Let States Exchange Obamacare For Something Better

Colorado Governor John Hickenlooper established an Obamacare state exchange that is now "teetering," according to a state official. [Credit: mnginteractive.com]

Colorado Governor John Hickenlooper established an Obamacare state exchange that is now “teetering,” according to a state official. [Credit: mnginteractive.com]

In the 34 states that did not establish Obamacare exchanges, Governors nervously await a Supreme Court ruling that could throw their health insurance markets into chaos. Meanwhile, many of the Governors who did establish exchanges are regretting their decision.

More than five years after its enactment, Obamacare has proven a bitter brew for many states.  Nowhere is this more evident than in health care exchanges. 

Exchanges began as a figment of Washington’s imagination.  The fertile minds of health policy analysts had conjured a bewildering system of cross-subsidies that involved charging young people unfairly high premiums to reduce premiums for older workers, overcharging healthy people to subsidize unhealthy ones, taxing middle income people to subsidize lower-income people (what the President likes to call “middle class economics”), cutting Medicare to enlarge Medicaid, taxing the uninsured for being uninsured, taxing employer-sponsored health plans and taxing employers for not sponsoring health plans, all garnished with tens of billions in new taxes on medicines, medical “devices” (everything from tongue depressors to defibrillators) and, of course, on health insurance itself.

And that was just for starters.  Congress also added hundreds of billions of dollars in premium and cost-sharing subsidies that fluctuate with income, creating the impossible administrative challenge of determining who is eligible for how much assistance and then transferring that assistance – not to the individual – but to his or her insurance company on a monthly basis.  [A recent Kaiser Family Foundation study concluded that the government last year got the subsidies wrong 95 percent of the time, lending new meaning to the phrase “close enough for government work.”]

No entity in creation could administer anything so baroque.  Thus was the health insurance exchange imagined into existence.  The notion was that something was needed to bring order to these entropic arrangements and that, given sufficient financial inducement, states would find a way to make this hallucination real.  So infatuated were the law’s architects with their creation that they, along with the ordinarily skeptical Congressional Budget Office, were certain that every state would want one.

Most Governors, being a pragmatic lot, saw through the $5 billion bribe that the federal government offered up to states to build exchanges.  They told the feds that if exchanges were so wonderful, they should set them up themselves.

The few Governors who took the bait now find themselves in a quandary.  The $5 billion having all been spent, nearly half of the state-established exchanges are “struggling financially, presenting state officials with an unexpected and serious challenge,” the Washington Post reported yesterday.

As with most challenges, government’s first impulse is to meet this one with higher taxes — in this case, higher taxes on insurance companies.  Such a levy, of course, is no more a tax on insurance companies than the sales tax is a tax on Target.  Consumers pay it; Target merely collects it.  Hiking the tax on insurance companies will raise premiums, something Governors are loathe to do.  So they find themselves casting about for some way to finance their clunky and error-prone exchanges now that the federal money has dried up.

The 34 Governors who chose to let the federal government run their exchanges are in no position to gloat.  The legislative slapdash known as Obamacare makes health insurance subsidies available only to consumers who purchased policies through an exchange “established by the state” — not through exchanges established by the federal government.

The IRS, government’s most powerful and least accountable agency, laid claim to more power and less accountability by issuing a regulation proclaiming that subsidies were to be paid through both federal and state exchanges, overriding the law’s plain text.

The Supreme Court is now pondering whether to legitimize this IRS audacity by confirming the agency’s authority to write tax law, an authority heretofore reserved to Congress.  A Court that often slips its constitutional leash in pursuit of its vision of the greater good will most likely save Obamacare by vindicating the IRS.

But should five justices rule next month that the Constitution means what it says, 34 Governors will find themselves facing a Sophie’s choice: take on the losing proposition of establishing a state exchange or stand by as the federal government strips from their residents subsidies that it had unlawfully provided.

Congress should give states a third option.

Governors and legislatures are not Washington’s day laborers, consigned to the dirty work the federal government doesn’t care to do.  If Washington wants the states to reform insurance markets and dispense subsidies, then it should provide states with the resources to implement such a program and not micromanage its administration.

Congress should make grants to states for the purpose of making affordable coverage available to people with low-incomes and those with pre-existing medical conditions.  The grants would be based on the amount that a state’s residents received in refundable tax credits and cost-sharing subsidies under Obamacare.  All states, including those that have established exchanges, would be eligible to opt in to the program.

States that chose to receive grants would be relieved of Obamacare’s oppressive regulatory regime of mandates, exchanges and suffocating uniformity.  They would regain control over the regulation of health insurance and set their own eligibility criteria for subsidies.  Federal regulation would be kept to a minimum.  States would be held accountable for results.  The mechanism of achieving those results is a matter for a state to decide, not for the federal government to dictate.

To avoid the disaster that accompanied the Obamacare rollout, states would be given time to put the new program into place.  During this transition period, states could, at their option, choose to have the federal government continue paying subsidies through existing mechanisms until their new system was ready to launch.

Were Congress to enact such a bill, the President, who makes concessions only to ayatollahs, would likely veto it, then blame Republican Governors and the Republican Congress for the damage his veto inflicts.

But unless the 22nd amendment is waived, we will have a new President soon enough.  He or she would do well to treat states as partners, rather than servants, in the work of health care reform.

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