What Health Care Reform Means for the States

.What Health Care Reform Means for the States
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By KATE PICKERT AND KAREN TUMULTY Kate Pickert And Karen Tumulty – Fri Jan 8, 6:20 pm ET
As the battle enters its final stage in Washington, a rebellion is taking shape in the states, which are alarmed about the new financial burdens they will face in a revamped system. Governors of both parties are complaining that reform will drive their budgets into even deeper holes, with some feeling the effects far more than others. But just how much will be riding on the states? Here's a look at four changes that lie ahead. (Watch TIME's video "Uninsured Again.")


1. A Bigger Medicaid Tab
Of the 31 million uninsured people who would gain coverage under a revamped health system, about half would do so through a vast expansion of Medicaid - the state-and-federal health care program for the poor. The Senate bill would make eligible anyone earning up to 133% of the federal poverty level (for a family of four, an income of about $29,300 a year); the House bill would lift that threshold to 150% of poverty (or about $33,000 for a family of four).


Congress is looking to expand Medicaid because in terms of raw costs, it is the cheapest and most efficient way to cover people of modest means. That's in part because Medicaid pays doctors and hospitals far lower reimbursements than private insurance does and in part because the states pick up some of the cost.


Both House and Senate bills would pay the states' share of the cost of the new patients over the first two years and up to 95% after that. But states would still face an enormous new financial obligation. There is also the question of finding enough providers to care for 15 million new patients. "It is a huge load on the states at a time when we are still climbing out of the recession," Tennessee Governor Phil Bredesen said this week in Nashville. His state - already facing $1.5 billion in budget cuts this year and next - has estimated that the Senate version would cost it an additional $735 million from 2014 to 2019 and that the price tag of the House bill would be nearly double that. California Governor Arnold Schwarzenegger was one of the few prominent Republicans to favor the Obama health care reform effort. Now he is calling on Congress to "rethink it." In a Dec. 22 letter to Speaker Nancy Pelosi, he wrote, "When asked for my support, I was assured that federal legislation would not increase costs to California." Instead, a state with a $21 billion budget deficit is looking at what Schwarzenegger calls a "crushing new burden" of at least $3 billion a year. (See "The Year in Health 2009.")


2. New Regulatory Burdens
Can states enforce the dramatic new health insurance regulations called for in reform legislation? States already oversee commercial health insurers, but few have rules as restrictive as those expected under federal reform, which would bar insurers from setting premiums based on health status and require them to sell coverage to anyone who applies for it.


State legislatures may have to act to give state commissioners power to enforce the new rules, a process that could be complicated by political squabbling - not to mention the many Republican state legislators who have already said they plan to challenge the constitutionality of federal health reform. But even if states adopted the new federal rules, most state insurance departments would need to bulk up staff at a time when many are experiencing layoffs because of already strapped state budgets. "We would certainly argue that we're cut to the bone right now," says Kevin McCarty, head of Florida's Office of Insurance Regulation, which cut 14 positions in the 2009 fiscal year. New staff members could be charged with rooting out insurers who continue to cherry-pick healthy customers and making sure plans stay solvent despite the crush of new, previously uninsured customers.


What's the alternative? The Federal Government could enforce the new national rules, but this would require creating a sizable new regulatory bureaucracy, even though one already exists at the state level. The states don't want that to happen. If the federal bureaucrats assumed regulatory control, says Sandy Praeger, Kansas' insurance commissioner and chair of the health insurance and managed care committee of the National Association of Insurance Commissioners, "we'd just be left to mop up the mess. We wouldn't have any authority, but we'd just deal with all the consumer complaints. That, to me, is the worst-case scenario."


3. Insurance Exchanges
Perhaps the least understood aspect of federal health reform is how private insurance would be sold on the open market if and when the legislation becomes law. Under the Senate bill, states would be responsible for creating and running new insurance marketplaces, also known as exchanges. There, individuals and small businesses would purchase private health insurance, receiving federal subsidies if they qualified. The House bill would establish a national exchange, which states could opt out of if they had the capacity to run their own.


Exactly what states will have to do remains unsettled. But it's likely to be a lot. States may be required to vet some insurance plans to make sure they meet new federal standards. They may have to determine who is eligible for federal subsidies; they may have to build websites to market and rate plans. All that would require expertise and manpower. Massachusetts, which set up an exchange after enacting health reform in 2006, did so quickly and effectively, but Jon Kingsdale, who runs the program, says, "We had a 10% or less uninsurance rate. It's a well-to-do state. It's a progressive employer community. And ... the fact that a Republican governor championed this was a huge advantage." In states where some 25% of the population is currently uninsured, like Texas, setting up exchanges could take longer and cost more. And, Kingsdale warns, in states where there is "sustained and organized hostility" to reform (as in red states in the South and Midwest), "that in and of itself could turn a good program bad."


4. A Fight for Federal Aid
Around the capital, the special deal that Nebraska Senator Ben Nelson got to secure his vital, filibuster-breaking 60th vote for the health care bill is now known as the Cornhusker Kickback. Even as political favors go, it's a whopper: if reform passes, the Federal Government will pay all of Nebraska's new Medicaid costs forever. And it's fueling envy and outrage in the other 49 states. Led by South Carolina's Henry McMaster, the attorneys general of 13 states - 12 Republicans and one Democrat - have signed on to a letter contending the Nelson deal is unconstitutional.


But that's not the only issue causing friction among states. Another is the fact that some good deeds will be punished under the health reform measures: states that expanded Medicaid coverage on their own - say, to include low-income childless adults under 65 - will get less federal aid than those that have been stingier with their Medicaid programs.


Because liberal and heavily Democratic states have traditionally been more generous in their Medicaid programs, they are likely to be the ones shortchanged. The biggest beneficiaries, arguably, could be states like Texas, whose lawmakers have waged the strongest rearguard campaign against reform. That may be reform's biggest political irony of all.


- With reporting by Hilary Hylton / Austin, Texas, and Maggie Sieger / Grand Rapids, Mich.