Federalism and National Health Reform, Part 2

This is a TIE-U post associated with Nick Bagley’s Health Reform and Its Legal Controversies (Michigan Law 866, Fall 2015). For related posts, see the course intro.

As I explained yesterday, it’s not immediately obvious why health reform had to happen at the federal level. The traditional justifications for federal action—the presence of externalities or a collective-action problem—don’t apply. Given the benefits of state differentiation, perhaps the states should have taken the lead.

Yet the idea that health reform ought to be left to the states was not a prominent part of the debate over the ACA. Across the political spectrum, it was largely taken for granted that federal intervention was appropriate. There was just vociferous disagreement about what the feds should do.

Why didn’t the states get more attention? I can think of two good reasons, both having to do with taxes.

First, from a state’s perspective, the costs of covering the uninsured fluctuate from year to year. When the economy is humming, costs decrease because more people will have insurance through their jobs. But when the economy nosedives, costs go up.

This sort of countercyclical fluctuation already creates serious problems for state Medicaid programs. Because nearly every state is required to maintain a balanced budget, an uptick in Medicaid costs forces them to raise taxes or cut spending right in the middle of an economic downturn—which is the opposite of sensible economic policy.

States are thus understandably leery of saddling themselves with new countercyclical obligations. The federal government, in contrast, can deficit spend until the economy picks up steam again. It’s much better-positioned to weather the economic cycle.

Second, no government, state or federal, likes to impose new taxes on their residents. But governments really don’t like it when their residents can complain that the new tax is discriminatory. If you get health coverage through your job, you already face a reduction in take-home pay commensurate with the value of that coverage. Your friend who works at a similar job but doesn’t get health coverage is paid somewhat better. Should you both be taxed equally in order to subsidize his coverage?

To avoid this problem, it’s really appealing to penalize employers who fail to offer health coverage to their employees. “Play or pay” laws have a clear political logic: employers that don’t offer coverage are failing to live up to their end of the social bargain. They have a certain economic logic, too: an employee who starts getting coverage because of a play-or-pay law will see an offsetting wage reduction, tying the costs of coverage to the person who receives it.

The trouble is that the Employee Retirement Income Security Act of 1974 (ERISA) preempts state laws that “relate to” the design of employee-benefit plans, including health insurance. Although there’s some legal ambiguity, ERISA means that the states probably lack the authority to tell employers to offer health coverage or face a penalty. (Indeed, one of the dirty secrets of Massachusetts health reform is that its modest employer penalties probably couldn’t survive an ERISA challenge.)

By taking play-or-pay laws off the table, ERISA complicates the politics of financing a state’s effort achieve near-universal coverage. At the same time, ERISA doesn’t impede a federal play-or-pay law—paving the way for an employer mandate like the one the ACA adopted.

In other words, the need for national health reform didn’t arise because of externalities or collective-action problems. It arose, instead, because balanced-budget rules and ERISA make it politically difficult to enact and sustain state-based reform. With those obstacles in place, the federal government was pretty much the only game in town.


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