Editorial: The false promise of state-based health insurance markets reform

News leaks from last month's Republican congressional retreat revealed there's a growing concern that precipitous change to the individual health insurance markets created by Obamacare will trigger their collapse.

GOP backbenchers worry that former Secretary of State Colin Powell's invocation of the Pottery Barn rule, issued just before the invasion of Iraq, will apply: If you break it, you own it.

The vestigial moderate wing of the GOP is attempting to come up with what on the surface looks like a compromise. Unfortunately, it can't work—not unless the majority party is willing to put money behind it comparable to funding for the Affordable Care Act.

The likelihood of that happening is not one of former Defense Secretary Donald Rumsfeld's unknown unknowns. Short answer: very unlikely.

The Patient Freedom Act, introduced last month by Sens. Bill Cassidy (R-La.) and Susan Collins (R-Maine), would leave it to states to decide how and whether they should move toward universal health insurance coverage.

They could keep Obamacare, which in theory would be music to the ears of blue states like California, New York and Massachusetts. Or they could pass a plan like those touted by House Speaker Paul Ryan, whose vision for universal access (not coverage) entails the voluntary purchase of “affordable” high-deductible plans linked to health savings accounts. Or they could do nothing at all, presumably an attractive option for many of the 19 states that never expanded Medicaid.

The plan is designed to win enough Democratic support to get 60 votes in the Senate, which is necessary to pass any ACA replacement. “Now you can say to a blue-state senator who is invested in supporting Obamacare, 'You can keep it, but why force it on us?' ” Cassidy told the news conference where he unveiled the bill.

Here's the problem. No state can afford to run an individual exchange without massive subsidies from the federal government. Massachusetts' Romneycare reform, the model for the ACA, relied on a very generous Medicaid waiver to make its individual plans affordable.

Moreover, prior to its 2006 passage, Massachusetts had one of the lowest uninsured rates in the country at about 9% (where the nation is now thanks to Obamacare). That made the overall cost of the plan much less than would be the case in states with greater economic distress, less generous employers, or both.

Even if a state tried to set up its own version of Obamacare by imposing some or all of the taxes that supported the national program (it could tax high-income individuals, drug and device companies, insurers and hospitals), that would still leave the program highly vulnerable in recessions.

Unlike the federal government, states can't run deficits. A recession would trigger sharp cutbacks in state-based health insurance coverage, exactly what you don't want in a downturn when maintaining coverage acts as both a safety net program for the newly uninsured and a countercyclical economic stabilizer.

And do not underestimate the political challenges in setting up a successful state-based reform program. Advocacy groups for low-income families would lobby for all the coverage benefits included in the ACA and more. Vermont's single-payer plan sank because of the level of taxation needed to support plans whose actuarial value exceeded the platinum plans on the national exchange.

But the ultimate challenge for every blue-state legislature would be raising the necessary taxes, especially if the Republican Congress simultaneously converts Medicaid—the largest component of many states' budgets—to block grants. That would put tremendous downward pressure on coverage benefits and already low provider payments since there would now be two major healthcare programs divvying up a limited fiscal capacity.

The Cassidy-Collins bill isn't a pathway to a two-tier health insurance system that pits blue-state models against red-state models. It will lead to a two-tier health insurance system that provides limited coverage and high deductibles for the less-well-off in every state.