Federalism and Health Care

Federalism and Health CareAuthor(s): Virginia GraySource: PS: Political Science and Politics, Vol. 27, No. 2 (Jun., 1994), pp. 217-220Published by: American Political Science AssociationStable URL: http://www.jstor.org/stable/420274 .

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Notes 1. For the long version of the story, see

Joseph White and Aaron Wildavsky, The Deficit and the Public Interest: The Search for Responsible Budgeting in the 1980s (Berkeley: University of California Press, 1991). For a focus on economic theory and the Clinton administration, see James D. Savage, "Deficits and the Economy: The Case of the Clinton Administration and In- terest Rates", Public Budgeting & Finance Vol. 14, No. 1 (Special Symposium, spring 1994).

2. By definition, if Ford reduces its labor costs by reducing its health care expenses per worker, its productivity per dollar of labor expense improves, as does the market- ability of its vehicles against foreign competition. This is the general version of the domestic automakers' argument that they are handicapped by their health care expenses.

3. Since the benefits are long-term and dubious and costs short-term and obvious, anyone who pays a fair share thinks that is a bad deal.

About the Author Joseph White is a research associate at the Brookings Institution in the Governmental Studies Program. He is author of Competing Solutions: American Health Care Proposals and International Experience (Brookings, forthcoming).

Federalism and Health Care


Virginia Gray, University of Minnesota

Among the many issues in the national health care debate is the role of the states. Some have asked whether the states can tackle health care on their own and have an- swered with a resounding "no." Deborah Stone (1992), for example, argues that health care is too big a challenge for the states to handle: they lack sufficient autonomy from the federal government in certain areas and sufficient power over private interests in others.

But apparently, states are unde- terred by such thinking. In the early 1990s, three states-Minne- sota, Washington, and Florida- passed comprehensive bills incor- porating elements of managed competition. Massachusetts, Ore- gon, and Vermont had already enacted (but not implemented) major reforms based upon different philosophies. And Hawaii led the way in 1974 with its enactment of an employer mandate.

Today, reform activity is every- where. In 1993, 1,850 health care reform proposals were introduced in state legislatures; this year virtu- ally every governor is working on some health care initiative. Even Lowell Weicker, Jr., governor of Connecticut, home to the nation's largest insurance companies, has announced his intention to provide universal coverage by 1997. The states are definitely not waiting around to see what the feds will do.

By waiting until 1993 to mount a serious effort at national reform, the feds have vastly complicated the strategic calculations involved in passage. Not only are they at- tempting reform after powerful private interests have mobilized, they have waited until public interests have become vested in the outcome. Vermont wants assurance that it can consider the single-payer option; Governor Mario Cuomo warns that New York public em- ployees will lose existing health benefits; Hawaii wants to keep its system, which has worked well for 20 years. Each state that has en- dured the agony of reform will try to defend its legislation.

But every state, whether an innovator or not, has a vested interest in the outcome of the health care battle. Clinton's plan affects states very differently because they are so varied in their health care situa- tions. For example, the states vary from 8% to 25% in the proportion of uninsured workers. This means that the employer mandate would hit harder in some states than in others (i.e., hardest in the South), but Clinton's subsidies would offset that, so much so that members of Congress from the Northeast and Midwest are the ones complaining about redistributional effects (Greenhouse 1993, E5). States' interests vastly complicate achieving passage of a national program.

Given these considerations, let's examine three possible outcomes of the congressional battle over the Clinton plan.

Can the States Go It Alone? The first outcome is for the fed-

eral government to do nothing and let the states continue to handle the problem. This scenario would oc- cur if Congress deadlocked and did not pass any of the comprehensive proposals currently before it. The pressures on states are already so intense that almost certainly more states would create their own health care systems if Congress does nothing. But who adopts and what they adopt depends on the pattern of the diffusion process- who emulates whom.

For 20 years no state has chosen to imitate Hawaii's program requir- ing employers to provide insurance for all nonunionized workers. By all accounts, it has been a success- ful program, though various gaps in coverage and rising costs drove Hawaii to adopt further measures in recent years. Interestingly, in 1974 Hawaiian leaders did not ex- pect to take this bold step alone; they thought the federal government was about to pass a national program (Neubauer 1992, 156).

In 1992-93 Washington, Minne- sota, and Florida enacted and be-

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National Health Care Program

gan to implement comprehensive health care programs. Their plans were based on the concept of managed competition, albeit with slightly different twists. Florida's version is voluntary, for example. News reports at the time pro- claimed each state to be the first in the country to adopt such far- reaching reforms; apparently, each state wanted to be known as an innovator. But they have not yet successfully provided universal coverage and controlled costs.

