CHAPTER 1

FederalismCreates HealthPolicy

Friends in my small town know that I have been involvedin national health care reform efforts as well as those in our home state ofMassachusetts. When conversation at the local pub turns to health care,they'll ask me questions. Because I'm a political scientist, not a medicaldoctor, I don't get pelted with questions everywhere I go, so I welcome theopportunity to respond. I only wish that there were better answers.

Jack, a salesman for a high-tech company, thought that the Massachusettshealth care reform would allow him to cover his 24-year-old daughter,Meghan, on his employer's health plan. So why did his company tell himthat she wasn't covered? I try to explain that larger companies are exemptfrom state insurance regulations because they self-insure; those businessesuse insurance companies like Blue Cross or Aetna only to administer theirclaims. It is confusing because the same insurance companies actually provideinsurance to small businesses, and in those cases they are subject to stateregulations. Eyes glaze over, and we quickly return to the fortunes of theBoston Red Sox. Meanwhile, Meghan remained uninsured.

Matthew runs a small financial consulting business. Because of double-digithealth insurance premium increases, coverage for him, his wife, andtheir three boys takes a big bite out of their budget. He wanted to knowwhether health care reform would offer more reasonably priced health plans.A while back, I had told him that help was on the way: Massachusetts had justcreated the Health Care Connector, which was intended to provide a choiceof plans at lower prices, at least in theory. The Connector did expand coverageto lower-income individuals and families, but it did not lower the costof insurance for people like Matt and his family. Perhaps I should have toldhim to hold tight for federal small business tax credits? Or let him know thathealth care exchanges created by national reform may offer a better solutionsoon? But at the risk of losing credibility and a good tennis partner, I turnback to discussing the ball game.

As the country geared up for national health care reform, I traveled fromstate to state talking about reform efforts in Massachusetts. Everywhere Iwent, I shared my excitement over the obvious progress in coverage. Morethan 98 percent of people in Massachusetts have health insurance, by far thehighest coverage rate in the nation. Enacted in 2006, state reform added apatchwork of new programs and regulations that built on previous expansionefforts. Over 300,000 previously uninsured individuals now have healthinsurance coverage and can sleep better at night. But the program is complexand difficult to comprehend—even for policy wonks—and it was notdesigned to address persistently rising health care costs.

National health care reform was signed into law by President Obama onMarch 23, 2010. The Patient Protection and Affordable Care Act (ACA) hasmuch in common with the Massachusetts effort. It holds similar promise—andsuffers from similar limitations—when it comes to expanding healthcare coverage to the uninsured. More of the uninsured will be covered, butcoverage will be complex to negotiate and cost containment will be just asdifficult. Despite its shortcomings, ACA represents a significant political triumphafter a series of failed efforts that date back to the Truman administration.1 Under national guidelines, reform will be administered in largepart by the states through existing health plans, insurers, hospitals, doctors,and other health care providers. States will be critical players in implementingreform and in establishing state-based health care exchanges. Applyingnational exchange rules to health systems that vary widely from state to statewill be a tremendous challenge.

The ACA barely passed Congress, along partisan lines. The Democratsstruggled to hold on to more conservative members of their party and usedparliamentary maneuvers to avert defeat by filibuster in the Senate. TheDemocrats in the Senate did not even have the votes to include a relativelymodest "public option" insurance plan to help balance private sector offeringsand force down administrative costs. However, it is unlikely that anythingmore progressive could have passed. In fact, after the 2010 election,when the Republicans gained control of the House of Representatives andthe conservative Tea Party adherents attacked the ACA as the centerpiece oftheir "revolution," the Democrats were fighting repeal.

Universal or near universal coverage has been referred to as the unfinishedbusiness of the New Deal. The New Deal represented a major realignmentof the political parties in favor of social welfare policy, and efforts toimprove, modify, and build on it have been a subject of political debate fordecades. In this case, the advantage went to the Democrats. The election ofRonald Reagan in the 1980s represented a realignment against social welfarepolicy expansion and the national agenda of the Great Society and War onPoverty programs of the 1960s and 1970s. In the 1990s, Speaker of the HouseNewt Gingrich took the Reagan revolution one step further, taking aim at theNew Deal with efforts to privatize portions of Social Security and Medicare.In this case, the Republicans had the advantage. Today the proper role ofgovernment and its role in health care reform is still hotly debated. The successor failure of the implementation of the ACA may well determine whichpolitical party holds sway over the next several decades.

