A Federal-State Partnership

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Given the respective strengths and challenges of either an all state or all federal approach to health reform, a strong federal-state partnership that builds upon the best of both could be a useful approach. In this scenario, the federal government would use its leverage as the largest purchaser in the country to set minimum standards and guidelines upon which states can build; it would also provide the necessary resources to the states to facilitate reform. States would then be responsible for implementing the programmatic aspects of health reform within an overall framework established at the national level. Key features of this approach are outlined below.

Regulating Insurance Markets. States have significant and lengthy experience with insurance market oversight and consumer protection.[i] However, while they have the advantage of being more directly accountable to consumers and providers, their purview over some employers is limited by federal law (e.g., Employment Retirement Income Security Act of 1974 [ERISA]). In addition, many of their residents are covered by federal insurance programs such as Medicare, the Veterans Health Administration, the Indian Health Services, and the Federal Employee Health Benefit Plan (FEHBP), and are therefore also beyond the reach of state regulation.
States are limited in their ability to engage with employers regarding the provision of health insurance. States can regulate insurers and the business of insurance but ERISA is often an issue when state law appears to affect whether and how employers offer worker health coverage. The federal law preempts state laws that “relate to” private sector employer-sponsored benefit plans. In effect, health benefits offered by self-funded employers have been exempted from any state regulatory oversight. This exemption limits the scope of cost-containment, quality improvement, and coverage expansion efforts of states.
States recognize the need for large multi-state employers to have national standards within which they can operate more efficiently. However, states who seek to innovate, especially through the use of public-private partnerships, are hampered by their lack of oversight and ability to engage. Tension between these two legitimate concerns is inevitable.
Federal policy steps could be taken to address employer concerns while still allowing for state innovation. For example, two states have recently imposed assessments on employers to help fund health care access initiatives but, because the question about whether they are subject to federal ERISA preemption has only been tested through the judicial system, other states have been reluctant to even consider such a financing mechanism.[ii] While Massachusetts managed to enact a very limited employer mandate that requires certain employers to offer coverage to employees or pay into a state fund to support public health programs, states have mostly felt the need to steer clear of requirements on employers to contribute to the financing of coverage expansions. The federal government could provide clarity on permissible state actions and/or allow safe harbors.
Several clear federal changes would allow states to require ERISA-protected health care purchasers to participate in payment reform collaboratives, quality improvement efforts, Medicaid premium assistance programs, and all-payer databases. States could be allowed to collect enrollment and benefit information from ERISA plans. An explicit allowance could permit states to apply premium taxes to employer plans. Due to federal preemption, states are not able to define the scope of benefits provided by ERISA plans; the federal government therefore could also set a national floor on benefits. Finally, while consumer protections for those covered by ERISA plans are currently provided at the federal level, states have more infrastructure and experience in these areas. Oversight responsibility, using federal standards, could be shifted to the state level.
Public Programs—Medicaid and the State Children’s Health Insurance Program (SCHIP): Medicaid and SCHIP are currently based on a federal-state partnership. Overall, the Medicaid program provides more than 59 million Americans with health coverage and long-term care services.[iii] The federal government provides broad guidelines within which each state must operate and the states are responsible for implementing the programs on the ground. These programs allow, to a certain extent, variation in eligibility levels, benefit structures, payment parameters, and breadth of optional populations covered.
In recent years, this partnership has been strained. The allowance for flexibility through the waiver process has been granted by Congress in several laws governing these programs. However, many states believe that federal regulatory oversight has become too inflexible and administratively cumbersome, and that proposed federal changes to the program have been taken unilaterally with little or no consultation with states nor with any regard to the impacts those changes will have to the program on the ground.[iv] National reform should address these tensions, particularly with regard to waivers, dual eligibles, citizenship requirements and other Medicaid policy changes, and SCHIP limitations.
While there are currently processes for approving State Plan Amendments and also for granting waivers that, ostensibly, allow for state flexibility, those processes are now viewed as being too time-consuming (often years), adversarial, and capricious. Waiver parameters that had been granted to some states are denied to others, leaving states with no guidance as to what may be acceptable. The waiver process needs to be more timely and collaborative. States are currently at the forefront of experimenting with payment reforms to contain costs and improve the delivery system; they need a better framework and an expedited approval process for payment reform demonstrations that allow them to experiment and move from a fee-for-service system that incents quantity and disregards quality to one that pays for value by rewarding quality improvement.
Another substantial change to the parameters of the federal-state program that should be considered is related to the “dual eligibles”—the almost 7.5 million individuals who receive both Medicare and Medicaid benefits. Currently, for dual eligibles, Medicaid pays Medicare premiums and cost sharing and clinical benefits such as long-term care that Medicare does not cover.[v] Dual eligibles represent more than 40 percent of all Medicaid spending and almost a quarter of Medicare spending.[vi] Some states have argued that all health care for the duals should be the responsibility of the federal government. Because dual eligibles have substantial medical needs and cost more per capita than other Medicaid beneficiaries, both state and federal governments need to be concerned about the impact of these individuals on both public programs. The federal government could support efforts to integrate care to overcome administrative and operational hurdles and financial misalignments between the Medicare and Medicaid programs through a single delivery system.[vii]
While both states and the federal government share the goal of maximizing pubic program enrollment and preventing ineligible individuals from taking advantage of benefits to which they are not entitled, the federal government added citizenship verification guidelines to the program that have proven to be severely burdensome to states. Many state officials report that the cost-saving benefit of trying to identify those individuals who are not eligible for programs is far outweighed by the administrative costs of implementing and maintaining such a verification effort.[viii] In addition, many states have reported that the requirements have the unintended consequence of denying benefits to those who otherwise would be eligible but have no proof of citizenship. The federal government should consider allowing a waiver from the citizenship requirement if the state can demonstrate it has effective verification standards in place.[ix]
Changes to federal Medicaid regulations designed to control the rate of growth in these programs have also caused concern for a number of states.  States view these proposals as reversing long-standing Medicaid policy. The regulations, most of which are currently under a one-year moratorium, also severely limit state efforts to use their public programs as a building block for coverage expansions.[x] A state survey noted that “a vast majority of states indicated that the regulations would have a real and significant impact on states and beneficiaries.[xi]