Other early innovators were both more diverse in philosophy and more limited in programmatic im- pact. They included Massachusetts, which enacted a pay-or-play plan in 1988 but did not implement it due to budgetary considerations; Ore- gon, which in 1989 decided to ra- tion Medicaid benefits and finally won federal approval in 1994; and Vermont, which initiated a reform framework in 1992 but left many details to be filled in later, including the funding source and whether to have a single-payer or managed- competition system.

How do existing theories of diffusion explain this set of innovators? They are not all contiguous states; those that are neighbors adopted programs with different philosophies. Accordingly, regional diffusion can be ruled out. Another possibility is "slack resources": the availability of time and money to apply innovative solutions in a number of policy areas. Hawaii, Vermont, and Florida are not usually at the top of the list of innovative states; Massachusetts and Min- nesota would rank higher but not at the very top of most rankings. Thus, slack resources is probably not a viable explanation either.

More to the point is the notion that "necessity is the mother of invention." News reports indicate that leaders in the innovative states felt they had to do something; they couldn't wait any longer. Florida's governor Lawton Chiles, for example, left a national governors' meeting where the debate was over achieving universal coverage by the year 2000 vowing to have universal coverage by the end of his first term, and he did (Brown 1993, 16).

Diffusion theory also tells us that

political conditions affect the ability to innovate. And the set of initial innovators had certain political commonalities. For one, the governors spent tremendous capital on the effort. Besides Chiles, there was Minnesota's Arne Carlson who vetoed a bill in 1991 but then put his support behind fashioning a new bill with an appropriate financ- ing mechanism. In Vermont, it was Dr. and Governor Howard Dean, an internist, whose medical exper- tise and commitment to reform was instrumental in passage.

Larry Brown (1993) has distilled several other lessons from the experiences of the early innovators. Most states had health care commissions and task forces that pre- dated the introduction of legislation, much like Hillary Rodham Clinton's task force at the national level. Second, the credible threat of a more severe reform-e.g., the Canadian system-forced private interests to accept moderate reform. Third, each legislature had a policy champion(s) who skillfully fashioned consensus among diverse interests. These are the political lessons that potential emulators in other states should heed.

But what will be the outcome if the states handle health care on their own? It depends on state administrative capacity, especially the state's ability to implement new programs. Can states organize purchasing pools, oversee integrated service networks, calculate inflation and cap prices, operate single-payer systems, regulate insurers, etc?

We have already noted that some scholars are pessimistic. But other scholars (e.g., Thompson, 1986) argue that the states collectively have improved their overall administrative capacities so they are ready for these new responsibilities. Other optimists (e.g., Leichter 1992; Dodson and Mueller 1993; Mashaw 1993/94) note that states have long had important health care responsibilities such as regu- lating health care occupations, run- ning public health programs, and engaging in health care systems planning. Thus, they are qualified to take on additional duties in health care. Despite the optimism, gaps still remain among the states

which can lead to differential outcomes across states.

This scenario suggests that a crazy quilt of health care plans may soon exist. Benefits would differ from state to state, resulting in some businesses and insurers exit- ing to avoid the cost and regulations, and some people migrating to receive the benefits. These possibil- ities make a national program look more attractive, one in which the benefits are the same wherever you live. But just as there are doubts about state administrative capacity, there are also doubts about the federal government's ability to deliver a health care program. Part of the opposition to Clinton's proposal is the public's lack of confidence in government.

Can the Feds Go It Alone?

Interestingly, the feds do not promise to deliver health care under the Clinton plan (nor its major alternatives); rather the feds promise that the states will deliver quality health care via the private sec- tor. The states would act as "middle managers," reviewing the financial solvency of health plans and approving the new health alliances including their location, their board members, and their criteria for evaluating insurance plans. A state could run its own alliance, which in essence allows the single- payer system. Thus, Vermont could have its Canadian style system, California its managed competition, New York many alliances, Montana only one alliance and so forth. We would still get substantial diversity in operation.

Similarly, the other bills before Congress also involve the states. For example, McDermott's version of the single payer plan has the states operating health security programs, issuing cards, and enrolling citizens in the system. And Coo- per's version of managed competition has states overseeing the for- mation of purchasing groups, although it does not allow testing of the single payer option. Thus, the major universal coverage proposals all rely upon the states to deliver the national program, in the same

218 PS: Political Science & Politics




way the Canadian system relies upon the provinces.

