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Health Care Policy

Last Updated: 2017

This entry examines significant health policy at the state and national levels largely since the New Deal and describes the nature of intergovernmental relations. American federalism until the New Deal has generally been characterized as constitutional federalism or dual federalism. During this period, states, local governments, and private charity took responsibility for addressing public health issues. The federal government’s role was the exception, providing services to merchant marines, veterans of the armed forces, and Native Americans. States regulated physicians and other health professionals through licensure, and in the 1930’s began regulating the emerging market of private insurance. With the exception of mental health, states did not provide direct services or health insurance.

The Great Depression and World War II created a shift in American federalism. By enhancing the role of the executive office, President Franklin D. Roosevelt helped create the modern American administrative state. The national government’s role in health policy expanded, but goals were achieved through decentralized administration that channeled funds through the states and private sector. This period is often referred to as “cooperative federalism.” Under this model, the federal government was dominant, and the states were the weaker partner lacking innovation or “particular interest in formulating policy initiatives.”

During World War II, employer-provided health insurance became exempt from taxation, and this led to the rapid expansion of private insurance. Business asked for this exemption to attract workers when the demand for labor was high and wages were fixed. Blue Cross, organized by the American Hospital Association, and Blue Shield, organized by the physician societies, dominated the health insurance field. These plans were state-based, nonprofit, and community-rated (one rate for everyone in a geographic area); paid for services on a cost bases; and were regulated by the states. The McCarran-Ferguson Act of 1945 exempted insurance companies from federal antitrust regulation if they were regulated by the state. Supreme Court rulings and this statute made it clear that Congress had jurisdiction over insurance (it almost always entails interstate commerce) and delegated this responsibility to the states. McCarran-Ferguson stated explicitly that “no federal law should be interpreted as overriding state insurance regulation unless it does so explicitly.”

Major federal spending for health system expansions occurred after the war, specifically for veterans’ hospitals, medical research, medical education, and hospital construction. Faith in science, which became prominent in the Progressive era and was strengthened by victory in war, led to physician and hospital administrator autonomy in how federal funds were spent. This was largely a supply-side strategy, providing federal resources to hospitals and doctors as well as for medical innovation in an effort to expand access to care. These funds were not spent on providing universal insurance or direct access to care. President Harry Truman attempted to pass a national health insurance plan, but was unsuccessful. Further, this massive influx of resources was not accompanied by significant regulations of the industry or progressive redistribution requirements, as was the case in most of Europe.

The Hill-Burton Act of 1946 provided $3 million to states in immediate funding to survey hospital need and $75 million a year for five years in hospital construction funds. Federal administrators had no say in how much money particular hospitals received. The program was thought progressive because it provided higher funding to states with lower per capita income. However, states could only distribute resources to communities that raised two-thirds of the funds and showed “financial viability.” Hill-Burton also included a federal requirement that hospitals provide care to the uninsured. However, the law merely stated that hospitals must provide “a reasonable volume of hospital services to persons unable to pay,” and regulations defining what this meant were not written until twenty years later.

The Kerr-Mills proposal passed in 1960 was a means-tested, state-run program for the poor and elderly. Federal funds were provided to match state expenditures with the poorer states receiving higher reimbursements similar to the current Medicaid program. However, this program was not particularly successful or popular with the states. In 1963, five of the largest states accounted for 90 percent of program funds. Significant expansions in regulation and redistribution did not take place until Great Society efforts to expand coverage and post–Great Society efforts to control costs.

In the 1960’s and 1970’s, President Lyndon Johnson created a direct relationship between local communities and the national government. Community-based care for the mentally ill, established in the late 1960’s, sent federal seed money directly to communities. Further, a series of neighborhood health centers providing direct services in the poorest communities developed out of the Community Action Program (CAP) administered by the Office of Economic Opportunity (OEO). The OEO made direct connections between the federal government and local communities, bypassing existing state and local governments and party structure. In 1967, Senator Edward Kennedy (DMA) successfully sponsored an amendment to create 100 new neighborhood health centers. Neighborhood health centers were successful in providing direct care to the most vulnerable, but the program pales in comparison to the billions more that would be spent on Medicare and Medicaid.

