Waivers and the future of repeal and replace

Over at National Review, Yuval Levin argues that a Republican consensus over repeal and replace might slowly be emerging:

It now seems that the familiar debates about tax credits vs. deductions and even about spending levels aren’t exactly where the dividing lines are in the House conference. Rather, … the Freedom Caucus Republicans want to maximize the reversal of Obamacare’s federalization of health insurance regulation to give people more options at lower costs and the Tuesday Group Republicans want to maximize genuine access to coverage and care for everyone in the individual market. Both want a more functional, competitive, consumer-oriented health-care system. And it’s not that either group simply doesn’t care about the other’s primary emphasis, but they do seem to enter the debate with these differences of emphasis and priority. The challenge, therefore, is to maximize both at the same time.

This is good news, because both of those are crucial goals and they can actually reinforce one another. But how do you maximize both … ? I think the waiver idea is an attempt to answer that question. In effect, it says to each state government that, if it can show that Obamacare’s regulations make it too hard for its residents to have a functional individual insurance market and can demonstrate how a different regulatory architecture would better enable it to make use of whatever federal support the legislation would offer and provide more people with access to coverage and care, then it can have that different regulatory architecture. How this might be achievable will vary from state to state, and a waiver approach can make room for such variance. It will also look different to state officials with different assumptions about health economics, which this approach could allow for as well.

It’s a good piece, and I’m sympathetic to Levin’s view that shifting more regulatory authority to the states is a good idea. (Andrew Sprung, who has a detailed and insightful discussion of Oklahoma’s nascent exploration of 1332 waivers, has also explored how decentralization might play into a Republican replacement.)

But I think Levin is wrong about what really divides Republicans. Levin’s mistake—and it’s a common one—is neglecting the role that money plays in federalism. It’s fine to give the states more authority to oversee their insurance markets. But, as I explain here, states don’t have the fiscal capacity to finance massive coverage expansions on their own. They’re required to balance their budgets every year, so any commitment to covering the uninsured will throttle their budgets when the next downturn comes. At the same time, ERISA prevents them from adopting the sort of employer mandates that could improve coverage.

The states thus need federal money; it’s the lifeblood of health reform. And the real cleavage among Republicans is over how much money the federal government is willing to shell out. The Freedom Caucus wants to repeal the ACA’s taxes on industry and the wealthy, financing them with savage cuts to Medicaid and slightly less savage cuts to individual-market subsidies. The Tuesday Group likes the tax relief, but worries about the coverage losses associated with all the cuts.

It’ll take more than waivers to bridge that gap.

It’s telling, for example, that Levin doesn’t mention the Cassidy-Collins bill, which would have granted broad authority to the states to opt out of the ACA’s regulations. Cassidy-Collins was dead on arrival not because it embraced waivers, but because it would have retained the ACA’s taxes and spending. For most Republicans, that’s a deal-breaker.

It’s also telling that Levin doesn’t discuss Medicaid in the piece, even though Republicans remain divided over whether and to what extent to keep the expansion in place. Again, the problem is not opposition to more state control: House Republicans were happy to adopt an amendment allowing states to impose work requirements. The problem, instead, is that Republicans disagree about how to trade off tax relief and Medicaid cuts.

When Levin talks about a federalism-respecting solution, he seems to have in mind something that hews to the anemic spending levels in the American Health Care Act. Even with much less money, he’s optimistic that the states can achieve broad coverage by eliminating ACA regulations. Here, however, he seems to be referring exclusively to the individual market. But if you take the AHCA’s Medicaid cuts as a given, as Levin seems to, a huge increase in the number of the uninsured is inevitable.

Even just focusing on the individual market, Levin understates the effect of the AHCA cuts. Levin opines, for example, that the states might “permit catastrophic coverage plans to be sold and then require every insurer in the individual market to offer at least one ‘default’ catastrophic plan with a premium equal to the federal credit so that everyone can have at least minimal coverage and no one remains uninsured.”

Levin is right: the states could do this. But play it out. In many markets, the credits under discussion in the AHCA are too low to cover the premiums for catastrophic plans. If you’re 35 and live in Nashville, Tennessee, for example, catastrophic coverage will run you about $287 per month, or $3,450 per year. But the AHCA’s credit for someone in that age bracket is just $2,500.

Selling a catastrophic plan at the size of the tax credit will therefore require insurers to increase their deductibles. But catastrophic plans already impose deductibles of $7,150 for an individual—that’s as much as the ACA permits. With that cap on out-of-pocket spending waived, we’d likely see the proliferation of catastrophic plans with deductibles in the five digits.

That’s still “minimal coverage” in some sense. But it’s also less coverage than the ACA guarantees—and five-digit deductibles make the Tuesday Group nervous. The same goes for other regulatory changes, like paring back the essential health benefits. Fewer regulations might yield a reduction in premiums, but people’s insurance would be crappier and less comprehensive. Voters tend to get mad when you make their coverage crappier and less comprehensive.

Contra Levin, then, I don’t think the logjam among Republicans is conceptual. It’s financial. Some Republicans want to stop paying as much for health care for the poor and near-poor. Others think that’d be political suicide. No amount of waivers will get them to agree.

@nicholas_bagley

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