States First: The Other Path to National Health Reform

As a state legislator in Massachusetts since 1985, I have seen the best and worst of state health policy-making. In 1988 the Massachusetts Legislature approved a measure intended to guarantee health insurance to all 600,000 uninsured state residents. The early steps under the law, covering students, the unemployed, and disabled adults and children, were preludes to a requirement, effective in 1992, that all employers provide insurance or pay for coverage by the state. Although flawed, the plan represented a striking effort by one state to push ahead of the federal government in the achievement of universal health insurance.

By 1991 a recession, a state budget crisis, and the political implosion of Governor Michael S. Dukakis led to a headlong retreat. To forestall repeal efforts by Governor William Weld, Dukakis's Republican successor, Democrats agreed to a delay of the employer mandate to 1995. Even more disturbing, a Democratic legislature that three years earlier had committed itself to universal access now gutted all statutory protections for Medicaid recipients, and handed Governor Weld both a blank check to cuts benefits and a Medicaid budget underfunded by at least $300 million. To make matters worse, the legislature agreed to deregulate a hospital rate-setting system that had been working since 1975.

Lesson: Trust the states, but not too much. What the States Have Done
States occupy a critical role in the debate about health care, although no more so than other key players such as the federal government, employers, labor, and health care providers. Those who look to the states as the source of all wisdom in health reform will be disappointed; those who dismiss the states as inconsequential will be surprised.

The best role model for the states comes not from the United States but from Canada. In 1947 the rural province of Saskatchewan became the first governmental entity in North America to adopt publicly financed, universal hospital insurance. Its action triggered the series of events leading to national health insurance in all of Canada in 1971. Indeed, Canada's national program is actually a provincial health system with major federal financing and rules.

Evolution toward a single-payer system of universal health insurance in the United States will first require that one or more states demonstrate its workability. (A revised version of the Senate leadership's Americare proposal for universal coverage, which relies mainly on employer-based insurance, now includes an option for states to adopt single-payer systems.) Short of that step, the states can lead the way in developing policy -- as they already have. Universal Insurance
Our closest parallel to Saskatchewan is Hawaii, which in 1974 passed a law requiring all employers to provide health coverage for their workers. That same year, Congress passed the Employee Retirement Income Security Act (ERISA), which the courts have interpreted as barring the states from imposing any requirements on employers to provide health benefits. In 1981, when Congress passed a narrow exemption for Hawaii from ERISA, it assured large employers that it was setting no precedent regarding other states. While the terms of the exemption have restricted Hawaii's capacity to improve its system, the mandate has worked well, and the state is now moving to cover all residual uninsured residents. The clear lesson from Hawaii for the rest of the nation is that employer-mandated insurance can work without economic disruption.

Like Massachusetts, Oregon has made the provision of health insurance mandatory for employers and delayed implementation until 1995. But while Massachusetts' law has been under constant political siege from small business, Oregon's, crafted as part of its overall rationing scheme, has not faced serious attack. Both laws require employers either to provide health insurance for workers and their families ("play") or pay a health tax to the state ("pay"), which will then take responsibility for covering uninsured workers. Both laws were constructed to avoid the need to seek a congressional ERISA exemption by creating a new "tax" rather than a "mandate" on employers. Legal observers say that their legality is questionable and a federal court challenge is certain should either near its 1995 implementation date.

These states, along with others that have voted on but not approved employer mandates, have moved far ahead of the federal government in their health reform deliberations. The Massachusetts experience illustrates the difficulty of achieving universal access without effectively controlling costs. The Oregon plan shows how hard it is to establish clinical priorities. Both our missteps and our successful moves have provided important lessons for Congress.


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No state has yet created a single-payer system of health insurance, but some are getting closer. In 1990 two state legislatures had bills that would supplant multiple private insurance firms with a single payer, by mid-1991, that number had risen to fourteen, in states as diverse as Kansas, New York, Florida, Minnesota, Iowa, Missouri, and Ohio. The state of Washington actually saw a single-payer bill pass its House of Representatives in 1990. Early this year, the California State Assembly gave more than 50-percent support to a single-payer proposal, although measures involving new taxes require two-thirds approval. Vermont is now engaged in a serious debate on a single-payer plan. If any state musters the political will to adopt such a system, the response of the federal government will be crucial. But, even so, the debate in the states is serving important educational and organizing purposes. State Rate Setting
Since the mid-1970s, New York, New Jersey, Maryland, and Massachusetts have regulated prices for hospital care. Other states joined in later years. The federal government's initial willingness to grant waivers to permit Medicare and Medicaid to abide by these systems helped make them possible. But by the mid-1980s, only Maryland retained its waiver, largely because it has congressional instead of administration sponsorship.

