Why the feds must take the lead on health reform.

In yesterday’s post on my new draft essay, Federalism and the End of Obamacare, I emphasized the benefits of returning more regulatory authority to the states. Today, I’d like to draw out a different point: the need for the federal government to take the lead when it comes to financing health reform.

The states face two enormous obstacles to achieving near-universal coverage on their own. First, the states don’t have the same fiscal capacity as the federal government. Keep in mind that the ACA is a large, countercyclical spending program:

When a recession hits, many people will lose both their jobs and their employer-sponsored coverage. The ranks of those eligible for Medicaid and for ACA subsidies will predictably grow, leading to larger federal outlays. At the same time, the economic downturn will depress tax revenues. The federal government can deficit-spend to manage these countercyclical fluctuations. The states, however, cannot. With the exception of Vermont, the states are legally obliged to balance their budgets every year. And states are understandably reluctant to adopt large obligations that will require savage spending cuts or hefty tax increases when times get tough. Cuts and taxes are not only unpopular, but they would also depress the economy further, exacerbating the recession. Broad coverage expansions thus commit states to an economic policy that could inflict serious damage on their residents.

Second, ERISA poses an enormous problem for states that want to tackle health reform.

No government, state or federal, likes to impose new taxes. But governments face a special challenge when their residents can complain that the new tax is discriminatory. That problem arises with particular force when states try to impose new taxes to finance a coverage expansion. A resident who gets health coverage through her job—let’s call her Anna—already faces a reduction in take-home pay commensurate with the value of that coverage. Another resident who works at a similar job but does not get health coverage—let’s call him Bob—likely receives higher cash wages. Should Anna and Bob both face the same new tax, even if it finances a coverage expansion that will only benefit Bob?

Penalizing employers who fail to offer health coverage to their employees avoids this problem. “Pay or play” laws thus 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: if Bob starts getting coverage through his employment because of a pay-or-play law, he will see an offsetting wage reduction, tying the costs of coverage to the person who receives it.

The trouble is that ERISA preempts state laws that “relate to any employee benefit plan,” including a plan offering health coverage. Although there is some legal uncertainty, preemption probably means that states cannot impose a penalty on employers that refuse to offer health coverage. By taking pay-or-play laws off the table, ERISA complicates the politics of financing state efforts to achieve near-universal coverage.

Taken together, these legal obstacles—state balanced-budget rules and ERISA—will predictably frustrate state efforts to achieve near-universal coverage. (Massachusetts and Hawaii, as I discuss in the essay, are the exceptions that prove the rule.) Federal money is thus the lifeblood of health reform; the states can’t go it alone.


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