Interposition: An Update From the Cliff

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If (as looks likely) a significant number of states decline to participate in Obamacare’s “exchanges” or in its Medicaid expansion (or both), I wrote last week, the Affordable Care Act may well crumble and collapse within the President’s term in office. Herewith a few additional thoughts, occasioned by news from the Beltway swamp.

Exchanges. Today’s Washington Post carries a front-page article, breathlessly announcing that conservative critics “slam GOP states for ceding control [over ACA exchanges] to feds.”  The Post’s intrepid reporter identifies three such critics: one member of the world’s oldest profession (insurance industry consulting); one worked-on-ACA Senate staffer turned Harvard prof; and former CBO director and McCain adviser Douglas Holtz-Eakin, who

warned that the administration could impose too many regulations, ultimately ruining the exchanges and opening the door to a “Washington takeover of health care.” He added, “If conservatives allow it to happen, they will be consenting to an unprecedented and potentially irreversible intrusion into states’ economies and health-care systems.”

Newsflash: this particular train left the station long ago. The notion that state governments could fend off the feds and help to establish workable, affordable health insurance regulation within the framework of the ACA, within a federal regulatory system that Mrs. Sebelius can change any day of the week with a mere wave of the hand, is charitably described as illusory. It’s also politically suicidal: the feds will blame the inevitable policy failure on state officials (and regulate some more), and all the officials can do is blame back. That is a losing game.

I stick to my story: state officials’ incentives are powerfully aligned with the right institutional (federalism) strategy and arrangement, which is to let a single government be responsible for results. The administration wanted this regime; now, let it own and run it. For the duration, the correct state strategy isn’t Albert Speer’s (“let’s hang around to keep worse things from happening”); it’s to figure out sensible policy options that promise to work, and to attract support, when the system crashes. AEI’s Tom Miller has a terrific piece on what such reforms might look like; it merits careful reading, prompt attention, and wide dissemination.

Medicaid is where the ACA has come to intersect with the “fiscal cliff”—more precisely, the administration’s resolute refusal to contemplate any entitlement cutbacks. The Supreme Court’s decision and opinion in NFIB v. Sebelius, recall, held that the states receipt of funds for the “old,” pre-ACA Medicaid program cannot be conditioned on their willingness to participate in the ACA’s expansion of Medicaid. The decision removed the feds’ stick to bludgeon states into acceding to an expansion. My own view is that the “stick” was never more than a small twig; but in any event, all that’s left now is the carrot—the feds’ promise to pay 100 percent (after 2019, 90 percent) of the newly covered Medicaid recipients (everyone up to 133 percent of the poverty line). Understandably, the states don’t trust that carrot, and so the administration is attempting to dress it up: no Medicaid cutbacks. A few weeks ago, there was still bipartisan support to curb a widely used state scheme (called “provider taxes”) to overcharge the feds for Medicaid services. Now, the administration has yanked even that proposal off the negotiating table. Anything to bamboozle states into the ACA, on the theory that current officials may be cynical enough to say “yes” while letting future officials deal with the sure-to-come screw-over.

What this means is that Medicaid expenditures (state and federal), predicted to grow at seven-plus percent anyhow, will shoot through the roof over the next two years. (Another Post article today provides a foretaste.) Consider: the ACA prohibits states from cutting existing services (for fear that states might dump Medicaid clients now and then re-enroll them under the far more generous expansion formula), and the administration will continue to police those requirements very stringently. Rock-bottom provider payments won’t be cut further, for fear of alienating that vital constituency. And  as just seen, even blatant strategies to milk the system are now off-limits. The administration’s strategy is to pour torrents of Fed-created dollars into cooperating states and to hold out yet-greater riches for fence sitters (“Come on in—the water is warm and the spigots are open.”). States, for their part, will want to hold out, for Game Theory 101 reasons.

NFIB v. Sebelius may have strengthened the states’ hand in the perennial game of chicken that is “our federalism,” but only at the price of making it yet more expensive. This stuff, too, needs rethinking—and soon.