Testimony

Should New Hampshire Create a Health Insurance Exchange?

Committee on Commerce and Consumer Affairs
New Hampshire House of Representatives

Good morning, Chairman Hunt and members of the committee. I am very pleased to be with you today. My name is Michael F. Cannon. I am the director of health policy studies at the Cato Institute, a non-partisan, non-profit educational foundation in Washington, D.C.. The mission of the Cato Institute is to promote the principles of individual liberty, limited government, free markets, and peace.

Background

The most important health policy issue facing New Hampshire is the fate of the health care law that President Barack Obama signed in March of 2010, whose official title is the “Patient Protection and Affordable Care Act.” That law is already increasing the cost of health insurance by as much as 30 percent in some cases, and will cause even greater premium increases in the years to come.

When that law takes full effect in 2014, it will set in motion several important changes. Though states are already struggling to pay for their current Medicaid programs, beginning in 2014, this law will add to those burdens with enormous unfunded mandates. The law imposes government price controls on health insurance that will dramatically increase premiums for healthy purchasers. The law’s so-called “individual mandate” will increase premiums further and compel nearly all Americans to purchase a nominally private but government-designed health insurance policy. Those who fail to comply will face penalties including fines and/or imprisonment.

Neutral observers and even supporters of the law estimate that due to the law’s government price controls and individual mandate alone, premiums for some Americans would more than double. A study performed by Milliman Inc. for the state of Ohio, projects: “In the individual market, a healthy young male (with benefit coverage at the market average actuarial value pre- and post-[PPACA]) may experience a rate increase of between 90 percent and 130 percent… In the ESI-small group market, rating changes may result in a premium increase of 150 percent… ” A study of the law’s impact on Wisconsin by MIT economist Jonathan Gruber, a leading defender of the law, projects that premiums for some individuals will rise by 139 percent or more.

Finally, the law envisions health insurance “Exchanges” that would become operational in 2014. These new government bureaucracies would enforce these costly new regulations and distribute hundreds of billions of taxpayer dollars to private health insurance companies, thereby driving up the national debt. The law allows but does not require states to create an Exchange.

To be clear: contrary to what some state officials have claimed, New Hampshire is under no obligation to create a health insurance Exchange. The authors of the health care law knew that such a requirement would be unconstitutional. Instead, the law asks states to do the heavy lifting of creating these bureaucracies, and as a fallback allows the federal government to create an Exchange if a state declines to do so.

The Health Care Law’s Future Is in Doubt

Supporters introduced the first draft of President Obama’s health care law in Congress in June 2009, and a bipartisan majority or plurality of the American people have consistently opposed it ever since. A mere 37 percent of the public supports the law. Opposition is highest among likely voters. More than 80 percent of Americans oppose the law’s individual mandate; Officials representing 28 states and both political parties have filed suit to overturn the entire law. Multiple federal courts have struck down all or part of the law as unconstitutional. The U.S. Supreme Court will hear oral arguments on the constitutional challenges to the individual mandate and Medicaid mandate in March 2012. Legal experts predict the Court will rule on these challenges the following summer. One of the two major political parties has committed itself to wholesale repeal.

Should New Hampshire Create a Health Insurance Exchange?

Against this backdrop, the most immediate question facing state officials is whether to create a health insurance Exchange. In the remainder of my remarks, I will explain why, whether one opposes or supports this law, the responsible course is not to create an Exchange.

The question of whether or not to create an Exchange is simplest for state officials who have taken the position that the federal health care law is unconstitutional. New Hampshire officials, like state officials nationwide, take an oath to protect not just their own state’s Constitution, but also the U.S. Constitution. They are therefore oath-bound to use all lawful means to block laws that they believe violate the U.S. Constitution. The same duty that obliges officials to sue to overturn the health care law also obliges them not to implement it. To implement this health care law, to create an Exchange, is to violate their oath of office.

Whether you support or oppose the law, there are several reasons for New Hampshire legislators not to create an Exchange.

