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Pulling It Together: Perspectives on State Health Reform

This Pulling It Together column is the fourth in my new series. All four so far have dealt with different dimensions of health reform. This time I write about one of my favorite topics, the states.

As a former head of an umbrella health and social services agency in a big state responsible for about a third of a state budget and workforce, I have a deep appreciation for state government. It’s a level of government where you make broad policy decisions, run institutions and deliver services, and are held directly accountable in nearly real time for what you do. In health, states are influenced by the same panoply of vested interests as Washington is, but state politics are more practical and less prone to the ideological gridlock that has prevented action on health reform in Washington. What most states don’t have, and it’s a critical missing element, is the money to sustain big new spending programs without help from the federal government.

A GLIMPSE INSIDE STATE GOVERNMENT  Because health care costs rise faster than virtually anything else in a state budget Medicaid spending rises faster too, even if no changes are made to the program. Enrollment also goes up in a weak economy. This simply reflects Medicaid playing its vital counter cyclical role as a safety valve when the economy falls off, but it also means more spending. Here is how it works at the state level. In a weak revenue year when the economy is bad, budget increases for Medicaid just to maintain the current program can easily consume more than a third of the new money available in a state budget.  A lot of state government is an annual contest for these new resources, and this can instantly make you the least popular person in the governor’s cabinet or with the state legislature. A single program and a single state department can only win just so much of the new money on the table each year, because other priorities are important, and other departments have influential constituencies too, often more influential. This means that there will not be enough money to address other critical health and social services priorities, from reducing waiting lists for community services for the mentally ill and developmentally disabled, to adequately funding state institutions, to paying child protective services workers a living wage, to funding state Head Start programs, to paying for services for homeless families, to providing child care so women on welfare can work, and much more. If you run a state umbrella agency as I did, the truly agonizing decisions are these tradeoff decisions because in state government decisions about Medicaid and SCHIP spending, especially in “bad years”, occur in the context of a host of other underfunded and unmet needs. For governors, who also need to worry about funding secondary and higher education, and corrections, and the environment and the state police and much more, the tradeoff decisions are even broader and more difficult. States are captives of their budget cycles which are driven by economic forces they do not control. As a result, as our annual fifty state surveys have shown over many years, states expand programs in good times and they cut them in bad times, and even when preserving coverage is a priority, many end up having to exact savings from programs like Medicaid and SCHIP.  When SCHIP was enacted with substantial new federal dollars for coverage of children, all states stepped up to the plate, but today with the economic downturn many are struggling to maintain children’s coverage and have sidelined efforts to expand adult coverage.  This is the essential reason why we can’t reform health care state by state: too many states don’t have the resources, and those that do at one point may not be able to sustain programs that require new spending when their fortunes shift. This is also one of the reasons why health reform failed here in California. The effort arrived at its key legislative moment exactly when the governor declared a state budget crisis. It is not possible to win political support for a big new spending program in state government when at the same time you are cutting so many other programs key constituencies care about.

A small number of pacesetting states can, however, serve as laboratories for national health reform, just as they did so decisively in welfare reform. Here the Massachusetts health reform program is especially significant. It is a real life example of a cross-ideological, combination approach to health reform that won support from all sides and passed with an overwhelming majority in the state legislature.  By building on public programs and the employment based system and also relying heavily on the private health insurance marketplace, the Massachusetts plan gave all sides something they could like. It allows those who like their coverage to keep it and tries to make affordable options available to those without coverage by extending public coverage and subsidies to assist those with low and modest incomes.  Massachusetts has shown that effective outreach and financial assistance can enable many of the uninsured to gain coverage.