Medicare and Medicaid, enacted in 1965, provided access to the privately developed health care infrastructure to seniors and select people with low incomes. The programs mirrored the bifurcated welfare system established during the New Deal in which the federal government administers broad-based social insurance and the states play a more direct role in implementing less popular “welfare” programs. The Medicare program provides insurance coverage for hospital, physician, and other services to senior citizens over 65. The rules are set by the federal government, which oversees the administration by private intermediaries who pay the Medicare bills. Medicaid is for low-income individuals who meet certain eligibility criteria. It is a means-tested program administered by the states. States are not required to have Medicaid programs, but all do because it provides significant federal money. By choosing to participate, federal funding is contingent on compliance with program rules and regulations. The federal government sets the rules, but there are mandatory and optional coverage groups and covered services. States choose from these options and can also seek federal waivers to develop unique programs. To reverse an old adage, “If you have seen one Medicaid program, you have [only] seen one Medicaid program.”

Medicare and Medicaid were major expansions in health policy, initiated largely by the national government but administered and implemented under very different models of federalism. These programs represented a new commitment of the federal government beyond infrastructure to financing broad-based benefits directly to individuals (in 2015, these programs represented close to 40 percent of total health care expenditures in the country). This redistribution strengthened existing medical institutions without regulating or modifying existing organizations and power systems. Along with expanding access to care, Medicare and Medicaid provided rich funding streams for hospitals, physicians, and other health providers. Payment systems encouraged hospitals and physicians to maximize the number of procedures they did and the charges for each procedure. This was a period of rapid economic growth. Similar reimbursement incentives in the private insurance market and the rampant inflation of the 1970’s sent health care costs soaring. In response, the Nixon administration implemented a series of federally directed cost-containment strategies.

Health regulations in the 1970’s were geared primarily toward controlling rampant health care costs. Federal efforts included wage and price controls, the fostering of economic competition through the encouragement of health maintenance organizations (HMOs), mandatory certificate of need programs, and mandated health planning. States were also active during this time implementing rate-setting programs designed to control hospital and nursing home costs. President Richard Nixon also introduced a national health plan that included an employer mandate and a federal Family Health Insurance program to cover those with low income. Nixon’s wage and price controls in 1971 capped doctor’s fees at 2.5 percent annual growth and hospital charges at 6 percent (less than half the rate they had been growing). While other wage and price controls were lifted in 1973, they were maintained for health care along with food and construction, until all price controls were ended by President Ford in the Spring of 1974. This represented unprecedented peacetime federal control over the private sector.

The HMO Act of 1973 required businesses with over twenty-five employees that offered health insurance to contract with at least one qualified HMO being offered in their area. Prepaid group practice plans, newly termed “health maintenance organizations” (or, often, HMOs), were being used to foster competition and manage health care costs, but they were so loaded with requirements that they could not compete with traditional indemnity plans and grew at a snail’s pace. The HMO Act represents federal control over an insurance product that traditionally would have been regulated by the states.

The National Health Planning and Resources Act of 1974 directed states to develop certificate of need programs to evaluate the proposed construction of health care facilities. State regulation of the provision of health insurance was further weakened by the federal Employee Retirement Income Security Act of 1974 (ERISA). ERISA prevents states from regulating the activities of employer self-funded plans. Originally, this was a minor provision that impacted only the largest corporations, but over time, the number of ERISA-protected plans expanded to cover nearly 50 percent of people with private health insurance coverage. Companies can avoid state regulation by self-insuring, but retain all the advantages of having an outside insurance company.

Beginning in the 1960’s and 1970’s, states also played a more direct role in efforts to control health care costs. In 1964, New York was the first state to regulate capital expenditures of hospitals and nursing homes. By 1972, 22 states had certificate of need programs prior to federal mandates. Further, by 1980, 30 states had some form of prospective rate-setting program for medical expenses. The American Hospital Association (AHA) actually supported state regulation (some of which included weak voluntary targets) as a preferred alternative to national regulation. However, AHA support for any type of rate regulation evaporated quickly as President Jimmy Carter’s program for national rate regulation failed.

In the 1980’s and 1990’s, the number of uninsured began to rise and Medicaid became the fastest-growing state budget item. Congress inserted Medicaid expansion deep in massive end-of-the-year budget reconciliation acts to shield them from presidential veto. During this period, states also developed a number of innovative strategies to maximize federal revenue. Medicaid expansion took place through federal statute and state discretion beginning in the 1980’s and continuing into the 1990’s. These expansions took the form of federal mandates and state options. For example, mandatory expansions for low-income pregnant women and children at increasing income levels were included in the Consolidated Omnibus Budget Reconciliation Act of 1986, the 1988 Medicare Catastrophic Coverage Act, and the Omnibus Budget Reconciliation Act of 1989 (OBRA). OBRA 1989 extended coverage to these groups up to 133 percent of the federal poverty level. The Omnibus Budget Reconciliation Act of 1990 required coverage of children born after 1983 with family incomes under 100 percent of the poverty level. By 2002, all children with family incomes below the poverty level became eligible for Medicaid coverage.