Conservative opposition to the ACA represented not only an attack on aparticular piece of legislation but an ongoing fight about the legitimacy of thegovernment's efforts to ensure health care security for citizens. While repealpassed the House several times in 2012, the Democrats, who controlled theSenate, protected the law. Even if the Senate were controlled by the Republicans,it would still take sixty votes even to end the debate and have a vote onrepeal. The American political system is structured to make passing legislationhard, which makes passing repeal equally challenging.

The ACA also dodged two near-death experiences. The first was theSupreme Court decision in National Federation of Independent Business(NFIB) v. Sebelius, which found the individual mandate requiring people topurchase health insurance to be constitutional. Without the mandate, muchof the ACA falls apart. The law prevents insurance companies from denyingcoverage for people with preexisting conditions and requires them to makeproducts widely available and renewable in their service area. Without a coveragemandate, people could simply wait until they got sick or needed careto sign up for insurance and then drop coverage when they were well. Doingthat flies in the face of the concept of insurance. Furthermore, implementingthe ACA without the mandate would lead to lower numbers of younger,healthier people enrolling in the health exchanges, leaving disproportionatelyolder and sicker people in what insurers call the risk pool. That wouldincrease costs and make insurance even less attractive to healthier people,creating still higher costs and an insurance death spiral. Finally, the mandateis essential to covering the 30 million uninsured people that the law isdesigned to cover.

The second bullet was dodged with the reelection of President Obama. Hischallenger, Mitt Romney, vowed to begin the repeal process through executiveorders on his first day in office. A Romney win would have empowered andemboldened opponents of reform in Congress and in state houses throughoutthe country. Furthermore, a large number of states were sitting on the fence,awaiting the election results before moving forward in earnest with implementation.In addition, a Romney administration could have significantlyweakened the ACA through the administrative rulemaking process. Nevertheless,the Court ruling and the election merely kept reform alive; the politicalbattle continues through the rulemaking process and state implementation.

Making the ACA a reality will be a complex process fraught with peril.How enthusiastic will the twenty-seven states that were part of the lawsuitagainst reform be about implementing the major provisions of the law?Further significant opposition continues in Congress, and public opinionon reform is split. In particular, 60 percent of the population is opposed tothe individual mandate. The political right still characterizes the ACA as"socialized medicine" and a "massive government takeover of the health caresystem." Certainly it represents an expansion of government intervention,but health plans, insurers, hospitals, and physicians and other providers allremain private or not-for-profit entities. Missteps in implementation willreinforce notions of government incompetence and increase calls for greaterprivatization. The political and individual stakes are high.

Success would be hard to reverse. Once the policy is in place, a powerfulpolitical coalition is likely to develop to protect gains. The program has thepotential to enjoy the kind of broad political support enjoyed by Medicare,Social Security, and unemployment insurance. If the plan succeeds in covering30 million additional Americans, who will be clamoring for the "goodold days" when millions could not pay their hospital bills and people weredenied coverage for preexisting conditions? Ultimately, the fate of reformrests on implementation and on intergovernmental relations within theframework of American federalism. The states are at the epicenter of implementation,and their actions will be guided by federal rules and regulations.The interplay between the states and the federal government will determine,for example, how the new health care exchanges will vary between states. Itwill also dictate the following:

—how federal tax-based subsidies will be administered through state-basedhealth exchanges

—how new insurance regulations will dovetail with existing state lawsand systems

—how states can use the new flexibility to alter the benefits for Medicaidbeneficiaries

—whether states agree to expand Medicaid to all low-income individualsand families with an income below 133 percent of the federal poverty level

—how the individual mandate for insurance coverage will be enforced

—who will determine what is considered "affordable" for the purpose ofenforcing the mandate

—who will set and enforce minimal benefit standards

—how sanctions on individuals and business will be administered.

In short, intergovernmental relations will shape the program and determinewhether reform will reach its coverage and cost-containment goals.

