begin. Political opposition has played an important role in many of the decisions to cede responsibility to the federal government, but in some cases administrative obstacles and difficulties in reaching a consensus about how to manage the exchanges have bogged down the process. In any case, the main upshot of so many states demurring or dithering over whether to create exchanges has left the Department of Health and Human Services with an unexpectedly colossal job for which it is ill prepared and inadequately financed.

During the health care reform debate, many progressive advocates supported the idea of a national exchange because it would create much larger risk pools, economies of scale, and a broader menu of options for consumers while pre-empting the wildly uneven state-by-state approaches that have actually occurred. But it’s important to recognize that the challenge confronting the federal government today is not to create a single nation-wide exchange but rather separate exchanges in each one of the states that have ceded that responsibility. That will be especially difficult because the health care landscape varies enormously among states. Some have one or two dominant insurers and many health care providers, for example, while others have the opposite mix. The demographics of the uninsured populations also differ from state to state, affecting the types of insurance products and pricing issues that exchanges will need to evaluate. In addition, the substantial overlap between states declining to set up exchanges and those opting out of Medicaid expansion greatly increases the difficulty of helping eligible individuals to become enrolled in Medicaid through the exchanges. That undercuts one of the Affordable Care Act’s cornerstone strategies for covering the uninsured.

Many Americans who will be shopping on the exchanges have incomes extending well up into middle-class levels. They are less accustomed than lower-income individuals to the often shoddy administrative practices that plague Medicaid programs in many states. If it turns out that the websites of the exchanges are excessively confusing, laden with faulty information, glitchy, or otherwise problematic, complaints may escalate well beyond the level to be expected with any new product rollout. Given the scarce time remaining until the exchanges are required by law to be up and running, and how little work on them has been accomplished in most states, the potential for a major political backlash seems much higher than has been generally acknowledged.

The good news is that the minority of states that will both expand their Medicaid programs and set up their own insurance exchanges will significantly reduce the share of their residents who are uninsured. Over time, the financial benefits of health care reform to politically powerful medical care providers and insurers will likely push more states to expand their Medicaid eligibility rules as well. The federal government will gradually learn from the mistakes it is sure to make in managing state exchanges, improving their quality. And in the end, the dysfunctional American health care system will at the very least have substantially fewer citizens without medical insurance. But thanks mainly to the relentless defiance of many state governors, that process will happen much slower and with greater public outcry than anyone expected when the Affordable Care Act was enacted in 2010.

Greg Anrig

Greg Anrig is the vice president for policy and programs at the Century Foundation.