In addition, in a directive dated August 17, 2007, the Centers for Medicare & Medicaid Services (CMS) announced that states would be barred from extending SCHIP coverage to children in families with incomes above 250 percent of the Federal Poverty Level (FPL) unless the state can demonstrate that 95 percent of their residents who are eligible under 200 percent FPL are enrolled in the program.[xii] That directive impacted 23 states—10 that had already increased eligibility beyond 250 percent FPL and 14 others had proposed doing so.  (Washington State falls into both categories.)[xiii] This directive has not been modified nor rescinded. 

Many Medicaid and SCHIP observers expressed frustration that the federal government had not sought state input or greater understanding of the potential impact of these policy changes, which severely reduce the flexibility that states have in their public programs and severely impact their budgets, before moving forward. CMS’s statutory authority to even issue the August 17 directive has also been called into question.[xiv] If the federal government wants to continue to support innovation and coverage expansions by states, it will need to rescind the August 17 directive and pursue a more collaborative regulatory process.
System Redesign/Quality Improvement: States have increasingly recognized that coverage expansions must be accompanied by value-enhancing strategies that contain costs and improve quality. The implementation of delivery system redesign and payment reforms, as well as the integration of public health strategies into other health care reforms, happens primarily at the state and local level. States are able to convene stakeholders and help provide a framework for collaboration to move these efforts forward. State health care system redesign efforts can provide lessons about how to take on this work and how to overcome challenges. In addition, most of the necessary health information technology (HIT) infrastructure needed to support these redesign efforts must be built on the ground—states have been playing an extensive role in this area as well.
While states have been moving ahead on these issues, the federal government has a number of levers that allow it to have, in a certain way, substantially more impact on the health care system than any individual state. By leveraging and aligning the purchasing power of the federal programs of Medicare, Medicaid, the Veterans Health Administration, the Indian Health Services as well as the FEHBP, payment reforms to encourage better processes and improved outcomes could be accelerated.
Federal programs could provide the leadership to emphasize evidence-based care and to use their claims data to establish better baselines; set goals for improving population outcomes; improve risk-adjustment methodologies; and reward results.[xv] The federal government could also promote the use of comparative effectiveness research in benefit design, value-based purchasing, and for determining best clinical practices. The federal government could consider including state programs (e.g., Medicaid, public employees) in any Medicare demonstration projects on payment reform and delivery system redesign. However, because states can move more quickly, the federal government could also assist states by developing a new process to allow Medicare to participate in state-based all-payer databases and other state pilots.
Federal leadership and support to encourage the rapid adoption of HIT and the use of requisite interoperability standards are critical. The health care sector is in dire need of uniform interoperability standards—that separate data from software applications—so  that providers and health systems that purchase electronic medical record systems and other HIT can be assured that those systems will be able to exchange key medical information. While states are moving ahead in this area in a somewhat limited fashion, it is difficult for them to proceed, in part, because many health care systems, hospitals and employers cross state lines and they do not want to invest in information systems that will not operate across those borders and across systems. States recognize that it does not make sense for 50 states to set 50 different standards, so they are waiting for federal regulators to set the needed benchmarks so that investment in HIT can move forward.
There is a dearth of federal standards and guidelines in the area of quality metrics. To reduce duplication of effort and capitalize on efforts underway, most states are using quality measures that have been approved by the National Quality Forum or national accreditation organizations such as the National Committee on Quality Assurance and the Joint Commission.  However, variation in quality and efficiency across the country remains[xvi] and a national strategy and national benchmarks coupled with the necessary resources are needed to reduce this variation and the unacceptable amount of poor quality.


