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HEALTH REFORM: Rich Vs. Poor States: Arkansas Surgeon General On How Income Affects State Innovation

December 21st, 2007

Editor’s Note: Economists Stuart Butler of the Heritage Foundation and Henry Aaron of the Brookings Institution have different worldviews when it comes to how best to allocate scarce health care resources, but on one subject they have come to strongly agree: a way to end the political impasse in Washington [free access article] and make progress on covering uninsured Americans is for states to experiment with widely different solutions to the problem. At the recent National Congress on the Un and Under Insured, held in Washington, D.C., Butler and Aaron made a strong pitch for other states to follow in the path of Massachusetts and Vermont in expanding insurance to individuals without it. In a follow-up to their joint presentation, Arkansas’ surgeon general, Dr. Joseph Thompson, pointed out that not all states are created equal when it comes to having the necessary resources to subsidize the coverage of all of their citizens without federal support.

As public and political debate once again focuses on strategies to stabilize and expand health care coverage in the U.S., hope for state “experimentation” to succeed and subsequently inform federal initiatives is strong. Optimists applaud Massachusetts for attempting to close the gap between publicly subsidized programs (Medicaid and SCHIP) and private sector coverage—a gap nationwide of 47 million Americans. However, despite state creativity, innovation, and pressure to resolve the problems of the uninsured, a critical factor is being ignored in the strategy of state experimentation: the dramatic differences in economic resources available between states.

For over four decades, the federal government through Medicaid and more recently through SCHIP has recognized this restriction and employed differential federal matching rates for state funds—ranging in FY2008 from 50 percent for the most affluent states (Massachusetts, New Jersey, and others) to 76 percent for the most impoverished, for SCHIP with enhanced matching rates from 65 percent to 83 percent, respectively. Arkansas matching rates are 73 percent and 82 percent, respectively.

Examining current median household incomes—an important marker for state gross domestic product, taxable income, and economic vitality—reveals marked variation between states ranging from Mississippi’s $35,261 to New Jersey’s $64,169 (Arkansas is $37,420; Massachusetts is $56,236). Uninsurance rates strongly correlate with these differences in household income and are a direct reflection of families’, employers’, and states’ abilities to afford increasingly expensive coverage.

This variation in economic substrate for state “experimentation” represents what may be the greatest deficiency in the federalism strategy of state-led innovation to achieve universal coverage. It is predictable that wealthier states that also have lower rates of uninsurance are more likely to achieve substantive improvements. If successful, will the strategies developed by wealthy state (e.g., an individual mandate) work in poorer states?

Income inequality between state populations must be considered prior to vesting federal policy development upon state experiences. Failure to do so, changes the question under consideration from “What state strategies could serve as a model for the nation?” to “Which states can do it on their own?”

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3 Responses to “HEALTH REFORM: Rich Vs. Poor States: Arkansas Surgeon General On How Income Affects State Innovation”

  1. Jeanne Keller Says:

    As someone who has participated in health reform discussions and initiatives in Vermont for 25 years now, I’d like to bring some facts to the table: Vermont could not be achieving what we are achieving in low uninsured rates if the legislature were actually paying the bill for the Medicaid program and its various expansions, instead of cost shifting to private insurance plans. To wit, a recent study by the state agency that reviews hospital budgets has determined that 44 cents of every dollar that hospitals collect to cover expenses related to Medicaid and expansion beneficiaries comes from overcharges to private insurance. The state legislature has to come up with only 22 cents for every dollar of hospital benefits, and the federal match contributes the remaining 34%. Because the major private carrier in the state negotiates a “discount off charges” contract with hospitals, the cost shift is passed right through. Consequently, 14% our private insurance premiums increases in 2007 can attributed specifically to increased cost shifting, when the legilsature clawed back millions from the hospitals to balance the Medicaid budget.

    The bad policy consequences of this are manifold, among them: legislatures that fund by cost shifting don’t really know how much their Medicaid programs really cost, because state budgets underrepresent the actual outlays. Also, what incentive do hospitals have to economize when private carriers pick up the cost shift tab. Further, would the insured pay this “premium tax” to fund Medicaid if it were imposed openly, instead of covertly?

    So, Arkansas, please don’t think that Vermont is ahead on health care reform because we are wealthy, we are “doing well” only because the legislature has found a way to not pay for it, and because private insurance (and the employers who buy it) have not rebelled —- up to now.

    A new coalition of hospitals and employers has formed in Montpelier this session under the banner “Fix Medicaid First.” It’s time for the legislators who vote for these expanded benefits to pay for the promises they continue to make.

  2. Brad Kirkman-Liff Says:

    States can serve as laboratories for mechanisms and models. The ability of states to experiment with Medicaid has produced stable innovations such as Arizona’s AHCCCS and ALTCS programs which have used competition among capitated manged care plans for over 25 years. They have also produced failures such as Tennesse’s experiment with a related by different model. Many states have experimented with high-risk pools for those in the individual market whom cannot afford experience-rated coverage. The different models of subsidies and risk-pooling provide lessons for states without such programs.

    However, in the long-run, only a coordinated national apporach will provide stability to healthcare financing.

  3. David L Rabin MD Says:

    While there are major differences in the financial ability of states to enact a universal health care access law there are also insurmontable difficulties in maintaining a law, if passed, for all states. There have been at least 9 instances of states passing laws for universal or for substantially improved access for the uninsured.. None have been successful over time.
    State budgets are subject to greater variability then the federal budget. Recessions can occur in industries or agricultural products that affect state incomes while the remainder of the country may remain prosperous. Further many states have balanced budget requirements so that, in the event of revenue shortfall, state expenditures have to be cut. Medicaid and related health program expenditures make up a substantial proportion of state budgets. These programs serfve people who are politically weak and poorly organized. They are therefore vulnerable to reductions in health programs when budgets have to be reduced. Expanded access programs become a convenient target for cutting under these circumstances.
    History tells us states can not maintain ambitious health programs. It is foolish to ignore that experience and look to states to resolve the national problem of the uninsured, wide social and economic dispariites in use of services, and comparitively poor health status. While health status is only partially addressed by access, covering everyone will focus attention on the need to improve the life style determinants of health; essential to decreasing costly avoidable illness. Attempts to look to the states to resolve the problem of the uninsured is an attempt to delay consideration of access to health care and improvement in health status that other developed nations have addressed. There is no dearth of national experience in financing health care but there is a dearth of national commitment to improve access.
    Worse laying off the responsibility for reform to states perpetuates indefinately the issue of containing health care costs. These costs affect the entire population and threaten the coverage of us all. State legislatures are even more subject to interest groups then Congress and these interests have not shown a commitment to containing health care system as compared to service costs. System cost containment is not in their self interest.
    We need national not state reform to assure sustainable access and true cost containment.

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