Rising insurance premiums, lack of access, uncertainty, and commotion around Affordable Care Act (ACA) repeal, have all contributed to the growing discontent and unease surrounding health care reform. Pressure to act continues to mount. Insurance titans Humana, United Healthcare, and Aetna have all rolled-back participation on the ACA Marketplaces. Anthem recently announced that it would exit the Ohio health insurance Marketplace, potentially leaving at least 18 counties without an exchange plan next year. Missouri and Washington State are also facing similar Marketplace participation issues. States such as Alabama, Arizona, Illinois, Kansas, Minnesota, Oklahoma, Pennsylvania, and Tennessee have seen individual market exchange premiums increase more than 45 percent since 2016. Furthermore, participating exchange plans are asking for steep rate increases for next year—averaging between 11.1 percent and 44.7 percent.

These events have contributed to an economic and political climate ripe for disruptive legislation. While Congress and the current administration pursue solutions to address premium and access issues, more states are inserting themselves in the conversation. More than a dozen states have explored options to leverage federal 1332 and 1115 waivers, which would provide flexibility to develop market stabilizing programs and regulatory changes to their respective individual and Medicaid markets. More recently, a few state legislatures have leap-frogged one-off programs such as reinsurance or high-risk pools, and sought to create a truly different market structure. Three states’ legislatures, California, New York, and Nevada, have developed high-profile state-driven solutions to address consumer access and price-related concerns. While state-led waiver initiatives such as those from Alaska and Oklahoma are meant to provide an incremental stabilizing force to their respective markets, the models that California, New York, and Nevada legislatures proposed could fundamentally reshape the framework of state health markets more akin to what Massachusetts did 11 years ago.

State Models

These state legislative developments are essentially falling into two camps, termed “state single payer” and “Medicaid buy-in.” State single payer describes almost any system that creates a single coverage mechanism for health care that is administered through a centralized authority. California and New York fall into this first bucket. The Medicaid buy-in proposal that the Nevada legislature approved did not expand the Medicaid program to everyone, but it attempted to leverage the structure and negotiated rates of the Medicaid program to enable commercial insurance carriers to replicate these features in the private market.

California

On June 1, 2017, the California State Senate passed SB 562 23-to-14, creating what is known as “Healthy California”—a program intent on eliminating the segmentation of the health insurance market into different coverage types such as Medicare, Medicaid, employer-sponsored, and individual insurance. Instead, there would be a single health care market for everyone. The benefits would be simplified as individuals would not be subject to premiums, copayments, or deductibles. Medical, pharmaceutical, dental, vision, and long-term care would be provided to all residents—including undocumented immigrants—free of charge. The state would seek to pay providers Medicare rates, and a nine-person panel would administer the program.

Experts estimate the program would cost approximately $400 billion per year—double California’s current budget. California could cover about $200 billion from current federal and state spending—including Medicaid and Medicare. An additional $100 to $150 billion would come from what employers are already spending. The additional funding needed could involve a 15.0 percent payroll tax, a 2.3 percent sales tax, and/or a business tax increase.

On Friday, June 23, Assembly Speaker Anthony Rendon decided to hold the bill within the Assembly Rules Committee until further notice. While Rendon’s actions did not entirely kill the bill, it will not be revived until next year. The bill may have a stronger prospect for passage next year if more thoughtful attempts to address financing, care delivery, and cost controls emerge.

New York

On Tuesday, May 16, the New York State Assembly passed a bill (A.5062) that resembles California’s in several core ways. Universal statewide coverage would be provided throughout the state, and enrollees would no longer be subject to out-of-pocket costs or network restrictions. This is the fourth time in recent history that the State Assembly has passed a similar bill.

The savings or costs—depending on who you talk to—range anywhere from $45 billion in savings to a need for $225 billion in tax increases. A hike of approximately $90 billion in annual new tax revenue appears to be the consensus estimate. Identified funding sources would be progressive payroll taxes and/or non-earned income tax increases.

Nevada

Nevada’s State Assembly and Senate recently passed a bill that was unique in its own merits but not quite as transformative. AB374—known as “Sprinkle care”—after its namesake State Rep. Mike Sprinkle (D) who introduced the bill—focused reforms solely on the individual insurance market and directed the state to contract with insurers to offer a commercial health plan based on the state’s Medicaid coverage. Employer-sponsored insurance and Medicare would have been maintained, but a commercial insurance product resembling the state’s Medicaid coverage would have provided consumers a new option. The plan would have offered a different benefit structure and leveraged the state’s lower Medicaid reimbursement rates.

On June 17, Nevada’s Republican Governor, Brian Sandoval, vetoed the bill hours before it would have become law. The bill’s failure may speak more to its hasty drafting than its potential to serve as a roadmap for future legislation. While Gov. Sandoval expressed concerns of moving too fast too soon without solid factual foundations, a more thoughtful version of Nevada’s plan could serve as a model for future legislation within Nevada or other states.