[i] “State Comprehensive Access Initiatives,” Statement of Deborah Chollet, Mathematica Policy Research, Inc., before the Appropriations Committee, Subcommittee on Labor, Health and Human Services, Education and Related Agencies, U.S. House of Representatives, March 5, 2008.
[ii] Butler, P. “Including Employer Financing in State Health Reform Initiatives: Implications of Recent Court Decisions,” State Coverage Initiatives and the National Academy for State Health Policy, January 2009.
[iii] Smith, V. et al. "Headed for a Crunch: An Update on Medicaid Spending, Coverage and Policy Heading into an Economic Downturn, Results from a 50-State Medicaid Budget Survey for State Fiscal Years 2008 and 2009," Kaiser Commission on Medicaid and the Uninsured, September 2008, p. 7.
[iv] Ibid, pp. 58-59.
[v] “Dual Eligibles: Medicaid’s Role for Low-Income Medicare Beneficiaries,” Kaiser Commission on Medicaid and the Uninsured, February 2006. www.kff.org/medicaid/upload/Dual-Eligibles-Medicaid-s-Role-for-Low-Income-Medicare-Beneficiaries-Feb-2006.pdf.
[vi] “Medicaid Best Buys - Integrating Care for Dual Eligibles: Opportunities for States,” Center for Health Care Strategies. www.chcs.org/publications3960/publications_show.htm?doc_id=747565.
[vii] Center for Health Care Strategies, Presentation by Melanie Bella. www.chcs.org/usr_doc/Bella,_CHCS.pdf.
[viii] Smith, V. op. cit., p. 36.
[ix] “Report to Oregon’s Congressional Delegation,” Oregon Health Fund Board, Federal Laws Committee,
[x] “Federal-State Policy Tensions,” presentation by Dave Lucas, Office of Governor Arnold Schwarzenegger, AcademyHealth National Health Policy Conference, February 2008. www.academyhealth.org/nhpc/2008/Lucas.ppt#405,11,Federal - State Policy Tensions.  
[xi] Smith, V. op. cit., p.60.
[xii] Centers for Medicare & Medicaid Services, Letter to State Officials, August 17, 2007. www.cms.hhs.gov/smdl/downloads/SHO081707.pdf. For more information about the impact of this directive on states, see “The CMS August 2007 Directive: Implementation Issues and Implications for State SCHIP Programs,” State Health Policy Briefing, Vol. 2, No. 5, Portland, ME: National Academy for State Health Policy, April 2008.
[xiii] Smith, V. op. cit., p. 62.
[xiv] “Applicability of the Congressional Review Act to Letter on State Children's Health Insurance Program,” Government Accountability Office, B-316048, April 17, 2008 and Memorandum from the Congressional Research Service, January 10, 2008. http://rockefeller.senate.gov/press/CRSMemo01102008.pdf.
[xv] “State Health Reform Series: Strengthening State/National Partnerships to Support Delivery System Reform,” Engelberg Center for Health Care Reform, Brookings Institution, October 2008.
[xvi] Cantor, J.C. et al. "Aiming Higher: Results from a State Scorecard on Health System Performance," The Commonwealth Fund Commission on a High Performance Health Syste, June 2007.