Unintended Consequences Of Healthcare Decentralization

All economic policies have unintended consequences. The decentralization of healthcare finance and policy proposed by congressional Republicans is no exception.

The Better Care Reconciliation Act (BCRA) pending in the Senate would sharply shift responsibility for healthcare toward the states. Some of the biggest changes would come in Medicaid. would sharply cut federal spending, leaving states with the choice of responding by increasing their own contributions to maintain current enrollments, or by reducing coverage. Aside from Medicaid, they would gain the right to redefine the essential services insurance must cover, to experiment with high risk pools, and to change policies toward pre-existing conditions.

A group of GOP senators skeptical of the BCRA have offered a different proposal that would permit even greater diversity in state healthcare policy. The Patient Freedom Act sponsored by Senators Susan Collins (R-ME), Bill Cassidy, MD (R-LA), Shelley Moore Capito (R-WV) and Johnny Isakson (R-GA) would give states three choices: Keep the existing framework of the ACA with most of its federal subsidies, sign up for a new market-oriented system centered on direct contributions to health savings accounts for each individual, or design a new system of their own, with federal approval.

The decentralization is intended to bring an upsurge of innovation, leading to a more flexible, more customer-centered system that better meets the needs of the diverse populations of various regions of the country. As AEI Visiting Scholar Joel Zinberg puts it, the BCRA would “make it far more likely that Obamacare’s section 1332 “innovation waivers” can become effective tools for state-based experimentation and reforms to improve insurance coverage.” He notes that the BCRA would lift restrictions that have inhibited waiver applications, streamline the application process and create a $2 billion fund to motivate states to apply for innovation waivers.

For the sake of argument, let’s take the promised upside at face value. Even so, increased state-to-state diversity in healthcare policy and increased state responsibility for funding have their downsides, too. They would strain the resources of many states, undermine labor mobility, and weaken key macroeconomic stabilization mechanisms. These unintended consequences, too, need to be part of the healthcare debate.

Constraints on states’ ability to respond to changes in federal policy

Republicans insist that the BCRA would not actually cut Medicaid spending. Instead, they claim that states will step in to fill the gap as the growth of federal spending slows. Pennsylvania Senator Pat Toomey, speaking on CBS’ Face the Nation, put it this way:

No one loses coverage. What we are going to do, gradually over seven years is transition from the 90 percent federal share that Obamacare created and transition that to where the federal government is still paying a majority, but the states are kicking in their fair share, an amount equivalent to what they pay for all the other categories of eligibility.

The problem is that not all states would have the capacity to respond constructively to the obligations and opportunities the BCRA would hand them. A new study from the Kaiser Family Foundation examines five groups of factors that affect states’ ability to respond to federal Medicaid cuts and caps: 

  • Medicaid policy choices, including expansion, eligibility, and reimbursement rates
  • Demographics, including poverty rates, age, and urban-rural mix
  • Health status of the state population, including disabilities, mental health problems, and opioid death rates
  • Budget and revenue issues, including personal income, tax policies, and current levels of per capita spending
  • Healthcare cost factors, including levels of per capita healthcare spending, insurance premiums, health shortage areas, and Medicaid provider participation.
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