Lou Cannon: Can California Rescue the Affordable Care Act?

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By Lou Cannon, State Net Capitol Journal

Intentionally or not, most states won't make the Obama administration's deadline for compliance with health insurance exchanges

While national candidates wage a war of words and half-truths on health issues, a handful of states, led by California, are charging ahead to implement the key feature of the Patient Protection and Affordable Care Act, widely viewed as the signal achievement of Barack Obama’s presidency.

The feature is an online state marketplace, known as a health insurance exchange, in which families and individuals will be able to shop for affordable health-care policies. These exchanges are supposed to begin enrolling applicants by October 2013 and be up and running by Jan. 1, 2014.

Backers of the new law shared high fives of congratulation after the U.S. Supreme Court upheld the constitutionality of most of the law early this summer. Since then, however, several states have balked at taking the preliminary steps necessary to set up the exchanges, either because of bureaucratic obstacles or political opposition. Only 15 states have passed legislation or issued executive orders to establish the exchanges, while seven have decided not to create them at all, according to the Kaiser Family Foundation. Most of the remaining states are awaiting the outcome of the November election, mindful of Republican vows to repeal the law they call “Obamacare” if the GOP controls both the White House and Congress.

California has moved to fill this partial vacuum. It was the first state to establish its own exchange after Obama signed the health-care legislation into law two years ago. In August, the state received a $196 million grant for start-up activities that include an ambitious marketing plan to reach the 7 million Californians who lack health care coverage.

“It’s all systems go, from both a legal and operational perspective,” Peter V. Lee, executive director of the California Health Benefit Exchange, told my colleague Rich Ehisen.

This optimistic outlook is reminiscent of an earlier era when California was noted for its constructive bipartisan approach to big issues. The California Health Benefit Exchange’s board of directors includes officials from the last three governors’ administrations, two of them Republican. Lee is a lawyer and well-regarded health-care expert with a background in private insurance and as an official in the Health and Human Services Department in the Obama administration. He helped establish the Center for Medicare & Medicaid Innovation in Washington, D.C., which is testing new payment and delivery reforms. Tom Epstein, a vice president of Blue Shield of California, lauds Lee and the board for trying to balance competing health-care interests.

One consequence of the exchange’s leadership is that health-care politics in California are now relatively free of the partisan acrimony that has characterized much of the national health-care debate. Under measures passed by the Legislature (Assembly Bill 1453, Senate Bill 951) and awaiting signature from Democratic Gov. Jerry Brown, the board will choose — on the basis of quality and affordability — the insurance plans that will be offered to the public. By putting the decisions in the board’s hands, the Legislature helped insulate the California exchange from the ebb-and-flow of politics.

When anything seems too good to be true, there’s usually a catch, so it should be pointed out that the exchanges are an experiment. The theory behind them is that competition among insurers for millions of new customers will lead to affordably priced policies and that this in turn, coupled with a tax penalty on those who refuse to buy insurance, will encourage the uninsured to purchase a health-care policy. Nationally, advocates of the new law hope to enroll 32 million of 50 million Americans who lack health insurance, either through the exchanges or an expansion of Medicaid, the federal-state program that provides health care for the poor. Making health care accessible to the uninsured is one of three over-arching goals of the law, which also seeks to improve the quality of health care and reduce its costs. The annual U.S. health-care bill is currently $2.6 trillion, more than any other country.

But some experts wonder if the increased savings from competition will match expectations. The skeptics include economist John Cogan of Stanford University, deputy budget director under President George H.W. Bush and author of a book that proposed an alternative to the new health-care law. Cogan points out, as recently noted by The Washington Post, that the law encourages mergers among health-care providers, potentially reducing competition.

“Big always wins in health care,” Cogan said.

Epstein, however, believes there will be considerable competition on the California exchange. He expects Blue Shield of California, the state’s largest nonprofit insurer, to be among the participants. Lee says California will be such a major player that insurance companies serious about the health-care business won’t be able to stay out of the exchange.

With 37.7 million people, California is home to more than a ninth of the nation’s population and an even higher percentage of the medically uninsured. The size of the California market has in the past encouraged industries to change the design and style of nationally marketed products. On two occasions, for instance, the auto industry reengineered car engines to comply with California laws designed to reduce air-polluting emissions.

California is not alone in getting up to speed on the exchanges. In recognition of progress the Health and Human Services Department in August doled out money to seven other states that are well along: the total of the grants, including California’s, was $765 million. Four states — Connecticut, Maryland, Nevada and Vermont — were singled out for having reached the highest level of preparedness. Hawaii, Iowa, New York, Rhode Island and Washington also appear ready to set up the exchanges.

Nonetheless, most states will not meet the conditional deadline of having a plan ready for approval by the end of 2012, and many will not even try. This is frustrating to HHS Secretary Kathleen Sebelius, but she and other administration officials are soft-pedaling their disappointment during the election campaign.

The slow progress on the exchanges has been compounded by the resistance of Republican governors, especially in the South, to the expansion of Medicaid, by which the new law intends to provide medical coverage to everyone whose income is 133 percent above the poverty line or less. (That’s the way the law reads; it comes out to 138 percent because the first 5 percent of income is exempted.) As passed by Congress and signed by Obama, the law gave the states two years of subsidies for new Medicaid enrollees but threatened to take away all federal Medicaid funds if states refused to expand their programs.

The Supreme Court decision left the carrot but removed the stick, holding that states could not be financially penalized for declining to expand Medicaid. Governors of five states — Florida, Louisiana, Mississippi, South Carolina and Texas — have said they will not expand Medicaid beyond current levels. More are expected to follow suit, especially if Republicans do well in the November elections.

So despite progress in a handful of states on building the exchanges, the Obama administration is likely to fall well short of its goal of providing health-care coverage to 32 million uninsured Americans. Roughly half this total was supposed to come from the new Medicaid enrollments, now an unobtainable goal given the escape hatch provided states by the Supreme Court. As for the exchanges, the law provides that the federal government will operate them for states unwilling or unable to do so on their own. But it would take a long time and enormous effort for the feds to manage more than 30 exchanges. The Obama administration clearly would prefer to avoid an option of this magnitude.

Given these handicaps, the best hope for the law to prove itself would be for a few state exchanges to achieve success in reducing health-care policy costs so that other states will want to emulate them. Because of its considerable population and diversity, California is best positioned to set an example. The eyes of the nation will be on the Golden State as it seeks to take advantage of this opportunity.

— Summerland resident Lou Cannon is a longtime national political writer and acclaimed presidential biographer. His most recent book — co-authored with his son, Carl — is Reagan’s Disciple: George W. Bush’s Troubled Quest for a Presidential Legacy. Cannon also is an editorial adviser to State Net Capitol Journal, which published this column originally.

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