Using State Reform Demonstrations to Build Back Better

The ambition of the Biden-Harris campaign’s national health reform plan is easy to overlook, in part, because of the relatively modest sound of an agenda framed as “Building on the Affordable Care Act,” as the campaign had pledged. But the plan is actually far from modest, particularly in light of the extraordinary political conditions that the incoming administration likely will confront. Certain key elements would require either an unprecedented level of bipartisanship or a Democratic majority in both houses of Congress, neither of which seems likely. Because states historically have been the proving ground for blueprints in health reform, a key question will be whether, and how, the new administration might leverage its considerable administrative powers to facilitate testing big ideas through state experimentation.

Consider Biden’s intention to create a national “public option,” a potentially more affordable government-run health insurance program that would build on the federal government’s purchasing and contracting powers to compete with private health insurance in the ACA marketplaces. To understand why this would be difficult to accomplish, keep in mind that even with Democratic majorities in both chambers and pressure from President Obama, the ACA preserved the structural firewall that divides public and private insurance. While it achieved landmark private market reforms, created a historic Medicaid expansion, and established a major tax subsidy program for low- and moderate-income people, the ACA also carefully maintained the foundational status quo of (1) public insurance (Medicare and Medicaid/CHIP) for higher-risk populations such as the elderly, the poor, and children and adults with severe disabilities, and (2) private insurance for healthier populations, especially employer groups and working-age individuals and families not attached to a group plan. Support for maintaining this foundation was especially strong in the Senate whose bill ultimately became the enacted legal text. As a result, the ACA omitted any bridge that would have enabled people to cross from private to public coverage, thereby creating less competition to drive down unsustainable health care costs.

If the Democrats are successful in Georgia’s Senate runoff races, the 117^th Congress that begins in January 2021 will include only a bare Democratic Senate majority. Furthermore, the House Democratic majority has shrunk by at least a dozen seats, and further losses are possible. Even with the far larger Democratic advantage in the 2009-2010 ACA legislative debate, support for a public option failed to gain sufficient traction. Given the historic public health and economic crises now confronting the nation, the likelihood of contentious confirmation processes for the President’s nominees, and the need to move an ambitious agenda extending far beyond health policy, the President will have achieved much if he can secure desperately needed public health investments, a more generous subsidy structure for the purchase of private plans, an extension of the private subsidy system to the poorest adults in Medicaid non-expansion states, a curb on balance billing, and at least some level of prescription drug pricing reform.

For this reason, the Biden administration might look to the broad powers it possesses to move health reform forward through state innovation. On the urgent pandemic-related front, the administration can use its regulatory powers under the ACA to do what the Trump administration would not—immediately open a special federal Marketplace enrollment period for any individual and family experiencing pandemic-related job loss. Eleven states that operate their own marketplaces, along with the District of Columbia, have done so. Similarly, the administration could use its broad experimental powers under § 1115 of the Social Security Act to allow Medicaid non-expansion states to extend Medicaid for COVID-19 testing, treatment (including immunizations), and aftercare to below-poverty uninsured persons. States that already have adopted the ACA Medicaid expansion could extend coverage to recently arrived and legally unauthorized immigrants. In allowing these reforms, the administration also can waive the § 1115 budget neutrality principle (a 40-year-old policy construct not required by statute) to enable waiver states to receive federal funding amounts that exceed what the government would have spent under their Medicaid plans in the absence of a demonstration.

Beyond an immediate pandemic-related health reform surge, the administration could develop special guidelines that enable states to pursue waivers simultaneously under § 1115 and § 1332 of the ACA to pursue more ambitious reform plans aimed at unifying coverage access through a public option that offers additional assistance for populations entitled to publicly supported coverage through Medicaid or ACA premiums and cost-sharing subsidies. Together, these two state innovation pathways offer a means to achieve a unified public option approach across both subsidized and unsubsidized populations, much as a federal public option would do. Section 1115 enables states to pursue demonstrations that promote Medicaid’s core objective of coverage, while 1332 creates a pathway to the development of ACA coverage alternatives that: insure at least as many people; offer coverage at least as comprehensive and affordable as ACA-compliant plans; and do not increase the federal deficit. Section 1115 has a long history of state innovation. To date, states have used § 1332 primarily to stabilize their insurance markets through more generous reinsurance systems. While a few states have thought about doing more, their proposals have been either declined or withdrawn.

A new administration could do much to encourage truly transformational thinking by developing new public option guidance focused on comprehensive reform, including models that would test a public option to increase coverage while also pursuing health equity. The Centers for Medicare and Medicaid Services, the Center for Medicare and Medicaid Innovation (CMMI), and experts in health care and public health across HHS could develop testable models in close consultation with states interested in pursuing comprehensive coverage models.

To the extent that budget and deficit neutrality principles are seen as impeding such an ambitious reform effort, the administration could develop special methodologies for public option demonstrations. Such methodologies might, for example, utilize a longer time horizon (at least 5 years) for measuring budget and deficit neutrality (required in the case of 1115 and 1332 experiments, respectively). In this way, the near-term cost increases inherent in any major demonstration can be offset by longer-term cost reductions flowing from heightened state purchasing powers (especially if public employees also are given the ability to choose the public option), heightened efficiencies, reduced uncompensated care, and reduced rates of churn—that is, the constant breaks in coverage that people in publicly subsidized markets tend to experience. A longer budgeting window, as well as a budget neutrality formula that takes into account the full range of potential offsetting savings, could help states overcome the narrow federal budgeting formulas that so frequently frustrate innovations before they can even begin.

We cannot recall a time that a new President and administration faced greater economic, health, or political challenges than now. Health reform need not be an enormous rock on which a new Presidency crashes. Legislation to stand up a reinvigorated public health system and shore up the existing health insurance framework (not to mention reversing a deep, pandemic-induced recession) is desperately needed. But as the nation moves toward recovery, there is time for more ambitious experimentation through deployment of existing waiver authority coupled with a collaborative and inclusive process. The administration should seize the opportunity.

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