Should Missouri Create a Health Insurance Exchange?

Background

The most important health policy issue facing Missouri is the fate of the health care law that President Barack Obama signed last year, 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.

A study of the law's impact on Wisconsin by one of its leading proponents, MIT economist Jonathan Gruber, projects that due to the law's government price controls and individual mandate alone, "87 percent of the individual market will experience an average premium increase of 41 percent." Though the law creates a new entitlement to premium assistance for qualified individuals, Gruber found that even after accounting for that new entitlement spending, "59 percent of the individual market will experience an average premium increase of 31 percent."

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: Missouri 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 38 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; Missouri voters overwhelmingly supported a referendum to block it. Officials representing 28 states (including Missouri) 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. Legal experts predict the U.S. Supreme Court will ultimately rule on the law's constitutionality sometime in the summer of 2012. One of the two major political parties has committed itself to wholesale repeal.

Should Missouri 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. Missouri officials, like state officials nationwide, take an oath to protect not just their own state's Constitution, but also the Constitution of the United States. They are therefore oath-bound to use all lawful means to block a law that they believe violates the U.S. Constitution. The same duty that obliges those 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 Missouri 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 Missouri's economy and unemployment situation are somehow bucking the national trend, Missouri'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. Because, there is no money. Unless Missouri's state budget is likewise bucking the national trend, neither Missouri nor the federal government has money to spend on new government bureaucracies. Every dollar that Missouri 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 Missouri 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 Missouri 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 sick from the rest of the law. Let's be clear about what is happening here: the federal government is offering insurers huge financial rewards if they mistreat the sick, and it wants you to stop insurers from chasing those rewards. The problem is, you can't. Those programs will inevitably fail, and many of Missouri's sickest patients will be hurt and angry. Those patients will blame whoever was supposed to stop the insurers from misbehaving. If Missouri creates an Exchange, those patients will blame you for not standing up to the insurance companies like they should have, and you will be treated to political 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.

Some Exchange proponents argue that creating an Exchange will give Missouri officials more control over Missouri's health insurance market. Paradoxically, it would give them less control because it would cement in place the federal government's takeover of Missouri's 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.)

The fact that an Exchange is state-run does not diminish federal control by one iota. 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 Missouri's health insurance markets, it would lend manpower to that effort.

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.
• Second, declaring the law unconstitutional but then accepting the funding it offers and creating 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 Missouri 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 new health care law only authorizes premium assistance in state-run Exchanges — not federal Exchanges. States thus have the collective power to deny the Obama administration the legal authority to dispense more than a half-trillion dollars in new entitlement spending, to expose the full cost of the law's mandates and government price controls, as well as to enforce the law's employer mandate — simply by not creating Exchanges. If Missouri joins other states in refusing to create an Exchange, it can essentially force Congress to reconsider the law. If Missouri instead creates an Exchange, it will increase the federal deficit and debt, hide the full cost of the health care law, expose Missouri employers to penalties and reduce the likelihood of repeal.

The Obama administration is offering financial inducements to states to create Exchanges because the administration knows that every new Exchange helps them shield the law from Congress, the courts, and the American people. Creating an Exchange is not a hedging-your-bets strategy but a sabotaging-your bets strategy.

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." EHealthInsurance.com already enables one-stop shopping for health insurance. One conservative group advocates government-created Exchanges because its analysts see Exchanges as a vehicle for enabling workers to purchase their own health plan using tax-free dollars from their employers. 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.

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 control 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 Missouri to create any kind of Exchange.

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. Similarly, 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. Of course, a state-run Exchange cannot preserve their influence. Only repealing or overturning the health care law can do that.

Conclusion

The most responsible course for Missouri is to refuse to create an Exchange. Many governors, including Florida's Rick Scott (R) and Louisiana's Bobby Jindal (R) have already done so. Missouri should also send back to Washington whatever funds it has received under this law, as Kansas, Oklahoma, Wisconsin, Florida, and other states have done. Missouri 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 Missouri can take to make health insurance and medical care more affordable to consumers.

First, the General Assembly can permit Missouri employers and consumers to purchase health insurance licensed by other states. Wyoming, Maine, and Georgia have already given their residents this freedom. Enabling Missouri 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 Missouri 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 Missouri residents with fewer choices.

Second, the General Assembly 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 Missouri residents purchase health insurance across state lines, is to let clinicians licensed by other states practice in Missouri under the terms of their license but subject to Missouri'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 Missouri residents. At a minimum, Missouri should emulate Tennessee by allowing clinicians licensed by other states to provide free charitable care to Missouri residents under the terms of their license.

Third, the General Assembly can reduce unnecessary medical malpractice costs by giving patients and doctors the freedom to choose higher or lower caps on non-economic damages than Missouri currently mandates. 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 preference for higher or lower caps. The General Assembly should instruct Missouri judges to enforce contracts that adopt alternative caps and other medical malpractice reforms. This approach would make lower caps available to those who want them, but still allow others to enjoy broader malpractice protections.

Fourth, Missouri 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 on a larger scale. Instead of expanding Medicaid to all residents below 138 percent of the federal poverty level as the new law requires, which one study projects would add 300,000 new recipients to Missouri'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 (much like Oregon did in 2008), 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.