Health Care Reform: Six Ways It Will Affect States
There are varying perspectives on the more than 2,500-page health care reform law, signed by President Obama in late March 2010, but most state policymakers can agree on one thing: A lot is going to change in the next four years.
Figure A: Selected Provisions of Federal Health Care Reform Legislation Effective in 2010: Download in PDF
Figure B: Timeline for Implementation of Selected Provisions of Federal Health Care Reform Legislation, 2011 and Beyond: Download in PDF
The changes brought about by the health care reform law will have huge implications for state governments, even if not everyone sees the implications the same way. For instance, Maryland Gov. Martin O’Malley, who appeared at the bill signing ceremony, believes the bill could ultimately save his state $1 billion over the next decade. But in Virginia, Gov. Bob McDonnell’s administration estimates the bill’s Medicaid provisions alone could cost his state $1 billion over 12 years beginning in 2014.
Six main provisions will have great importance to state policymakers.
1. Law will overhaul Medicaid
Medicaid will be expanded in 2014 to cover all citizens and legal immigrants under age 65 who earn up to 133 percent of the federal poverty level—$14,404 for an individual and $29,327 for a family of four in 2009.
The new population to be covered in Medicaid will be largely made up of childless adults, who typically have not been eligible for the state-federal program. Less than half the states provide any health insurance for those people, and most of the programs are very limited in scope, whether they are Medicaid waiver programs or state-funded only programs. (See Table A for more details.)
An estimated 17 million adults—or 37 percent of the nation’s uninsured population—could gain coverage through the mandated Medicaid expansion, according to the Kaiser Family Foundation, and the states will have some help paying for it. The federal government will cover 100 percent of the cost of insuring newly eligible people from 2014 through 2016, but the federal share drops to 95 percent in 2017, 94 percent in 2018, 93 percent in 2019, and 90 percent in 2020 and beyond.
But there are other anticipated expenses with this expansion. State Medicaid administrators know that outreach efforts for the newly eligible populations will also bring into the program individuals who were previously eligible but didn’t know it. States will receive only their traditional Medicaid match rates for those people—even though Congress intended to minimize states’ new financial obligations. . In addition, the increased administrative expenses of outreach and claims processing for a larger population will continue to be matched at regular rates. So for some states the federal promise of minimal state expenses due to new mandates may seem hollow.
For a number of states, income eligibility levels for adults with children have remained constant since the welfare reform mandates of 1988. In less wealthy Southern states, especially, eligibility has changed little—and parents, whether working or jobless, are not eligible if their income is more than one-third or one-half the federal poverty level. (See Table A for more details.)
But some states—such as Wisconsin, Minnesota, Maine and Massachusetts—already had expanded Medicaid coverage beyond existing federal requirements, and the health care bill recognizes those states by providing a separate package of Medicaid financial assistance. Current state matching levels will be reduced 50 percent in 2014, 60 percent in 2015, 70 percent in 2016, 80 percent in 2017 and 90 percent in 2018 when all states will reach the same matching formula for adults, except for pregnant women.
Until 2014, states must maintain their current eligibility levels for Medicaid using the current federal-state funding agreement. The so-called enhanced Medicaid matching rates provided in the American Recovery and Reinvestment Act are set to expire Dec. 31, 2010, with Congress expected to extend them only to June 30, 2011. States are exempt from this “maintenance of effort” requirement if they can prove that they are experiencing a budget deficit.
Under another provision of the law, Medicaid reimbursements to primary care providers will be increased to match Medicare rates in 2013 and 2014, an increase that will be fully funded by the federal government in those years. After that, states likely will be responsible for setting, and funding, their own reimbursement rates.
The increase in rates is viewed as critical to having enough doctors to treat the millions of people who will be added to Medicaid rolls. Increasing reimbursement levels will not only keep current Medicaid providers from leaving the system, but also might entice more providers to join it.
Work force shortages will also be exacerbated by provisions of the law to provide insurance to previously uninsured Americans. The bill attempts to address this problem through expanding scholarships and loans for primary care practitioners, increasing the number of graduate medical education training positions and supporting the development of primary care models such as medical homes and team management of chronic disease. In 2010, a multi-stakeholder Workforce Advisory Committee will be appointed to develop a national work force strategy.
In Minnesota, lawmakers like Sen. Linda Berglin are eager to see how the federal legislation will complement and advance what the state has done already.
“One provision we are very excited about is that (for) states that create medical homes for their chronically ill patients, Medicaid will cover 90 percent of the cost of covering them within those medical homes,” she said.
That federal provision builds on 2008 legislation passed in Minnesota that allows providers to become certified medical homes in exchange for enhanced payments. Berglin said 73 percent of the state’s providers have become certified medical homes or are working toward certification.
Some state leaders worry their state’s innovative programs could fall by the wayside because of the health care law. For instance, the Healthy Indiana program allows uninsured adults to purchase private insurance with state subsidies. The health plans also come with savings accounts that are used to pay for medical care.
Once the federal reform legislation was passed, however, Indiana Gov. Mitch Daniels closed the program to new enrollees because of concerns it would be wiped out under the new health regulations.
2. States to oversee new regulations
The new federal law also makes changes to the way private health insurance plans must be structured. States will be in charge of enforcing these new regulations, reviewing rates and the solvency of plans, and overseeing various other requirements.
For example, beginning later this year, existing insurance plans will be prohibited from imposing lifetime dollar limits on benefits and cannot rescind coverage except in cases of fraud. Individuals up to age 26 will be permitted to stay on their parents’ health plans unless they have access to employer-based coverage.