These programs have gone in markedly differing directions. Maryland has retained a consistent, all-payer system for more than fifteen years and has achieved impressive results. In 1974 its hospital costs were fourth highest in the nation, 30 percent above the national median; by 1990 its costs were 7 percent below the national median. New York has also successfully held down hospital costs -- some would argue too much.

All rate-setting states have demonstrated an overall pattern of cost growth below the national average for more than fifteen years. All have done a markedly better job than other states in addressing the issue of uncompensated hospital care. State free care pools, an integral feature of rate-setting laws, are the fairest and most equitable instruments in the nation for universal hospital care. New Jersey's Uncompensated Care Trust Fund, for example, guarantees that hospitals will be paid for every uninsured patient that walks through their doors; as a result, New Jersey's hospitals do not try to dump the uninsured.

These laws have also been our closest experiment to the German and Canadian procedures for negotiating rates of payment. The federal government's only attempt to move in this direction was President Jimmy Carter's ill-fated proposal for hospital cost containment. Today, the Senate's Americare proposal includes specific incentives for states to use all-payer rate-setting systems. The state systems demonstrate the ability of regulatory models to hold down costs better than the market. And once again, states' experience informs Washington's reform efforts. Tax Incentives and Employer Subsidies
The states' experiments with voluntary incentives provide a different, although equally valuable lesson: voluntary initiatives have limited value. This experience is especially important in light of President Bush's efforts to promote tax incentives and voluntary efforts to deal with the health care crisis.

State governments have created a variety of models to assist small employers in providing health coverage. They have tried to reform the small-business insurance market, enacted tax incentives, subsidized employer premiums, and created reinsurance mechanisms and risk pools. As of mid-1991, more than twenty-eight states had passed laws carrying out one or more of these reforms.

More than five years of state experimentation with these options demonstrates their slender impact. Last November, The New York Times wrote of the "small-business insurance reform bust" as state after state reported limited interest in subsidized, bare-bones insurance. According to a study by Kenneth Thorpe of the University of North Carolina, a 50-percent premium subsidy offered to employers in New York increased the number of small employers offering coverage by only 3.5 percent.

The President and his allies may not like it, but the jury is already in from the states on the voluntary incentives approach. The results uniformly point to failure. Medicaid and the Push for Rationing
The states have not played such a positive role in running the one major national health program for which they have primary administrative responsibility -- Medicaid. From about 3 percent of state budgets in 1970, Medicaid climbed to over 13 percent 1990, reaching 20 percent in some states. As a result, the pressure for cost reduction has been intense.

In 1987, the state of Oregon became the first governmental entity in the U.S. to withhold medically necessary treatment from an individual in an explicit rationing decision. Although the state had approved a significant tax cut earlier the same year, seven-year-old Coby Howard died in December 1987 after the state refused to pay for a bone marrow transplant. This episode set off the series of events leading to the current proposed Oregon Medicaid Demonstration Project, which would explicitly deny services to poor women and children on welfare when those services fall below the level financed by state appropriations. Ironically, the plan now being considered would cover bone marrow transplants such as the one denied Coby Howard.

Oregon's rationale is that other states engage in a less visible though more insidious form of rationing by denying all services to entire populations of needy people. While this claim does not provide adequate justification for approval of the Oregon experiment, it is true that all other states engage in insidious, though less visible forms of rationing.

Although originally intended to cover all citizens who fell below the federal poverty line, Medicaid in 1987 covered only about 13.2 million Americans, while some 32.5 million were living in poverty. The federal government has given states broad discretion in defining financial eligibility levels, and their record is not admirable. Further, the eligibility cutoffs vary widely from state to state, even among states with common borders. In recent years, Congress has taken repeated steps to compel states to cover a larger number of families and individuals in poverty. Though states receive a minimum of fifty cents in federal money for every dollar spent on Medicaid, the outcry against these mandates to cover more poor women and children has been fierce.

Medicaid's variations in benefits from state to state are notorious. If eligible for Medicaid, you are covered for podiatrist services in North Dakota, but not in South Dakota; for dental services in California, but not in Colorado; for dentures in West Virginia, but not in Kentucky; for emergency hospital services in New Hampshire, but not in Connecticut; for prosthetic devices in Georgia, but not in North Carolina. And on and on.

