11.16.09

Returning to the Articles of Confederation?

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A week ago the House of Representatives adopted HR 3962, the “Affordable Health Care for America Act.” In the very near future, the Senate will begin consideration of some version of the “America’s Healthy Future Act” or the “Affordable Health Choices Act.” Although we do not know the exact language of the Senate bill, its broad outlines are quite clear because the bill will be a combination of the Senate Health, Education, Labor, and Pensions (HELP) Committee and Finance Committee bills, which share important similarities. The basic approaches of the House and likely Senate legislation, like their titles, will also share significant common features–regulatory reform to end the denial of insurance based on risk, exchanges to promote insurance competition and availability, and mandates and subsidies to expand coverage. Nevertheless, the House and Senate bills will also differ in very significant respects. The most important of these, I would argue, is their approach to federalism–the relationship that the legislation will create between the federal and state government in implementing health care reform.

In this respect the bills could not be more different. The House bill contemplates a respectful partnership between the national and the state governments. HR 3962 creates a new federal agency, the Health Choices Administration (HCA), which, together with the Departments of Health and Human Services, Labor, and Treasury would have primary responsibility for administering the regulatory and subsidy programs established under the bill. The insurance reforms would be adopted as federal law and would be enforced by the HCA in conjunction with HHS, Labor, and Treasury. A national exchange would be established by the HCA, which would be responsible for negotiation and enforcing agreements with insurers to ensure that they met participation requirements. A national public plan will be established.

The House bill also, however, recognizes the continuing role of the states in regulating insurance. The federal law would not supersede state laws except insofar as they came in conflict. The HCA would be responsible for consulting and coordinating with the states. The federal government would conduct insurance compliance audits in cooperation with the states, and state attorneys general could enforce the federal law. State law remedies against health insurers would be preserved. States would have input into the definition of the essential benefit package, could decide whether to enter into interstate insurance compacts, and could even operate their own exchange if they met federal requirements. The federal law will form a floor, not a ceiling. States will remain responsible for protecting their citizens, and will be allowed to do so as long as they do not come in conflict with the federal reforms.

The Senate bill, on the other hand, is likely to adopt the hierarchical arrangement represented by the Senate HELP and Finance bills. Congress would adopt a law establishing insurance reforms and an exchange framework and then require the states to implement the law. The Senate Finance bill, for example, begins “. . . each State shall provide that each health benefits plan which is offered in the individual or small group market shall be a qualified health plan.” The phrase, “each State shall” appears repeatedly throughout the bill, seventeen times in the Finance Committee Bill: “Each State shall” establish rating areas, adopt risk adjustment models, adopt federal insurance standards, establish insurance exchanges, and much else.

The primary responsibility of the federal government under the Senate bills, on the other hand, is to monitor state compliance with the law. If HHS determines that a state has failed to implement the federal reforms, for example, HHS will implement the reforms itself directly “until such time as the Secretary determines that the State has adopted and is substantially enforcing the requirements. If a state fails to establish an exchange, the federal government will, under the Finance bill, contract with a nonprofit entity to do so. Basically, Congress will adopt the law, require the states to implement and enforce it, and then constantly look over their shoulders to see if they are doing it right.

There are several reasons why the House approach is significantly preferable to that of the Senate. First, we have tried the Senate approach and it has not worked very well. Indeed, it was the basic approach of the Articles of Confederation, which we rejected as unworkable in adopting our current Constitution. In New York v. United States, one of the Supreme Court’s most extensive considerations of the relationship between the federal and state governments, Justice O’Connor described this experience at length:

Under the Articles of Confederation, Congress lacked the authority in most respects to govern the people directly. In practice, Congress “could not directly tax or legislate upon individuals; it had no explicit “legislative” or “governmental” power to make binding “law” enforceable as such.” . . .

The inadequacy of this governmental structure was responsible in part for the Constitutional Convention. Alexander Hamilton observed: “The great and radical vice in the construction of the existing Confederation is in the principle of LEGISLATION for STATES or GOVERNMENTS, in their CORPORATE or COLLECTIVE CAPACITIES, and as contra-distinguished from the INDIVIDUALS of whom they consist.” . . . As Hamilton saw it, “we must resolve to incorporate into our plan those ingredients which may be considered as forming the characteristic difference between a league and a government; we must extend the authority of the Union to the persons of the citizens – the only proper objects of government.” . . . The new National Government must carry its agency to the persons of the citizens. It must stand in need of no intermediate legislations. . . . The government of the Union, like that of each State, must be able to address itself immediately to the hopes and fears of individuals.” . . .

The Convention generated a great number of proposals for the structure of the new Government, but two quickly took center stage. Under the Virginia Plan, as first introduced by Edmund Randolph, Congress would exercise legislative authority directly upon individuals, without employing the States as intermediaries. . . . Under the New Jersey Plan, as first introduced by William Paterson, Congress would continue to require the approval of the States before legislating, as it had under the Articles of Confederation. . . . One frequently expressed objection to the New Jersey Plan was that it might require the Federal Government to coerce the States into implementing legislation. As Randolph explained the distinction, “[t]he true question is whether we shall adhere to the federal plan [i.e., the New Jersey Plan], or introduce the national plan. The insufficiency of the former has been fully displayed. . . .