If I tried to explain the importance of federalism and intergovernmentalrelations to Jack and Matt, not only would their eyes glaze over, but the guyswould probably get up and leave me at the bar. Yet federal-state interactionsdetermine the success or failure of policy and programs that impact usall. Knowledge about intergovernmental relations is essential to understandthe policy process, to evaluate options for effective and politically feasibleimplementation, and to understand how programs operate. Such insight,which can be obtained only by systematically examining intergovernmentalrelations for different types of policy across the policy process, is essential forscholars and students of public policy as well as practitioners at the national,state, and local level who struggle to make programs work.

A more comprehensive understanding of American federalism in practiceand its impact on programs and policy comes from three case studies—theState Children's Health Insurance Program (CHIP), the Health InsurancePortability and Accountability Act (HIPAA), and the health care reformenacted by Massachusetts. Each mirrors key elements of the ACA and offersunique insights into policy formulation and implementation. CHIP is anexample of coverage expansion, with state flexibility and federal oversight.HIPAA is an example of insurance regulation, with federal standards butlimited national resources and weak oversight of state activity. The Massachusettsreform has many similarities to national reform, but within apolicy environment that is significantly different from that of the majorityof states. Each case demonstrates that states can be a source of innovationfor social welfare policy, particularly during times of national policy gridlock.Each case provides lessons in how the ACA might be successfully—orunsuccessfully-implemented.

The book is divided into three sections, each of which addresses one of thethree case studies. Within the sections are chapters on federal-state relationsas they apply to legislative development, rulemaking, and implementation.The final chapter draws conclusions from all the cases regarding how federalismaffects both program development and the policy process and applieswhat has been learned to the implementation of national health care reform.

CHIP, HIPAA, and Massachusetts Reform

CHIP, passed in 1997, provides grants to the states to expand health insurancecoverage to uninsured children whose family income is too high toqualify for Medicaid but who lack access to private insurance. The programhas been an enormously successful federal-state partnership resulting inhealth insurance for millions of uninsured children. In 2010, the programcovered more than 7 million children. National reform in 2010 extendedCHIP until 2019 and provided supplemental federal funding, along with arequirement that states continue to maintain coverage levels.

As with many policies, a good deal of work occurred before most of thefederal rules relating to CHIP were put in place and details ironed out. Stateswere encouraged to innovate by designing alternative programs, and theyreceived incentives to participate through increased federal reimbursements.State implementation was kept in line through significant federal oversightand mandatory reporting requirements. From the outset, CHIP providedstates with the flexibility to design their own program or expand Medicaidor to come up with some combination of those two options. Within federalguidelines, states could set eligibility rules, benefit levels, provider payments,and other program requirements. The result was not only a major expansionof coverage but also great equalization in coverage levels across states.

HIPAA, which passed in 1996, had a host of goals, including privacy protection,regulation of insurance, prevention of fraud and abuse, simplificationof administrative tasks, and creation of medical savings accounts. Thefocus here is on the portion of the HIPAA that addresses insurance regulation,including limiting exclusions for preexisting conditions and guaranteeingpolicy renewal. These aims are similar to those of national insurancereform in the ACA. HIPAA standards were meant to extend federal controlin an area traditionally regulated by the states, but unlike with CHIP, federalresources, administrative expertise, and oversight were so limited that stateslargely controlled the process nevertheless. Ultimately, there remained widevariation between states and the regulations had limited impact, hence theneed for significant insurance regulation in the ACA.

The third case, Massachusetts health care reform, served as a model fornational reform, even if presidential candidate and former Massachusettsgovernor Mitt Romney later denied it. Both plans include an individual mandateto purchase insurance, health care purchasing exchanges, expansion ofthe Medicaid program, and subsidies for low- and moderate-income individualsand families. The reform was based on the notion of shared responsibility,and Massachusetts asked individuals, businesses, and government topitch in. Individuals must purchase health insurance if it is deemed affordable,or they face a fine. Businesses with eleven or more full-time employeesmust provide health insurance or pay a small fee. In order to increase affordability,the state government, with federal support, expanded subsidies tolow- and moderate-income residents.

From the beginning, Massachusetts reform depended on support fromthe federal government. Through a federal government Medicaid waiver, thestate was receiving millions of dollars paid directly to hospitals for uncompensatedcare. The George W. Bush administration threatened to stop providingthis money, $385 million a year, if the state did not shift fundingaway from hospitals and toward direct coverage of the uninsured. Interestingly,the conservative Bush administration pushed for reform and approvedthe plan that would ultimately serve as a model for "Obamacare," which isdetested by the political right.