Who Should Control the ObamaCare Exchanges?

After ObamaCare was passed, one path of resistance was to encourage states to resist establishing Health Benefit Exchanges. By the end of 2011, this approach had become settled conservative orthodoxy. Republican governors like Wisconsin’s Scott Walker returned federal grants; and those who wavered on exchanges, like Virginia’s Bob McDonnell, faced attacks from the right flank.

After President Obama’s re-election, this approach has not changed. Florida’s Rick Scott suggested that it was time buy into a state-based exchange, but Tea Party activists appear to have beaten him back (according to the Tampa Bay Times). Even The Wall Street Journal editorial board has come down solidly against states establishing exchanges. This position made sense before President Obama’s re-election. Holding onto it today risks dooming states to irrelevance as ObamaCare evolves. Republican governors’ failure to adapt to the fact that ObamaCare will not be repealed will hinder, not help, any future patient-centered reforms.

As of January 3, the U.S. Department of Health & Human Services has approved 18 state-based exchanges and two “state partnership exchanges” (a sort of hybrid state-federal exchange). The deadline for applying for approval of a state-based exchange has passed, and states which failed to apply have missed a significant opportunity to have any influence over ObamaCare’s future. They should reconsider and ask for extensions.

Let’s examine some of the arguments against state-based exchanges:

First, opponents argue that the federal government never anticipated having to run its own exchanges, and will not be ready to implement them on time. That made sense before the election, when opponents were trying to convince the voters to stop something that had not really started. However, with Obama’s re-election, this point becomes irrelevant. Whether the federal government runs its exchanges competently or incompetently, it will run them nevertheless. The Weekly Standard‘s Jeffrey A. Anderson (an opponent of ObamaCare) has written about cronyism in the awarding of contracts to establish federal exchanges. His article describes an ugly business. Nevertheless, it hardly describes an agency idle in doling out cash to contractors for federal exchanges. In any case, who can seriously believe that if federal exchanges are not ready to start enrolling people by October, they will just give up? ObamaCare will not self-repeal because of another missed deadline.

Second, opponents argue that regulations and guidelines are unclear. But this is a straw man: Regulations and guidelines are never clear until interested parties engage them. Medicare regulations, for example, are never settled: Every year sees comment letters demanding modifications to proposed changes. And Medicare was established in 1965! Indeed, the only way for states to clarify or have any influence on the regulations is to establish exchanges.

Third, opponents claim that exchanges will be too expensive to operate. A recent article by Heritage Foundation analysts compares the 3.5 percent premium tax that will fund federal exchanges with the various means of funding state-based exchange. But exchanges are going to exist — whether federal or state — so these operating costs are unavoidable. In any case, they verge on trivial. The Citizens’ Council for Health Freedom (which opposes ObamaCare) has compiled a list of exchanges’ annual operating costs. California received an operating grant of $288 million for the period ending December 2014. However, this includes set-up costs. Even if we consider that apparently large figure as an estimate of annual operating costs alone, it amounts to only $8 or so per resident. If ObamaCare had been defeated, there would be no reason to incur these costs. However, the only choice now is whether these costs are funnelled through the state or federal government.

Fourth, opponents claim that state-based exchanges will be so in name only. In fact, they will only be water-bearers for the federal government. But this is clearly not true. For example, a state can selectively contract with a few health insurers or allow any licensed insurer to participate in its exchange. To be sure, the relationship will not be without conflict, as the history of Medicaid has shown. Nevertheless, a state-based ObamaCare exchange must, by definition, have some margin of independence over a federal exchange.

Which brings us to the benefits of a state-based exchange:

First: It keeps a toe jammed in the door of government-run health care. To be sure, the toe is broken, and the door is made of heavy oak, but ignoring it is not productive. Take Medicaid for example. Suppose states had decided not to participate in Medicaid. There is no way that conservatives and Republicans would have developed the policy of reforming Medicaid by block granting cash to the states. It would have been too far from the status quo to be considered.

Second: As ObamaCare’s weaknesses and costs become more apparent, states which are operating exchanges will have a far greater voice in future reforms than those that have simply said no. The latter will simply be ignored as the participating states and the federal government adjust ObamaCare to their needs.

Third: Although the media have already declared Hillary Clinton the next President of the United States, there is surely a good chance that an ObamaCare opponent might win the 2016 election. By this time, every interest group — insurers, physicians, manufacturers, hospitals, et cetera – will have accommodated ObamaCare. There will likely be no chance for non-participating governors to reach past those groups’ lobbying efforts to join with the next president to make whatever reforms are possible. ObamaCare will have to be reformed from within, and states which have not set up exchanges will be treated as alien invaders if they try to get involved after the 2016 election. It would have been better if ObamaCare had been repealed. Instead, it was confirmed by last November’s election. Reforming it will be a huge political challenge. States which refuse to establish Health Benefits Exchanges are shirking this challenge.

(Sebastian Alexander is a health care executive. He can be reached at salexanderhealthpolicy@gmail.com.)

Comments (10)

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  1. Dale says:

    I think your arguments against participation are much stronger than your arguments for…For me, the fourth point overwhelms the remainder. I believe that participation by my state will only server to incur additional expenses locally, while providing political cover and local imprimatur to this federally-directed rube goldberg makeover of the health care industry. I’m glad we’re staying out of this–I see no meaningful benefit to legitimizing this law.