Exhibit 1 below outlines and distinguishes the three models.

Exhibit 1: Distinctions Among the State Models

 CaliforniaNevadaNew York
Cost$400 billion per year; $200 billion outside current state and federal spendingUnclear$90 billion in annual new tax revenue
Proposed funding source15.0% payroll tax; 2.3% sales tax; business tax increasePossible use of federal income tax creditsProgressive payroll tax; non-earned income taxes, for example capital gains
Administration of benefitsStatePrivate sectorState
Employer-sponsored insurance continuesNoYesNo
Medicare and Medicaid continue as separate programsNoYesNo
Reimbursement ratesMedicarePossibly MedicaidMedicare
1332 waiver neededYesYesYes
1115 waiver neededYesUnclearYes

Possible Implementation Scenarios

First off, it’s important to note that any single-payer model proposed by California and New York are likely years away from implementation as significant market restructuring and government infrastructure would need to be in place to enact such a drastic shift. Nevada proposed its solution be implemented in 2019, which was aggressive given that much of the plan’s details were not fully developed (the original bill is only four pages).

We foresee three potential scenarios playing out across the state legislative movements: limited adoption, a Massachusetts-like scenario in which the federal government uses a state’s plan as a blueprint for national reform, or nothing happens at all.

Under the limited adoption model, a state such as California passes a single-payer model, and other like-minded and potentially neighboring states adopt similar models over time. For example, one could envision California passing a bill that Oregon and Washington later adopted and tweaked according to the needs of their specific populations. Further adoption would be limited, however, given many states’ reticence to increase taxes, adversely affect their labor markets, and abandon private-sector solutions.

In a Massachusetts-like scenario, a state such as New York, California, or some other state adopts a single-payer model that serves as a template for a federal single-payer approach. Just as Massachusetts provided a roadmap for the ACA’s enactment, a trailblazer state could provide a workable model for an expanded federal government single-payer program.

A final scenario assumes that states either do not pass single-payer or other disruptive models given consumer and business community pushback or the Centers for Medicare and Medicaid Services does not grant federal waivers necessary to implement the programs. As to the latter point, there will be a host of regulatory hurdles and waiver applications necessary under any of these models, and getting approval could be challenging despite the prospect of increased waiver flexibility within the current administration.

Let us consider Nevada, given that it was likely the least disruptive of the three proposals. The designation of a commercialized Medicaid policy as a Qualified Health Plan and the potential application of federal tax credits toward such a product may have required the use of Section 1332 to apply for a State Innovation Waiver. Alternatively, current federal law prohibits a state from using federally matched Medicaid funding to reimburse a health care provider for services provided to a person who earns more than 138 percent of the federal poverty level or for other expenses that are unrelated to the administration of Medicaid. To the extent that the Nevada Care Plan relied on state or federal Medicaid dollars, the state may have also needed to consider applying for a Section 1115 or similarly oriented Medicaid waiver. These waivers were never crafted, and it’s unknown if the current administration would have been receptive to these changes.

At least for the short run, the “nothing happens” scenario has a high probability of playing out. Other states have tried and failed to create single-payer systems in the past. For example, consider the original Washington State effort in the early 1990s, Vermont’s attempt a couple years ago, and Colorado’s failed ballot measure last year.

Potential Local And National Impact

What would happen to markets if states passed legislation resembling any of these models? The answer depends on the model. In the California and New York scenarios, private insurance companies and brokers would cease to operate within the state. If a single-payer model spread to other states and/or the federal government, then the insurance and brokerage markets would be decimated. It is beyond this post’s scope to discuss in meaningful detail consumer implications associated with the various models. One thing is certain, consumer premium, coinsurance, and copayment responsibilities would either drop completely or be heavily reduced. Accessibility would improve in the sense that more people would have coverage, but it would also depend on agreed reimbursement rates and the percentage of providers who would be willing to accept new patients. Even if a state passed legislation, implementation could eventually become unworkable as was the case in Vermont.

In a Nevada-like scenario, private payers would continue to compete for Medicaid insurance lives as the state leverages aspects of the Medicaid program to reform commercial markets. Brokers would continue to sell group and individual market plans. Employers would continue to offer insurance, although fewer would likely offer over time given the tax advantages associated with qualified small employer health reimbursement arrangements.

Regardless of what scenario occurs, the broader industry trend of states engaging in thoughtful attempts to innovate amid difficult market conditions is one that will likely have broader impacts across the country. While the US health insurance system is unique in its reliance on the private market to facilitate and manage health care coverage, much of the regulatory construct of the market is still shaped by the federal government. As more states seek to develop their own unique systems and solutions, we appear to be in a time where states are truly the laboratories of health care policy.