First, you don’t have the time. There is not just one Exchange; there are two of them. If you opt to create an Exchange, then among your many responsibilities will be such diverse tasks as the following. You would be responsible for ensuring that carriers do not follow the law’s enormous financial incentives to avoid, mistreat, and dump the sick. You would have to run a reinsurance program and a risk-adjustment program. You would have to define and monitor “network adequacy” as well as each insurance carrier’s service area. You would have to monitor each carrier’s marketing materials. You would have to monitor and enforce carriers’ compliance with the law’s other anti-discrimination provisions. You would have to fund and monitor the “navigators” the law envisions. You would have to fund the Exchange in 2015 and beyond, perhaps with a premium tax. (Oregon has opted for a premium tax of up to 5 percent.) Then there’s all the reporting you would have to do to Washington, the approvals you would have to obtain, and the months and months of waiting for an answer on everything.

Unless New Hampshire’s economy and unemployment situation are somehow bucking the national trend, New Hampshire’s elected officials have more pressing matters to attend. If you do somehow find that you are not busy enough, at the end of my testimony I suggest some real health care reforms you might advance.

Second, you don’t have the money. That’s because there is no money. Unless New Hampshire’s state budget is likewise bucking the national trend, neither New Hampshire nor the federal government has money to spend on new government bureaucracies. Every dollar that New Hampshire spends on an Exchange is a dollar it cannot spend on roads, education, or police — or more important, a missed opportunity to spur economic recovery by reducing the tax burden. Any federal grants that New Hampshire has already received, and any additional federal funds it may receive, are adding to the nation’s debt burden and bringing the United States closer to a Greek-style debt crisis. The fiscally responsible option, which many states have exercised, is to send that money back to Washington and to refuse any additional funds.

Third, it makes little sense to create a new government bureaucracy today to implement a law that may be repealed or overturned tomorrow.

Fourth, creating an Exchange will leave New Hampshire officials to take the blame when this law begins hurting the state’s sickest patients. When the Exchanges open for business, they will be inundated with high-cost patients. The government price controls that the law imposes on health insurance premiums will create massive incentives for insurers to avoid, dump, and mistreat the sick — as carriers have done in every market where governments have imposed these price controls. The law creates several programs whose sole purpose is to protect sick people from the perverse incentives inherent in these price controls. I mention many of these programs above: programs that tax some health plans in order to subsidize others, “network adequacy” rules, requirements that carriers serve a large enough “service area,” restrictions on marketing, and other anti-discrimination provisions.

States that create their own Exchanges will be responsible for running these programs and protecting the perverse and harmful incentives the law creates. Let’s be clear about what is happening here: the federal government wants you to stop insurers from mistreating the sick, even while the federal government is offering insurers huge financial incentives to do just that. In other words, the federal government is setting you up to take the fall. The programs intended to prevent such misbehavior will inevitably fail, and many of New Hampshire’s sickest patients will be hurt and angry. Those patients will not blame the well-meaning price controls that create those perverse incentives. They will blame whoever is running the programs that were supposed to stop the insurers from responding to those incentives. If New Hampshire creates an Exchange, those patients will blame you for not standing up to the insurance companies like you should have. One can already imagine the attack ads, where very sick patients tell your constituents how you don’t care about them. If you create an Exchange, you are volunteering to take a bullet for the federal government, and shield federal officials from responsibility for their actions.

The Mirage of State Control

Some Exchange proponents argue that creating an Exchange will give New Hampshire officials more control over New Hampshire’s health insurance market. The promise of local control is a mirage.

The law allows the federal government to commandeer any state-run Exchange that falls short of full compliance with federal dictates. An Obama administration missive explains that the new law “authorizes [the federal government] to ensure that States with Exchanges are substantially enforcing the Federal standards… and to set up Exchanges in States that elect not to do so or are not substantially enforcing related provisions.” (Emphasis added.) Paradoxically, if New Hampshire officials create an Exchange, you will be surrendering control over your health insurance markets because you would be cementing in place a federal takeover.

The fact that an Exchange is state-run does not diminish federal control by one iota. To be clear: there is nothing that a federal Exchange can do that the federal government cannot also force a state-run Exchange to do through regulation. The federal government will heap regulations upon state-run Exchanges; indeed, it is already imposing greater requirements on them than the law itself does. Creating a state-run Exchange would not prevent a federal takeover of New Hampshire’s health insurance markets, it would lend manpower to that effort.

The conservative Heritage Foundation once took the position that states should set up a “defensive” Exchange to preserve a modicum of control over their Medicaid programs. After reading the administration’s Exchange regulations and concluding that the federal government will allow state-run Exchanges no such autonomy, Heritage scholars now counsel states to refuse to establish one of the law’s Exchanges and to send all related grants back to Washington.