  2. Evan Carr says:

    Casting partisanship aside, the question for each state government should be which exchange is most beneficial for our constituents? I think the more devolved Obamacare implementation is, the greater say states will have in the debate over changes in the futures. Fiscally, letting the federal government foot the bill would be a smart move for states struggling to emerge the recession. But perhaps a prudent move is to establish the partnership-exchange. This transfers many of the responsibilities to HHS while the state receives grant money and reserves the right to move to a state-based exchange or discontinue participation (implicitly?).

    Since Obamacare is apparently here to stay (for now), States would be remiss in letting the federal government, known for waste and policies not reflective of state or local realities, handle every aspect of ACA implementation.

  3. Neil Caffrey says:

    “Regulations and guidelines are never clear until interested parties engage them.”

    I dont think these guidelines or regulations should be enforced by law without clarity.

  4. Evan Carr says:

    There is clarity, check somewhere in the thousands of pages of the act and the subsequent regulations that have followed. Good luck interpreting the technical jargon!

  5. Jardinero1 says:

    The most important reason for allowing a federal exchange is that the state’s employers will not be subject to the tax penalties under a federal exchange regime. Employers in states with state exchanges will have a higher cost of doing business than employers in states with federal exchanges. The IRS claims that it will still penalize employers in states with federal exchanges, in direct contravention of the plain text of the law; but there is is a lawsuit pending which challenges this assertion. Look up Jonathan Adler’s writing on this topic.

  6. Mulligan says:

    I wonder what the real cost for providing state coverage is. Federal sourcing laws require it be contracted out unless they can prove that the gov. is providing it cheaper and better.

  7. Sebastian Alexander says:

    @Dale: I must continue to insist that the costs incurred by the state are trivial. Take California, for example, where I cited $288 million for the first year – including set up costs.

    The California DMV reports a budget of $6.8 billion for FY 2011-2012 – and it has been running for decades.

    So, the exchange (including start-up costs) will cost about four percent of the annual operating cost of the DMV. And I’ve never heard anyone suggest that states should close their DMVs and have the US DOT take over vehicle and driver licensing – not even when federal highway funding forced states to have “double nickel” (55 mph) speed limits.

    @Jardinero1: I was wondering how long it would take someone to bring up the Adler/Cannon/Oklahoma argument. I’ll write about it in a future blog post. My key point is that even if the legal argument is correct (which I doubt: Timothy Stoltzfus Jost’s rebuttal is pretty devastating, IMHO), the political argument is hopeless. Watch this space!

  8. Linda Gorman says:

    Comparing exchange costs to total state budgets and arguing that a marginal increase of a few percent is “trivial” is the kind of thinking that got states, and the federal government, into the fiscal mess they are in. A million here, a million there, pretty soon you’re talking real money.

    In my state, the $30 to $50 million that is predicted for annual exchange operating costs would fund the Department of Agriculture or almost all of the state general fund costs of courts administration. The state spends every nickel it takes in, and then some, so the money either has to come from tax increases (which the citizenry probably will not vote in favor of) or by cutting some other program, typically the road maintenance budget.

    What existing state program would you cut in order to fund an exchange which does the job that insurance brokers and the state Medicaid enrollment system have done more expensively?

    Of course no program will be cut, because the exchanges will self-finance by raising the cost of required health coverage (a mere tax increase according to Chief Justice Roberts) in ways that are not readily observable.

    They will help hide the real cost of ObamaCare by “sharing” it between federal, state, and quasi-private payers. This is the same strategy that made welfare and Medicaid spending Death Stars. It also blurs the line between public and private entities with quasi-taxing authority. Since a first step in achieving spending discipline is making sure that all costs are readily observable in one pot, simple arguments for fiscal probity would support a single federal budget entry for running the exchanges.

    State exchanges create yet more local interest groups clamoring for subsidies at the state level. They expand the crony capitalism that is rampant in the Medicaid program through the picking and choosing of the plans that will be allowed, the slush funds for the navigator program, certifying that networks contain a “sufficient number” of “essential community providers,” designing new programs for case management, care coordination, chronic disease management, and care compliance initiatives, designing and certifying the required wellness promotion programs, and operating the required programs for community outreach and cultural competency training to reduce health disparities.

    Finally, state exchanges get to determine risk corridor and risk adjustment requirements, pricing that can be manipulated to reward favored competitors and achieve politically favorable outcomes. In my state, these have already been off-loaded to the feds because the state properly realized that it simply lacked the capacity to produce enough central planners to simulate market mechanisms.

    Given that key pricing determinations have already been defaulted to the feds, doesn’t it make more sense to make them responsible for the whole mess?

  9. Jardinero1 says:

    @Sebastian Alexander. The problem with Tim Jost’s rebuttal is that he responds in global terms to the Adler’s much narrower arguments about agency law. The case, if it gets decided, is going to be decided within the very narrow domain of Agency law and focus very narrowly on the limits of the IRS’s rulemaking ability. The Supreme Court is unlikely to set a precedent which abruptly expands a federal agency’s rulemaking ability.

  10. civisisus says:

    Gee, who would have guessed that conducting one’s personal or institutional life in accord with rigid ideological “principles” would cause honest-to-gosh problems for politicians, bureaucrats, entrepreneurs, and “thought leaders” (horrible term)?

    Get a life, you ridiculous blowhards – Sebastian’s given you (if not the cowardly Goodman – why’s he lent his forum, but not his name, to this pragmatic course of action?) cover for taking up a sensible course of action – for making health reform (not ACA, if you insist) your own.

    Look at the history of railroads; of the interstate highway system; of water treatment; of the internet. Now imagine if you have the chance to build a health system in/on a sympathetic ‘platform’, in much the same way as those systems were constructed? Who will history declare the winner?