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Health Reform and the Art of Federalism

The U.S. Department of Health and Human Services (HHS) recently announced significant changes to the premiums charged in the Pre-existing Condition Insurance Plan (PCIP), aka the “high risk pool” created by the Affordable Care Act. Premiums will now be up to 40% lower depending on the state (in some states the cost to enrollees is unchanged), and application procedures will be eased.

The PCIP plans provide coverage for people who cannot buy coverage in the non-group market because they have pre-existing health conditions. Most states allow insurers to deny coverage or charge higher premiums based on health status, a practice that will change in 2014 when the main elements of the ACA take effect. Under the PCIP, people who are uninsured and have pre-existing health conditions are able to buy coverage at premiums that match the standard rates for non-group coverage where they live. The federal government pays any costs that exceed the amount collected through premiums.

There’s a small catch, though. The premium reductions in the PCIP only apply in 23 states and the District of Columbia, where states chose not to operate the high risk pool and left it up to the federal government. For the other 27 states (see the map below from the federal government’s healthcare.gov web site), the news release announcing the changes said that HHS sent letters to the states running their own programs to inform them of the opportunity to modify their current PCIP premiums.

Pre-existing Condition Insurance Plan

This is an early sign of the tension inherent in the basic structure of the health reform law: in many cases, there’s an expectation and hope that states will take the lead on implementation, but the fallback is that the federal government will do so if not. One key factor in how this will all play out is whether the federal  government judges state plans strictly or give them lots of wiggle room.

In the case of this latest announcement on the PCIP, the federal government seems not to be requiring states that operate their own programs to reduce (or at least review) the premiums that are charged, instead giving them the opportunity to do so. As a result, it is possible that consumers in states where the federal government operates the high risk pool will be better off than consumers where states have assumed that task, even though the federal government is paying all of the subsidies in both cases.

This federal-state tension permeates the health reform structure, where states are given the opportunity to implement (and sometimes exceed) federal standards and where the federal government will have to make judgments about how strict or flexible to be with the states. Next up may be the prior review of unreasonable premium increases in the non-group and small business insurance markets. Also on the horizon are programs that allow enrollees in insured health plans to appeal a denied claim to an external reviewer. And, of course, what states decide to do in creating health insurance exchanges.

In all these cases, the federal government will have to judge whether state programs meet the applicable federal laws and regulations, and to step in with a federal program if not.

States all have their own policy preferences and politics. There are likely to be cases where states decide to implement the federal rules almost to a tee and others where they decide just to take a pass and let the federal government implement certain provisions. But there may also be cases in between where states mostly follow the federal framework, but then diverge somewhat, maybe in minor ways or maybe in major ways that have significant consequences for consumer protection or federal costs (the federal government pays all of the premium and cost sharing subsidies authorized by the ACA). What will the federal government do? Let the state slide? Or, declare the state out of compliance and put in place a federally-operated program?

- Larry Levitt