Creating an Exchange Undermines Repeal

Some opponents of the law nevertheless argue for creating an Exchange so that states can be prepared in case the law is not overturned or repealed. Yet creating an Exchange would entrench the law and make it less likely to be repealed or overturned.

  • First, creating an Exchange lends a veneer of legitimacy to the law. The Obama administration heralds the creation of each new Exchange as proof that the law is gaining acceptance, and heralds states accepting the federal grants available under the law in the same manner. The administration even cited New Hampshire as one of the states that is making steady progress toward establishing an Exchange.
  • Second, declaring the law unconstitutional but then accepting the funding it offers and setting up an Exchange undermines the credibility of state officials seeking to overturn the law and also undermines the lawsuits themselves. One federal judge who overturned the law wrote that the fact that some of the plaintiff states are themselves implementing the law “undercut” their own argument that he should order the federal government to halt implementation.
  • Third, to create an Exchange is to create a taxpayer-funded lobbying group dedicated to fighting repeal. An Exchange’s employees would owe their power and their paychecks to this law. Naturally, they would aid the fight to preserve the law.
  • Fourth, both Congress and the courts are less likely to eliminate actual government bureaucracies that have assembled dedicated constituencies than they are to eliminate theoretical ones. The more disruptive repeal would be, the less likely it becomes.
  • Fifth, many knowledgeable observers believe few Exchanges, state or federal, will be operational by 2014. If states like New Hampshire create their own Exchanges, they will begin handing out billions of taxpayer dollars sooner than if the federal government creates them. Creating a state-run Exchange will hasten the day when the private insurance companies who receive those subsidies plow much of the money back into fighting repeal.
  • Sixth, and perhaps most important, due to a recently discovered glitch in the statute, the law only authorizes premium subsidies in state-run Exchanges. It does not authorize these subsidies in federal Exchanges. Viewed from one perspective, this gives state governments the ability to protect themselves from penalties under the law’s “employer mandate.” The law imposes fines on large employers if any of their workers obtain subsidized coverage through an Exchange. If a state creates its own Exchange, it will be subject to those penalties. But if the state refuses to establish an Exchange and the federal government does instead, then the federal government will have no authority to penalize states because it will have no authority to distribute those subsidies. Viewed from another perspective, this glitch gives states the collective power to deny the federal government the legal authority to dispense more than a half-trillion dollars in new deficit spending and to expose the full cost of the law’s mandates and government price controls. All that states need do is not set up a health insurance Exchange. If New Hampshire joins other states in refusing to create an Exchange, it can essentially force Congress to reconsider the law. If New Hampshire instead creates an Exchange, it will increase the federal deficit and debt, hide the full cost of the health care law, expose New Hampshire employers to penalties and reduce the likelihood of repeal. (See the attached article for more information.)

The Obama administration is offering financial inducements to states to create Exchanges because the administration knows that every new Exchange helps it shield the law from the American people. For opponents of the law, creating an Exchange is not a hedging-your-bets strategy but a sabotaging-your bets strategy.

A Free-Market Government Bureaucracy?

Some conservatives have recommended that states create “market-friendly” (i.e., non-compliant) Exchanges that offer an “alternative vision” to the law.

There is no conservative rationale for doing so. Former Utah Gov. Jon Huntsman (R) created a health insurance Exchange in 2008. A Utah official overseeing that Exchange says, “Nearly every Exchange function already exists in the private sector.” For instance, eHealthInsurance.com already enables one-stop shopping for health insurance. One conservative group advocates government-created Exchanges as a vehicle for enabling workers to purchase their own health plan using tax-free dollars from their employers. Yet workers can already do that under a provision of the federal tax code known as “health reimbursement arrangements,” or HRAs. Companies like Minneapolis’ Bloom Health are helping employers take advantage of HRAs and giving workers that freedom, without any new government bureaucracies or regulations.

More fundamentally, there is no such thing as a market-friendly government bureaucracy. As Thomas Jefferson explained more than 200 years ago: “The natural progress of things is for liberty to yield, and government to gain ground.” Government bureaucracies will always seek more power because that is their nature. Former Massachusetts Gov. Mitt Romney (R) proposed a “market-friendly” health insurance Exchange in 2006. By the time he signed it into law, it had become the very market-unfriendly plan on which Congress modeled the federal law. When Utah politicians saw that health insurance was more expensive inside their Exchange than on the open market, they imposed a series of taxes on consumers outside of the Exchange to prop up the health plans inside it. In the process, Utah unwittingly put in place the infrastructure for a federal Exchange: if Utah’s Exchange fails to comply with the health care law in 2014, the federal government will commandeer it or brush it aside.