Beginning in 2014, when all individuals must have health insurance or face a financial penalty (with some exceptions), private insurance plans will be prohibited from denying coverage to people for any reason—including pre-existing conditions. They will not be able to impose annual benefit limits or charge people more based on their health status or gender. Rates will vary only based on age (limited to a 3-to-1 ratio), geographic area, family composition and tobacco use (limited to a 1.5-to-1 ratio).
State insurance commissioners will continue to have important oversight, but some rules will be set at the federal level. It remains unclear, however, exactly how the state-federal regulatory relationship will work. State officials are waiting for further guidance from the federal government.
States must also create a consumer assistance office or ombudsman’s program to help people in the individual and small-group markets navigate the new system.
In addition, the federal legislation directs states to report on trends in insurance premiums and identify plans that have had unjustified premium increases.
3. State exchanges to fill coverage gaps
While the Medicaid expansion will help cover roughly one-third of uninsured Americans, there will still be people without access to employer-sponsored plans whose incomes are too high to quality for the public health insurance program. To fill this coverage gap, state-based health exchanges will be created. States will also be allowed to form multi-state exchanges to take advantage of administrative efficiencies.
The exchanges will virtually replace the nation’s individual and small-group health insurance markets.
For the small-group market, state-based exchanges will be set up to serve small businesses with up to 100 employees. Meanwhile, individuals will use the exchanges to choose from a variety of health plans that meet criteria set by the federal government, such as guaranteed issue and renewal.
States will be allowed to extend exchange coverage to employers with more than 100 employees beginning in 2017.
Perhaps the most similar model of an insurance exchange was established in Massachusetts when that state moved to universal health care insurance. Utah also has a more limited insurance exchange.
The Congressional Budget Office estimates about 24 million people will purchase insurance through the exchanges by 2019.
People whose incomes are between 133 percent and 400 percent of the federal poverty level will be eligible for subsidies. Premium credits will be offered on a sliding scale and will ensure that premium contributions do not exceed a certain percentage of income. In order to receive the subsidies, individuals must purchase insurance through the exchanges.
The new law lays out standards for the plans offered by the exchanges. Four benefit categories of plans, plus a catastrophic plan, will be offered through the exchanges. State governments may administer these exchanges or set up a nonprofit association to do so.
The state exchanges will provide oversight of health plans with regard to the new insurance market regulations, consumer protections, rate reviews, solvency, reserve fund requirements and premium taxes. They shall also define rating areas. These duties may overlap with state insurance departments and require new role definitions.
Beginning in 2016, states also will have the authority to create interstate health care compacts. Under these arrangements, insurers can sell policies in any state that belongs to the compact. Coverage under compacts must be at least as comprehensive and affordable as coverage provided through the state exchanges.
4. States can create new public plans
Many states insure some individuals with income levels above 133 percent of the poverty level—particularly children and pregnant women (See Table A for more details). These people are insured through Medicaid or another public health insurance program. Once the federal health law takes full effect, states can keep those people in the Medicaid program under the state’s current federal matching rate or have this population of low-income families seek insurance through the exchanges.
States will have to weigh their options carefully.
In Wisconsin, for example, this population currently receives comprehensive insurance through the state’s BadgerCare Plus program. But under the exchange, benefits might be less and the cost-sharing and premiums higher.
The federal health bill does provide a third option for states: Create a basic health plan for people between 133 percent and 200 percent of the federal poverty level. Under this provision, states could receive 95 percent of the federal funds that those individuals would otherwise have received in subsidies to buy insurance in the state-based exchanges. This money could then be used to contract with a private plan and create a state program.
5. Improving access to information
In the next few years, states will need to figure out how to meet a requirement in the federal legislation geared toward administrative simplicity.
Under the federal law, states will be required to provide a single online access point for individuals seeking information on different insurance options. This online access point must, for example, allow individuals to determine whether they are eligible for Medicaid or for a subsidy through the state-based exchange.
This is one administrative task for states; another will be handling what will likely be a sudden influx of new Medicaid applications.
6. High-risk pools play short-term role
Within 90 days of enactment of the health care bill, the federal government will set up a temporary high-risk pool—an option for people with a pre-existing medical condition who have been uninsured for at least six months. (The law requiring insurers to cover people with pre-existing conditions does not take effect until 2014; only children with pre-existing conditions are required to be covered in 2010, just six months after passage.)
Premium subsidies will be available through the new federal high-risk pool.
The legislation provides $5 billion for the pool until 2014. After 2014, the pools will not be necessary when insurance companies are prohibited from using pre-existing conditions to exclude persons from coverage.
Details about how the pool will be structured had not been released as of late March.
But some policy experts believe the federal government will contract with states’ current high-risk pools. According to the National Association of State Comprehensive Health Insurance Plans, 35 states have high-risk pools (See Table B for more details.)
Since the first high-risk pool was established in 1975, at least 1 million Americans have been insured through this mechanism. Enrollment figures for 2007, however, place the annualized numbers of people in state high-risk pools at about 210,000. Enrollment ranged from fewer than 350 in Florida to nearly 29,000 in Minnesota.
In the coming years, states will face a myriad of new challenges in the health care arena. The increased coverage promised by the new federal law will both provide and require new resources. Federal-state relationships will be tested. Whether the cost curve of rising health care costs can be bent for states’ residents as well as states’ budgets will be tested. Improving the quality of health care—and health—is another desired outcome to be measured over time.
About the Authors
Kate Tormey is a policy analyst/assistant editor in The Council of State Governments Midwestern Office and Debra Miller is director of health policy for CSG’s national office.