States also took advantage of Medicaid options to increase coverage beyond federal requirements. Section 1902 (r)(2) of the Social Security Act gives states the ability to raise the coverage age and income level for children beyond federal requirements. By 1995, 41 states expanded eligibility for pregnant women and children beyond federal requirements. States took the initiative and expanded coverage and captured more federal money in the process. Simultaneously, the federal government allowed this expansion and mandated states to cover certain populations.

States could also alter their Medicaid programs and increase coverage through federal waivers. Section 1115(a) of the Social Security Act enables the secretary of health and human services to grant waivers from the act’s provisions for demonstration programs. These waivers allow wholesale modification of Medicaid requirements including eligibility rules, minimum benefit requirements, freedom of choice, dis-enrollment requirements, federal standards for enrollment in full-risk managed care, provider reimbursement rules, and state administration requirements. These provide significant flexibility to the states, but necessitate federal approval and are subject to federal oversight. The goal of waivers is to give states an opportunity to be innovative in meeting the requirements of the act. Waivers represent an opportunity to give states flexibility to cover more people and to promote cost stabilization, predictability, and containment. Waivers started being used more widespread in the Clinton administration, with the emphasis on expanding coverage and continued under George W. Bush. On August 4, 2001, the Bush administration introduced a new approach to waivers through its Health Insurance Flexibility and Accountability (HIFA) initiative. This provides states with flexibility to modify state programs to increase efficiencies without necessarily expanding coverage. They are still subject to federal approval and oversight. The Obama Administration like the Clinton Administration only approved waivers that expanded enrollment while meeting budget neutrality standards (the waiver will not cost the federal government more than if the state ran their traditional Medicaid program). Similarly, the Trump administration is encouraging states to submit waivers to meet its priorities such as reducing program costs, and enacting restrictions such as work requirements and drug testing in order to receive benefits.

President Bill Clinton introduced comprehensive national health care reform in 1993 with the Health Security Act. Public opinion polls showed that the American people strongly supported the goals of reform—cost containment and universal coverage. No consensus developed on the specific mechanism for achieving these goals. Because of this and a number of other factors, the plan failed. The Health Security Act included a preeminent role for the states in terms of policy development and implementation under a broad national framework. States were to design and operate “health alliances,” which would have been command posts for organizing and operating nearly every aspect of the proposed health care system. The Clinton Plan included flexibility for states, at their option, to implement a single-payer system similar to Canada’s.

Three major pieces of health legislation have passed since the failed Clinton plan: the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the State Children’s Health Insurance Program of 1997 (CHIP), and the Medicare reforms including a prescription drug benefit in 2003. Each of these programs has significant intergovernmental components.

HIPAA increased federal regulation of insurance products and privacy standards. This took place in a time characterized as devolution when Speaker of the House Newt Gingrich was advancing his Contract with America. A primary goal of HIPAA was to improve the access, portability, and renewability of private health insurance in both the group and individual market. With the private insurance sector becoming increasingly competitive, many people, particularly those with high or potentially high health care costs, were “falling through the cracks.” Workers were being forced to stay in particular jobs in order to retain health insurance coverage—so-called job lock. Insurance companies were excluding coverage for preexisting conditions, including pregnancy. Insurance companies were dropping coverage completely for individuals or businesses as their health risk increased.

Many of the states had already implemented changes in the small-group market to remedy some of these problems. This legislation was necessary primarily to extend these types of protection to federally regulated self-insured plans. The scope of HIPAA insurance reforms was diminished first by the fact that health plans could, in effect, still exclude coverage of certain companies by increasing their rates, and by weak federal enforcement and oversight. States have considerable flexibility in implementation. The HIPAA privacy standards represent significant national regulation of the health care sector from top to bottom. HIPAA has elements of both centralization (new federal authority over an area traditionally regulated by the states) and devolution (state influence, leadership, and flexibility).

The Balanced Budget Act of 1997 created CHIP, providing $20.3 billion in funding for the first five years. This act created Title XXI of the Social Security Act, which provides grants to states for the coverage of uninsured children in families with incomes below 200 percent of the federal poverty level. States that have already expanded their Medicaid programs to cover children above 150 percent of the poverty level may increase coverage by 50 percent over their current levels and be eligible for federal funds.

