What's Next for Obamacare and the States?

What's Next for Obamacare and the States?
November 9, 2012

Benjamin Domenech

Benjamin Domenech (bdomenech@heartland.org) is a senior fellow at The Heartland Institute. Domenech... (read full bio)

President Obama's re-election impacts the domestic policy future of the United States in a number of meaningful ways, but particularly in the arena of health care policy, where the law that bears his name is secure for at least four years. States that have resisted or slowed their implementation of Obamacare now face a number of key decisions that must be made in very short order. Next week, Republican governors will meet in Las Vegas, Nevada to decide on how to proceed - but already several are making themselves heard on how they will respond to Obama's re-election.

Decision Number One: Exchanges

First, states must decide whether to implement Obamacare exchanges in their state, or cede that responsibility to the federal government. Given that the vast majority of states - more than thirty - have taken little or no steps toward the establishment of an exchange, the general indication from policy staffers with the governors is that a federal exchange will be the preferred option. HHS has extended the window of opportunity for states to decide until February 15, but many are leaning toward letting the federal government handle the burden.

There are a number of reasons for this. The final word for all decisions within the exchanges, whether created by the states or the federal government, is in Washington. There is very little known thus far about the nature of the federal exchange, and many of the most important regulatory guidance has been left until after the election. But governors may calculate that it would be better not to politically own the process of implementation, particularly given the many pitfalls and organizational challenges involved, if they do not have real authority. The reasoning goes among some policy staffers that it's better to let Washington proceed and avoid blame for failures or rate increases, and not share responsibility in the public eye when little or no power is shared in truth.

Overall, the governors offices I contacted indicated they were unlikely to implement a state-created exchange for these reasons and more. Governors offices which have already announced they are leaning against implementation include several Republicans, such as Florida Gov. Rick Scott, Virginia Gov. Bob McDonnell, Georgia Gov. Nathan Deal, South Carolina Gov. Nikki Haley, Wisconsin Gov. Scott Walker, Kansas Gov. Sam Brownback, and Missouri Gov. Jay Nixon, a Democrat.

Several states also have laws on the books which would conflict with the implementation of an exchange, including Alabama, Arizona, Georgia, Idaho, Indiana, Kansas, Louisiana, Missouri, Montana, Ohio, Oklahoma, Tennessee, Utah, and Virginia. These would likely have to be repealed in order to implement a state exchange.

Decision Two: Medicaid Expansion

Governors will also have to make a decision about whether to accept the Obama administration's push to expand Medicaid. While the Supreme Court gave governors the power to say no to the expansion without losing current dollars, many state legislators are particularly bent on this, as they see the Medicaid expansion as "free" money, at least in the short term. The long term ramifications of Medicaid expansion, however, will almost certainly lead to higher payments from the states and the need to raise taxes to meet their matching obligations.

Unlike the exchange issue, only a handful of states have firmly rejected the Medicaid expansion, and the pressure from providers and state legislatures to expand may prove too much even for conservative governors. While the exchanges deal with populations that for the most part have insurance currently, forcing employers and employees into altered plans, Medicaid will reach a population that for the most part does not have current coverage. As employers shift employees to part-time jobs in reaction to Obamacare's employer mandate, the clamor in states will be for Medicaid to become an option. Additionally, unlike the exchanges, the disruptive effect of expanding Medicaid is delayed politically into future years.

Conservative governors may end up using the Supreme Court-granted authority to propose a deal of sorts with the Obama administration: an expansion of coverage, either in whole or in part (partial expansion is still an outstanding question with HHS), in exchange for vastly more flexibility for their current programs, even up to a full block grant of the program, in order to adopt reforms along the lines of Jeb Bush's successful "Medicaid Cure". This would allow the Obama administration to claim victory on expanding coverage, while giving governors the ability to alter their broken Medicaid systems dramatically.

Decision Three: Continued Resistance

Lawsuits continue to put pressure on key aspects of Obama's law, and they're likely to continue with the support of some key states which have joined the suits over the HHS contraception mandate. We are likely to see continued lawsuits filed in the coming months over other aspects and regulations spurred under the law as employers and employees gain legal standing to challenge them. There is also some likelihood that portions of Obama's law could be reopened as part of any "grand bargain" in the Congress, though that may not come to pass given the gridlock in Washington.

One critical outstanding issue is the distribution of subsidies via the exchanges. A key legal argument, now embraced by the state of Oklahoma, is challenging the authority of the IRS in implementing a rule which may go beyond the scope of the law in allowing the federal exchanges to distribute taxpayer subsidies. Resolution of this conflict could prove to be a major difficulty for the administration should the courts find in the favor of a literal reading of the law.

Benjamin Domenech

Benjamin Domenech (bdomenech@heartland.org) is a senior fellow at The Heartland Institute. Domenech... (read full bio)