A centrist compromise similar in spirit, though not in detail, will almost certainly be necessary if there is to be a deal on health reform in the Congress in 2009. The Massachusetts program does not satisfy the purists on the left or right; it does not achieve universal coverage; and it has faced and will continue to face many challenges, not least whether the private health plans it offers will prove affordable in the long run and whether the cost of the program will be sustainable for the state.  But to date it has covered about 340,000 previously uninsured citizens of my former home state, cutting the rate of uninsured in half, and the State and the coalition supporting the program has shown a willingness to make whatever adjustments are necessary in implementation to keep it moving forward.  Massachusetts’s (and California’s failed plan) also underscore a critical point about financing state health reform; about half of the new funding originally proposed for both plans came from federal Medicaid funds underscoring that even motivated and relatively wealthy states cannot pay for significant coverage expansions without substantial federal financial participation and raising a cautionary note for other states where the ability to utilize federal financing is more limited.

While the weak economy has halted the momentum for comprehensive state health reform efforts, states have not cut back as much as in past downturns, in part because they have previously exhausted their most obvious cutback strategies that focus on provider payments and one-time savings. There are also many incremental efforts underway in the states that can provide important lessons for other states and for national policy across a broad range of issue areas, from payment reform, to quality improvement, to disease management, to long term-care, to cost containment, to coverage expansion.  But with a debate looming in the presidential campaign about building on the employment based system and public programs versus moving to individually purchased insurance, special efforts should be made to learn everything we can from the states about the successes and failures they have had in their efforts to make private policies affordable for the uninsured and to make the nongroup market work more effectively for all comers. It is instructive to remember that two-thirds of the nation’s uninsured come from families earning less than $40,000 for a family of 4 in 2006; as a result the vast majority of the newly insured people in Massachusetts (175,000) have qualified for subsidized coverage and two percent of state residents (~130,000) with incomes above the subsidy cutoff were exempted from the mandate to purchase insurance because no affordable options were available for people in their income range. This underscores the difficulty of making health insurance affordable for working people without some form of subsidy. As reform discussions continue to focus on providing broader access to the individual health insurance market, the state experience with high risk pools and insurance market reform will offer additional insight into the challenge of putting together the pieces of health reform.

Should comprehensive health reform legislation fail in the Congress in 2009 as history suggests it could, a fallback might be to consider a program to facilitate state reform efforts.  One obvious strategy for states would be to build on the existing SCHIP and Medicaid framework for coverage of the low-income uninsured.  To spur broader state action, Congress could develop new authorities to broaden the scope of Medicaid-based waiver projects and eliminate the requirement that demonstration projects be revenue neutral to the federal government, which was initially imposed in the Carter Administration when I worked in HCFA (now CMS). If the federal government wants to usher in a new era of large scale state health reform efforts it would need to think differently about waivers, enact a broader demonstration authority that goes beyond programs in the Social Security Act to address tax code changes and federal ERISA requirements which pose serious obstacles to many state reform efforts and provide a real incentive for states to participate in the form of enhanced federal financial participation and a long-term commitment. In return the federal government could require states to put up new money of their own and meet other health reform objectives.

As I can attest having once secured a critical federal waiver for a welfare reform program at 2 a.m. in the White House after a marathon bargaining session, it would also be important to depoliticize the process by specifying the key rules for the new program in statute (our program, which would have been operating in violation of federal rules, was scheduled to go live at 9 a.m. that morning!).  Indeed, the program should probably not work through the existing Social Security Act Section 1115 waiver authority at all, but rather take the form of a newly legislated federal effort to encourage state innovation in health reform if critical national objectives are met by participating states. In terms of covering the uninsured, controlling costs, and establishing a reliable financing base for health reform, a state initiated, state by state strategy would never accomplish as much as national legislation could. History suggests that only a relatively small number of states could be expected to participate or to mount large scale efforts. However, it could be a good stepping stone to guide future health reform activities if national legislation does not prove achievable.

Having seen the back and forth between state and federal government both as a state and a federal official and studied it at Kaiser, both my experience and our studies suggest that the biggest obstacle to greater efforts at the state level has never really been disagreement between Washington and the states about the philosophy of federalism and state flexibility, rather it has been the ongoing tussle over the level of federal financial participation in state efforts. At the federal level the biggest obstacle to action on health reform may well be the ideological and policy differences between left and right; at the state level it is money.

(I want to thank my friend, colleague and trustee Donna Shalala for getting me thinking again about state innovation, though Secretary Shalala is not responsible for any of the particulars above.)