States may use their allotment of funds to expand coverage for children to expand their existing Medicaid program, to develop a new separate state program to cover these children, or a combination of both. If states choose to expand Medicaid, they must meet all the guidelines of this program including comparability of eligibility and benefits across the state. If states choose to develop their own program, they have some flexibility to set eligibility levels, define benefit packages, and tailor programs based on age, geographic location, or disability status.

CHIP is a matching program, whereby states draw down apportioned funding of a set pool. The matching rate is based on current Medicaid matching rates that range between 50 and 79 percent based on a state’s poverty level and financial capacity. The CHIP rate is the state’s Medicaid rate plus 30 percent of the difference between this rate and 100 percent. The rate is capped at 85 percent. The federal government will pay 65 percent of the program for more affluent states and up to 85 percent for less affluent states. Each state is eligible for a portion of this funding based on a formula taking into consideration the number of uninsured children with a family income below 200 percent FPL. The formula accounts for regional differences in state health care costs and guarantees a minimum for every state.

CHIP provides considerable flexibility to states along with enhanced funding for the coverage of children. However, the act also includes a number of federal safeguards and restrictions. Federal rules restricted state flexibility in a number of areas, including eligibility (only children meeting citizenship requirements with a certain family income not eligible for Medicaid or other insurance coverage), benefits (some variation but still had to be comprehensive), and cost sharing or payments for coverage (restricted or prohibited). In addition, states must submit detailed plans for national approval and are subject to federal audits and oversight. Because of cumulative state requirements, the program is best understood as flexibility within federally prescribed corridors.

There are also bargaining and negotiations between the federal government and the states regarding the application of federal standards to state specific circumstances. Overall the best model of federalism might be one of cooperation, but certainly not devolution. The federal government, through rules and regulations and control over how federal funds and state funds are spent, continues to play a major role in the implementation of this program.

On December 8, 2003, President Bush signed the Medicare Prescription Drug Improvement and Modernization Act of 2003 into law. This law provides a prescription drug benefit to Medicare recipients beginning January 1, 2006. Many of the states currently provide state-only programs to help seniors pay for prescription drugs and were supportive of this federal initiative. The standard benefit includes a $250 deductible, then covers 75 percent of costs up to $2,250. There is no additional coverage until a person spends $3,600. At this point, people with income below 135 percent of the poverty line have no copayments, those between 135 and 150 percent of poverty have between $2 and $5 copayments, and people with higher incomes are responsible for 5 percent coinsurance. The average premium is expected to be $35 per month. This program is means tested, providing premium support and low out-of-pocket costs to low-income seniors. This will help many states that currently have state-only programs to assist seniors with prescription drugs.

President Obama signed the Affordable Care Act into law in 2010 included significant responsibilities for state governments. The ACA expanded Medicaid coverage to all citizens with income below 138 percent of the federal poverty level. The federal government would cover 100 percent of the cost for the newly eligible scaling down to 90 percent in 2020. However, in 2012 the U.S. Supreme Court ruled that states were not required to expand Medicaid programs and this became a state option. A total of 29 states plus the District of Columbia opted for this expansion. The law also included state based marketplaces for people to purchase insurance in the individual and small group markets. These plans were subsidized on a sliding scale up to 400 percent of the federal poverty level. The federal government would create state based marketplaces in states that did not create them. In 2017, there were 28 federally facilitated state based marketplaces. There has been considerable opposition to the ACA, which was passed largely along partisan lines. Efforts to repeal and replace proposed major changes to the Medicaid program including significant funding reductions paired with state block grants and expanded state flexibility.

In 2017 the Republican led Congress and the Trump Administration attempted to repeal and replace the ACA, but was unsuccessful. However, the Trump Administration does have significant power to alter the law through executive orders, by changing administrative rules, and by what it chooses to enforce. Executive orders were signed to eliminate federal funding for cost sharing subsidies to low income enrollees, to make it easier for employers and insurers to become exempt from the requirement to provide coverage for contraception, and to sell insurance across state lines. The White House also established guidelines for administrative agencies to cut back as much of the ACA as they can through the rulemaking system. Congress is still considering efforts to repeal including block granting ACA and Medicaid funds to provide major federal budgetary savings and state flexibility. The uncertainty in the health care markets is leading to higher health care premiums and with Washington in gridlock states may again take a more central role in health policy.

SEE ALSO: Great SocietyMedicaidMedicarePatient Protection and Affordable Care Act


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