Whatever is plaguing America’s health care sector, a lack of government bureaucracies is not it. There is simply no reason for New Hampshire to create any kind of Exchange.

Conflicts of Interest

Finally, I encourage you to bear in mind that the interests of those asking the legislature to create an Exchange may not line up with the interests of patients. For instance, private insurers’ pro-Exchange lobbying efforts may be related to the fact that Exchanges are necessary for them to tap hundreds of billions of dollars in taxpayer subsidies. The consultants who have been criss-crossing the country encouraging states to set up Exchanges are often bidding on the contracts that result. Insurance regulators and state health care officials across the country have urged their governors and legislatures to create an Exchange, otherwise they would have to watch the federal takeover from the sidelines rather than be an active participant. Unfortunately, a state-run Exchange cannot preserve their influence. Only repeal can do that.

Conclusion

The most responsible course for New Hampshire is to refuse to create an Exchange. Many governors, including Florida’s Rick Scott (R), Louisiana’s Bobby Jindal (R), Kansas’ Sam Brownback (R), Oklahoma’s Mary Fallin (R), and Wisconsin’s Scott Walker (R) have already done so. New Hampshire should also send back to Washington whatever funds it has received under this law, as these and other states have done. New Hampshire can send that money back with a message that if Congress is looking to cut federal spending, a good place to start would be laws that federal courts have declared unconstitutional.

In the meantime, there are other steps New Hampshire can take to make health insurance and medical care more affordable to consumers.

First, the General Court can permit New Hampshire employers and consumers to purchase health insurance licensed by other states. Wyoming, Maine, and Georgia have already given their residents this freedom. Enabling New Hampshire residents to purchase health insurance across state lines would expand choice and competition, and would reduce premiums by letting consumers avoid unwanted regulatory costs. As important, granting New Hampshire residents this freedom would not require any new government spending or the creation of any new government bureaucracies. Domestic carriers typically object to giving consumers this freedom because they would prefer what they call a “level playing field” — i.e., where government protects them from competition, and leaves New Hampshire residents with fewer choices.

Second, the General Court can make basic medical care more affordable for the poor by broadening the scopes of practice of mid-level clinicians such as nurse practitioners and physician assistants. One promising approach, similar to letting New Hampshire residents purchase health insurance across state lines, is to let clinicians licensed by other states practice in New Hampshire under the terms of their license but subject to New Hampshire’s malpractice laws. Reforms such as these would spur the growth of retail clinics and other innovations that bring quality medical care within reach for more low-income New Hampshire residents. At a minimum, New Hampshire should emulate Tennessee and Illinois by allowing clinicians licensed by other states to provide free charitable care to New Hampshire residents under the terms of their license.

Third, the General Court can reduce unnecessary medical malpractice costs by giving patients and doctors the freedom to choose caps on non-economic damages, “loser pays” rules, mandatory binding arbitration, or other liability rules. The obstacle to patients and providers (and insurers) exercising this freedom is that courts will not enforce such contracts. Thus we have a perverse situation where judges can by fiat force patients to “purchase” an unlimited right to sue, or the legislature can by fiat drastically reduce their right to recover, but the patient has no power to voice her preferences. The General Court should instruct New Hampshire judges to enforce contracts that adopt damage caps and other medical malpractice reforms. This approach would make damage caps available to those who want them (read: those who cannot afford medical care otherwise), while respecting the preferences of those who prefer other malpractice liability protections.

Fourth, New Hampshire should apply for a waiver from the health care law’s Medicaid expansion that would allow the state to replicate the Oregon Health Insurance Experiment. Instead of expanding Medicaid to all residents below 138 percent of the federal poverty level as the new law requires, and which one study projects would add 56,000 new recipients to New Hampshire’s Medicaid rolls by 2019, the state could randomly assign half of this group to receive Medicaid coverage and the other half not to receive it, and then measure the outcomes of both groups. Such a study could help fill the tremendous gaps in our knowledge about the actual benefits of expanding Medicaid, and whether there are more cost-effective ways of improving the health of low-income households. Along the way, such a waiver would reduce both state and federal spending.

Again, I am very pleased to be with you today, and I look forward to any questions you may have.