In crafting a national program, Congress has the opportunity to adopt some programmatic elements already enacted by the states. What will the federal government learn from the states' experiences? An obvious limitation is that, except for Hawaii, the comprehensive state programs are just getting off the ground themselves. So immedi- ate learning from the pioneer states would necessarily be limited to their enactment, not their imple- mentation. Of course, as the debate in Washington drags on, the possibility of learning more from the states increases. But states have tried a myriad of incremental reforms over the years-varieties of managed competition, demonstra- tion projects, and experimental programs-all of which could be sources of knowledge.

In the Clinton task force deliber- ations and in the congressional tes- timony thus far, mention has been made of successes in various states-holding down costs, cover- ing the uninsured, use of quality indicators, etc. But much of this seems to be drawing lessons from anecdotes rather than reporting the results of policy evaluations. Previ- ous research can tell us whether the states usually serve more as laboratories for the federal government.

In the limited research on verti- cal diffusion, Boeckelman (1992) found that Congress usually ignores the states' experiences in designing new programs. States were most relevant as laboratories when ex- pensive social programs were involved and when state officials pressed vigorously for federal action. These conditions seem to be fulfilled in the health care debate. However, a more relevant study by Lammers (1990) of hospital rate regulation found that federal imitation is more likely when interest group advocacy is high and home- state congressional delegations are supportive. Currently it seems that in health care interest group advocacy is high, but interest group opposition is also high, suggesting that imitation won't take place. Ba- sically, both studies indicate that

pressure from below, i.e., from the states doing the innovating, is nec- essary for emulation to take place at the top. Echoing this theme, Hecht (1993) in a study of the verti- cal diffusion of welfare reform ex- periments concluded that state experiences provided politicians with information about what policy changes are acceptable to the vot- ers. Thus, even anecdotal evidence has a political currency that fosters upward diffusion.

Is There A Middle Ground? As Clinton's plan comes under

considerable fire, and no other bill has a majority, it is possible that no comprehensive national program will be enacted this year or in the near future. What then? Does our health depend on which state we live in? No, there is a middle ground in which the federal government can use its considerable power to facilitate state innovation and improve the current system.

For starters, Congress could re- peal ERISA (Employee Retirement Income Security Act) as it relates to health insurance; this act regu- lates benefits plans so that national companies do not have to deal with 50 different sets of regulations. If companies self-insure (as many do), states cannot regulate or tax them under ERISA. This means that states cannot enforce uniform benefits nor collect premium taxes, crip- pling their efforts to provide universal coverage. The state reforms described above have been jerry- rigged to avoid ERISA, but many will be subject to court tests in the future. The import of ERISA can be seen in the actions of the Na- tional Governors' Association, which called for the law's overhaul, while at the same time selecting a self-insured health plan for its em- ployees because it is cheaper than the alternatives (Pear 1994, A14). Modifying ERISA would stimulate state innovation.

The states would also like Con- gress to overhaul the Medicaid program, especially the overly com- plex regulations and the federal/ state cost-sharing formula. A substantial portion of state innova-

tion is driven by the perception that Medicaid is the "PAC man" of state government. Until something is done to bring Medicaid cost increases in line (and insure the rest of the poor), governors believe they will have little money to spend on other priorities. For this reason, Oregon focused its reform efforts solely on rationing Medicaid benefits.

Although these are the major irri- tants, a number of other federal reforms would indirectly facilitate state activity: limiting the tax de- ductibility of health care benefits, stopping certain insurance under- writing practices, etc. Thus, even if the federal government does not enact a national comprehensive health care program, it could take a series of incremental steps that, along with state programs, would greatly improve health care for all Americans.

References Boeckelman, Keith. 1992. "The Influence of

States on Federal Policy Adoptions." Policy Studies Journal 20 (3): 365-75.

Brown, Lawrence D. 1993. "Commissions, Clubs, and Consensus: Florida Reorga- nizes for Health Reform." Health Affairs (Summer): 7-26.

Dodson, Anthony L., and Keith J. Mueller. 1993. "National Health Care Reform: Whither State Government?" Policy Cur- rents 3 (November): 5-7.

Greenhouse, Steven. 1993. "The States' Stakes in Clinton's Health Plan." New York Times 10 October: E5.

Hecht, Stacey Hunter. 1993. "Lighthouse, Laboratories or Leaders? AFDC Innova- tion in a Federal System." University of Minnesota. Typescript.

Lammers, William W. 1990. "State Health Policy Innovations: A Stimulus for Fed- eral Action?" Presented at the American Political Science Association Annual Meeting, San Francisco, CA.

Leichter, Howard M. 1992. "The States and Health Care Policy: Taking the Lead." In Health Policy Reform in America, ed. Howard M. Leichter. Armonk, NY: M. E. Sharpe.

Mashaw, Jerry L. 1993/94. "Taking Federal- ism Seriously: The Case for State-Led Health Care Reform." Domestic Affairs (Winter): 1-21.