From a menu of thirty-three allowed optional services, no two states provide the same range of services to their eligible recipients. As I learned when Massachusetts eliminated chiropractic treatment and other optional benefits, the primary impetus for the inclusion of these services comes from providers, not recipients. This state variation is without rhyme or reason. And if one could find a rationale, it would not last long, because states are constantly adding and removing benefits based on available dollars, not medical needs.


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And when eligibility standards and benefit levels have been squeezed as much as possible -- and sometimes earlier -- states can be sure to squeeze down on reimbursement of medical providers for covered services. As reimbursements decline, significant numbers of providers refuse to serve Medicaid beneficiaries. In state after state, recipients who have gotten through the eligibility hoops find new obstacles to locating doctors and other practitioners who will serve them. Availability of obstetrical services for Medicaid-eligible women is particularly scarce across the nation. States have the authority through their licensure powers to mandate that physicians accept Medicaid reimbursement as full payment. Although bills have been filed to do so in several states, no state has enacted one. The lack of participating providers is another hidden form of rationing within the system.

Yet another limitation of state policy has been "provider capture." In the well publicized Oregon Health Decisions public meetings leading to the state's rationing proposal, almost 70 percent of the more than 1,000 persons who attended the meetings were health care workers; two-thirds were college graduates, and over one-third had incomes greater than $50,000. Not surprisingly, health care providers are protected against both reimbursement cutbacks and liability problems in the Oregon rationing plan.

In the Massachusetts hospital financing debate, the players who hold sway are the same as in all other states: the hospitals, Blue Cross, the HMOs, and some large business groups. Standing outside the circle are the voices of labor, consumers, and senior citizens. Although only a miniaturized version of the dynamics at play in Congress, state legislatures and executives repeatedly show themselves to be compliant pawns in the service of wealthy and effective concentrated lobbying interests. A Framework for Effective Reform
Varied observers of the health care scene have noted the common elements of successful health systems in industrialized nations: 1) universal access for all citizens; 2) uniform rates of payment to providers; and 3) global budgets or expenditure caps affecting the entire system.

Within the United States, there exists substantial disagreement over the appropriate shape of national health reform. From single payer to play-or-pay to managed competition, a variety of reforms are advocated by thoughtful individuals and groups who share similar goals. Any system will face extraordinary problems given the rising numbers of people shut out of the system and our high rate of health spending, institutional commitment to high-intensity care, and level of physician specialization -- all certain to generate intense cost pressures in the aftermath of reform as before.


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A workable framework must recognize the uncertainty that exists about various proposals by setting firm parameters for a new insurance system and yet allowing the states flexibility to experiment in the organization of health services. The states' chief strength has been their ability to test different reforms and to achieve positive results without risking grave national consequences and without having to obtain nationwide consensus. Their chief weaknesses have been a tendency to slash benefits in difficult times, to engage in hidden forms of rationing, and to tolerate wide disparities in benefits among different groups. That their hands have been tied by federal tax laws, ERISA, Medicare, Medicaid, and other requirements does not negate their important role. That they have been hamstrung in the past is no reason to hamstring them further.

A program such as that outlined by the National Leadership Coalition for Health Care Reform comes closest to recognizing the complexity and uncertainty that other health reform proposals seem to deny. The federal government can fix the financial outlines of a new system by guaranteeing access to all citizens, establishing rules ensuring uniform payments to providers, and by setting firm fiscal limits. Within these guidelines, states should exercise great leeway in the design and administration of health delivery systems, using fee-for-service, managed care, managed competition, and other approaches. States should have the ability to use private insurance, public-private sponsors, or complete public financing. But to avoid the failures of the past, particularly of the Medicaid program, we should keep specific lessons in mind:

  • The federal government must guarantee universal access for all citizens to prevent the poor, sick, and disadvantaged from being shut out.
  • The federal government should set uniform standards for the level and scope of benefits covered, allowing states some flexibility to seek waivers for programmatic experiments.
  • State health budgets should require explicit federal approval to guard against implicit rationing.
  • Both the federal and state governments should monitor reimbursement rates to providers to prevent loss of services to particular groups, and to ensure against provider withdrawal.
  • The federal government should mandate prevention programs and incentives to promote primary care.

    These parameters would permit states to continue to experiment with alternative delivery structures, but would guarantee adherence to access and cost-control goals. We must recognize that when it comes to the states' role in health care, we can't live with 'em, and we can't live without 'em.

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