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Health Care Overhaul Threatens States

The Democrats’ proposed health care overhaul raises federalism concerns and burdens cash-strapped states with hundreds of billions of dollars in new spending obligations.

By 7.14.09

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Even as California struggles with a catastrophic fiscal crisis and other states scramble to avoid the same fate, Democrats in Washington are proposing health care measures that would add hundreds of billions of dollars of spending to state budgets.

Thus far, very little of the debate surrounding the push to overhaul the nation’s health care system has focused on the federalism concerns raised by several provisions within legislation pending in Congress. Taken together, the measures will impose a raft of new financial and regulatory obligations on individual states.

Most directly, Democratic plans to extend health care coverage to all Americans are contingent on a massive expansion of Medicaid. The program, which covers about 40 million people now, would gain 15 million to 20 million new beneficiaries if Democrats get their way.

The Congressional Budget Office pegged the cost of such an expansion at $500 billion over 10 years, but the total cost is likely higher because the estimate only counts the projected burden on the federal government. Under the current arrangement, Washington picks up about 57 percent of the cost of Medicaid and states pay for 43 percent. While the latest draft of the bill by the Senate Health, Education, Labor and Pensions (HELP) Committee has the federal government subsidizing the Medicaid expansion for the first five years, after that, the burden will gradually shift back to the states.

“There’s an air of unreality here,” said Sen. Lamar Alexander, a member of the HELP committee. “The language is, ‘we’ll shift it back to the states’ as if the states had the money or a printing press. But this isn’t just a little increase. This is a bankrupting increase for most states.”

Alexander, who had to balance a state budget when he served as governor of Tennessee, quipped, “Any Senator that votes to expand Medicaid the way it is currently being proposed in Democratic bills ought to be sent home to serve as governor for eight years and try to manage the program.”

He said that financing this Medicaid increase would require Tennessee to introduce a new 10 percent state income tax. He also noted that as it is, the economic stimulus package passed in February already expanded Medicaid by $85 billion over two years, imposing costs on the states thereafter.

Ray Scheppach, executive director of the National Governors Association, testified before the committee last month that the state executives were concerned about the proposed expansion.

“Governors oppose changes to the Medicaid program that will result in an unfunded mandate imposed on the states,” Scheppach said. “Any increase in the mandatory minimum eligibility threshold will cost states tens of billions of dollars per year.”

Another problem posed by the Medicaid expansion involves access. If Congress approves lower payments to doctors to cut the cost of the program, it means that more providers will stop accepting Medicaid patients and thus reduce the quality of available care.

Alexander proposed an amendment to the HELP bill (also known as the “Kennedy bill” after the committee’s chairman, Sen. Ted Kennedy) that would have prevented any Medicaid expansion from adding to the financial burden of the states. But Democrats struck it down, leaving the issue to be resolved in the Finance Committee, which oversees the program.

But Medicaid is only one of many areas in which Democrats seek to use the power of the federal government to impose their health care vision on states. 

The Kennedy bill would also create health insurance exchanges called “Gateways” in every state, allowing individuals to use government subsidies to purchase a private health care plan or a new government-run plan. While the legislation claims to offer flexibility in how states set up the exchanges, any state that refuses to establish an exchange within four years will have one imposed from Washington.

Among the hundreds of new powers the unelected Secretary of Health and Human Services would be granted by the legislation is the authority to “establish and operate a Gateway” in a state that does not create one on its own. And once this happens, all of the new insurance regulations created by the legislation “shall become effective in such State, notwithstanding any contrary provision of State law.”

Every individual in the state would be required to purchase “qualifying” health insurance and employers would be forced to provide insurance or pay a tax. And once again, the HHS Secretary (currently Kathleen Sebelius) would be tasked with “establish(ing) criteria” to define “qualifying” coverage.

Michael Greve, an American Enterprise Institute scholar who focuses on federalism, said that any state that accepts Medicaid money would have to go along with any conditions the federal government attaches to it. “The central problem is the temptation by the states,” he said.

However, he said that the imposition of health insurance exchanges on the states raises much more complex legal issues involving the hotly contested concept of “conditional preemption,” which is when the federal government tells states to enact a given regulation or else have the federal government do it for them. Greve said his hunch is that the current U.S. Supreme Court would find such a provision unconstitutional.

As legislation moves through Congress, at least one state is trying to protect its citizens against federal overreach. Last month, the Arizona state legislature voted to include a referendum on the 2010 ballot that would amend the state constitution to prevent anybody in the state from being forced to participate in any health care system. Practically speaking, the provision would mean that people and businesses in Arizona would be exempt from insurance coverage mandates.

“This is an effort to create a federalism shield to protect the rights of Arizonans,” said Clint Bolick, a director at the Phoenix-based Goldwater Institute, who supports the measure.

In 2008, Arizona voters narrowly rejected a similar proposal by less than 9,000 votes out of more than 2.1 million cast after then Gov. Janet Napolitano campaigned vigorously against it. But Bolick said that the 2010 proposition has different language that prevents opponents from arguing that it would affect existing state programs.

The legislation would not seek to address the issue created by the imposition of an insurance exchange on the state, but Bolick said such a provision could be challenged under the “anti-commandeering” principle. This applies when “the federal government enlists the state as if it were an agent of the federal government,” he said. “That raises constitutional alarm bells.”

Christie Herrera of the American Legislative Exchange Council, which boasts 1,800 conservative state legislators as members, said that efforts are already underway in five other states (Indiana, Minnesota, New Mexico, North Dakota, and Wyoming) to imitate the Arizona example if it succeeds next year.

Health care has already been the subject of several failed state experiments. In 1994, Tennessee expanded Medicaid coverage, but by 2003 its health care system was deemed “not financially viable” and Democratic Gov. Phil Bredesen was forced to rein in the program.

In 2006, then-Massachusetts Gov. Mitt Romney signed health care legislation in which the state government forced individuals to obtain coverage and offered them subsidies to purchase government-designed plans on a government-run exchange. The result has been skyrocketing costs and longer waits in doctors’ offices. A Rasmussen poll taken last month found that just 26 percent of voters in the overwhelmingly liberal state said the effort was a success.

Instead of learning from these failed experiments, Democrats in Washington are planning to use federal power to muscle all states into replicating them.

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About the Author

Philip Klein is The American Spectator's Washington correspondent. You can follow him on Twitter at: http://twitter.com/Philipaklein