Neubauer, Deane. 1992. "Hawaii: The Health State." In Health Policy Reform in America, ed. Howard M. Leichter. Armonk, NY: M. E. Sharpe.

Pear, Robert. 1994. "Governors Ask for Power Over Self-Insurance Plans." New York Times 30 January: A14.

June 1994 219



National Health Care Reform

Stone, Deborah A. 1992. "Why the States Can't Solve the Health Care Crisis." The American Prospect 9 (Spring): 51-60.

Thompson, Frank J. 1986. "New Federalism and Health Care Policy: States and the Old Questions." Journal of Health Poli- tics, Policy and Law 11 (4): 647-69.

About the Author Virginia Gray is professor of political science at the University of Minnesota. During 1993-94 she was at the University of North

Carolina, Chapel Hill, under the auspices of the NSF Visiting Professorship for Women Program. She is a member of the Board of Directors of Group Health, Inc., an HMO in Minneapolis.

Neglected Institutions: Politics, Administration, and Health Reform

James A. Morone, Brown University

Americans have been debating national health insurance throughout the twentieth century. The content of this elusive reform has evolved far more than the tone of the debate. When Theodore Roosevelt championed health care reform (during the 1912 presidential campaign) he wanted to build a hardy stock of Anglo Saxons-health insurance would help deliver white America from race suicide (Dyer 1980; Ross 1913, 299-304). More than thirty years later, President Truman made health insurance the major domestic issue of his presidential campaign; his goal was an extension of the New Deal social welfare state (Starr 1982). Today, the reform that was once con- demned as too costly is widely pre- scribed as cost control.

While the reform itself has changed, the debate that surrounds it remains entirely predictable. Theda Skocpol describes the con- testants: On one side, self-confi- dent, neo-Progressive experts tout- ing rationalizing schemes. On the other, conservative critics deploy- ing "ideological, emotionally charged arguments" (Skocpol 1994). The shrill rhetoric of opposition has alternately bemused and baffled observers. Compulsory insurance was "a dangerous device . . . announced by the German em- peror" (in 1918), a force represent- ing "social theory .. socialism, even communism" (in 1932), "the keystone to the arch of socialism" and "a threat to every area of free- dom as we have known it (by the 1960s). And always there were the specters of rising taxes and ram-

pant bureaucracy (Morone 1990, chap. 7).

However, too much attention to the rhetorical pyrotechnics mis- leads observers into an overly plu- ralistic reading of the long health insurance debate. Why don't Amer- icans have national health insurance? Answer: the dreaded Ameri- can Medical Association (or, more recently, the Insurance Industry or Big Business or Small Business). A variation of this interpretation suggests that the groups provoke a deep-seated American unease with government action. A combination of interest-group muscle and a cul- tural dread of government defeats health reform.

Focusing on political institutions suggests an overlooked alternative. National health reform has been wrecked by the organization of our government. The fragmentation of checks and balances, rooted in the Constitution and exacerbated by each generation of political reform, creates a policy apparatus that is maladroit at securing broad policy changes. Our government produces distributive benefits to narrow claimants; big reform efforts gener- ally result in stalemate (Morone 1990). After all, if the United States had been operating under English (or German or Canadian) rules, the Truman administration would have had the opportunity-indeed, it would have been expected-to leg- islate the health reform it had pro- moted on the hustings. American national health insurance would have arrived roughly on time com- pared to other industrial democra- cies.

The Clinton Strategy Almost every feature of the old

political patterns have appeared in the latest round of health reform. Once again, reformers pursued their complicated, neo-Progressive muse. Hundreds of expert advisors produced an intricate 1,300-page legislative proposal.

The Clinton administration pursued an unabashedly pluralist cal- culus. Its proposal seemed almost self-consciously designed to divide potential opponents. Big insurers would win; small ones lose. Busi- nesses that now offer generous health benefits would support the plan; the stingy would oppose. Physician supporters would balance out the opponents (Bendavid 1993, 25). With divisions criss-crossing the interest groups, the administration could perhaps build its reform coalition.

Typically, the difficult institu- tional realities were overlooked. Compromises forged in the execu- tive are thrown open again in the legislature. Congressional rules do not promote stable alignments of winners and losers. Seven congressional committees and subcommit- tees play a significant role in the fate of the health legislation (re- portedly, thirty-one have at least a sliver of jurisdiction) (Clymer 1994). The committee politics vary enormously-from the liberal House Committee on Education and Labor to the far more conservative Senate Finance. Once again, past reforms (this time, the congressional reforms of the 1970s) made power more diffuse, action

220 PS: Political Science & Politics



Federalism and Health Care

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