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Pulling It Together: Writing Regulations

Not since Geraldo Rivera revealed the secret contents of Al Capone’s vault on national TV in the mid-80s, or more recently, sports fans awaited the LeBron James “decision” about where he would play next, have we so anxiously awaited anything as much as the draft health exchange regulations just published by HHS. Well, okay, I exaggerate for effect, but the regulations on health insurance exchanges were anxiously awaited by the health policy community. The hallmark of this NPRM (Notice of Proposed Rulemaking) is state flexibility. In this column I examine the importance of exchanges and the broader issue of state flexibility in implementing major legislation.

The draft regulations were highly-anticipated for a couple of reasons: First, exchanges are a key element of the Affordable Care Act (ACA). Second, the “exchange reg” is the first formal statement from the Federal Government about how a reformed private health insurance system may look after January 1, 2014, when major pieces of the ACA go into effect.

The regulations give states substantial flexibility in structuring exchanges, should they choose to set them up. (If a state doesn’t establish an exchange, then the Federal Government will operate one in the state.) In crafting the draft regulations, federal policymakers had to weigh how prescriptive to be. For example, they had to decide whether to prohibit insurance company representatives from serving on the boards of exchanges, or require exchanges to aggressively negotiate with insurers. In general, they erred on the side of less, rather than more, requirements.

This means, for example, that states will have a high degree of discretion in deciding whether to take a more free market or more regulatory approach in moderating the growth in health insurance premiums. Under any scenario, plans offered in exchanges will be run by private insurers. But, a state can choose to create a more powerful, highly-regulated exchange, one that is part of state government and has the authority to negotiate premiums and selectively-contract with insurers. Or, a state could build a less-constrained marketplace, operated by a non-profit exchange that acts as an Amazon.com-like clearinghouse for any insurer that meets minimum requirements. States looking to take a more regulatory approach with exchanges can also give their insurance departments the authority to disapprove unjustified premium increases. The health reform law requires the review and public disclosure of large rate increases, but it’s up to states whether to go further. The Administration also gave states and employers wide latitude in recent guidance on the rights of consumers to appeal denials of coverage for medical services. At the end of this column is a chart showing where each of the states stand with regard to the implementation of their exchanges and whether they are tilting towards a more proactive exchange or more of a clearinghouse model.

Politically, being less prescriptive on issues like this is generally a plus with well-funded interest groups, and placating them can lower the temperature of their criticism of the law. But for voters themselves, there’s rarely a downside to strengthening consumer protections, which polls show are very popular and can be real selling points for a law that needs them.

The dynamics of how all this will play out in the states, though, is not so simple.

It is an iron law of federalism that any time you give states wide discretion in carrying out a law, you get wide variation in performance. Some states will do exceptional things and, as pacesetters, point the way for future policy; some states will perform poorly, or in this case, potentially refuse to implement at all (they will require the most attention from the Federal Government and will get the most press attention); and most states will fall somewhere in the middle.

States almost always say they want greater flexibility, and more often than not they do (even more, they want more federal money). But if you have been a state official, as I have, you know that inside a state attitudes about federal rules are often more nuanced and complex. Sometimes states want flexibility and sometimes they want clear and even binding federal rules, depending on the circumstances and the viewpoint of different players at the state level. For example, a Democratic state executive branch that is friendly towards the health reform law and desires a robust exchange might welcome very detailed federal rules if it is faced with a conservative legislature. A governor or cabinet officer can then turn to that legislature and say: “we have no choice; our hands are tied by the federal regulations.” By contrast, a state with Republican control of both the executive and legislative branches might want as much flexibility as possible to implement the kind of exchange they prefer. Differences within branches of state government are also possible. Insurance commissioners or other cabinet officers might benefit from detailed regs that support the direction they want to go, in either Republican or Democratic states. I often did when I was in state government.

In Washington and in the national press, governors typically represent the public face of states on issues such as these. Inside a state, there are multiple players with different points of view on substantive issues and on how much flexibility the Federal Government should provide. Today twenty states have Republican governors and legislatures. No doubt most of those states prefer flexible rules.  Eighteen states are divided and eleven states have Democratic control of both the executive and legislative branches of government (Nebraska has a Republican governor and a technically nonpartisan, but mostly Republican, legislature). Thus, in as many as twenty nine states, and possibly more, there may be a constituency of some kind for more prescriptive federal rules that ensure a more assertive approach to consumer protection and cost containment by state government.

One reason to build flexibility into a regulation like this one is simply to be practical about implementation. Timetables, such as the requirement that all states have clear plans for their exchanges by 2013, often slip in the real world and it can be wise, as in soccer, to build in some extra stoppage time rather than sacrifice the successful implementation of a program. Another reason to delay or water down regulations is classic pressure from interest groups like insurers or the business community. The degree to which that played a role in this case is not known. We do know that virtually all of these consumer-oriented provisions in the law are popular with the public. To oversimplify the essential tradeoff: The more you strengthen the regulatory aspects of the law the more vulnerable you may be to interest group criticism, but the more tangible benefits and protections you will have to sell to a public looking at the ACA and trying to answer the question, “how will this help me.” It is important to remember that these are draft regulations, and changes can be made as the process moves along.

Many years ago I published a study of the regulation writing process in health. It was at a time when congress began drafting longer and more detailed statutes in order to limit administrative discretion in writing regulations. Among other things, the study documented the perfectly obvious: Writing regulations is not a technical process; and politics, interest group bargaining and policymaking continues after the passage of a statute throughout the process of promulgating implementing regulations. The bottom line in cases like these is always that there is inherent tension between writing regulations that preserve the intent of a law to the letter — or sometimes even try to use administrative powers to go beyond it — and managing the intricate interplay of partisan politics, interest group lobbying, public opinion, and state capacity to actually carry out the law. Where the tradeoffs between these competing pressures are made is the art of implementation and in many cases not everybody can be satisfied.

Click on the table for more information about exchanges on Kaiser’s statehealthfacts.org

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Source: Statehealthfacts.org