In the end, the Convention opted for a Constitution in which Congress would exercise its legislative authority directly over individuals, rather than over States; for a variety of reasons, it rejected the New Jersey Plan in favor of the Virginia Plan. . . . This choice was made clear to the subsequent state ratifying conventions. Oliver Ellsworth, a member of the Connecticut delegation in Philadelphia, explained the distinction to his State’s convention: “This Constitution does not attempt to coerce sovereign bodies, states, in their political capacity. . . . But this legal coercion singles out the . . . individual.” . . . Charles Pinckney, another delegate at the Constitutional Convention, emphasized to the South Carolina House of Representatives that, in Philadelphia, “the necessity of having a government which should at once operate upon the people, and not upon the states, was conceived to be indispensable by every delegation present.” . . . Rufus King, one of Massachusetts’ delegates, returned home to support ratification by recalling the Commonwealth’s unhappy experience under the Articles of Confederation and arguing: “Laws, to be effective, therefore, must not be laid on states, but upon individuals.” . . .

In providing for a stronger central government, therefore, the Framers explicitly chose a Constitution that confers upon Congress the power to regulate individuals, not States. As we have seen, the Court has consistently respected this choice. We have always understood that, even where Congress has the authority under the Constitution to pass laws requiring or prohibiting certain acts, it lacks the power directly to compel the States to require or prohibit those acts. . . (505 U.S. 144, 163-166 (1992)).

Of course, the approach chosen by the Senate committees–offering the states the option of enforcing the federal law themselves or to have the federal government enforce it directly, is constitutional; the Court recognized this in the New York case. But it is not wise. It puts the federal government in a position of regulating the states, either continuing looking over their shoulders to make sure they are doing a good job, or, alternatively, abdicating its responsibility to protect its own citizens, leaving the states to do whatever haphazard job they in fact do at reforming health care. It was precisely to avoid this situation that we created a national government.

Imagine for a moment the following scenario. Congress adopts the Senate approach. HHS drafts regulations to implement the exchanges. The states are invited to implement exchanges in compliance with the guidelines. A state agrees to do so. It receives federal start up funds. The state then proceeds to implement the exchange through an approach that totally fails to comply with the federal statute and guidelines, or attempts to comply but does a totally inadequate job, resulting in a failed program. The federal government realizes that the program is failing. Will it in fact step in to terminate the program and replace it with a program run by a nonprofit? The whole situation will be terribly awkward. Most likely the federal government will instead allow the exchange to limp along, preferring to let health care reform fail rather than step in to deal with a recalcitrant or ineffective state.

We are not writing on a clean slate here. Congress used the fallback approach, with decidedly mixed results in 1996 when it adopted the portability provisions of the Health Insurance Portability and Accountability Act. HIPAA invited the states to adopt reforms in the group insurance market (guaranteed issue and renewability and limits on pre-existing conditions exclusions) and individual insurance market (guaranteed issue and limits on pre-existing conditions clauses under some circumstances and guaranteed renewability). HHS was designated to ensure that states implemented each of these specific requirements and given “fallback” authority to implement the requirements itself against insurers in states that failed substantially to implement any of the requirements or in states that in fact refused to do so. States were given alternative means of implementing the individual mandate, such as the creation of high-risk pools.

State compliance with HIPAA requirements was not uniform and some states failed to comply altogether, undermining the effectiveness of the law. Most states had already implemented the group market reforms and those that had not already done so adopted them quickly. The states had been much less active in regulating the individual market and a number of states failed to implement these reforms. Most states that did implement them chose one of the options permitted by the law other than the federal fallback position. Some states, however, simply did not comply. Some of these states notified HHS that they did not intend to comply with the law themselves, but helped HHS to enforce the federal fallback requirements. Others notified HHS that they would not comply at the very last minute before HHS enforcement was to begin and offered HHS no assistance with implementation. Finally, some states simply did not implement parts of the law but failed to communicate this to HHS, leaving HHS uncertain as to how to proceed.

Implementation of the law by HHS was slow and uneven. Repeated GAO reports criticized HHS for its failure to enforce the law and implement the federal fallback requirements. Eventually after more than a decade, compliance was nominally achieved in all states. Testimony presented to the House Oversight Committee last year, however, revealed that compliance oversight at HHS has largely ceased. The four-person office at HHS responsible for compliance relies solely on complaints, and had received only five complaints in the five years previous to the hearing. Blatant violations of the individual plan guaranteed renewal provisions widely reported in the press had been completely ignored by HHS. In a number of states, that is, the HIPAA approach failed. Regulating states is simply a very difficult task for the federal government. Is this the future we want for health care reform?

A final consideration is the fact that, as noted in an earlier post, a number of states are actively opposed to implementation of the federal health care reform. Several states are considering adopting laws or constitutional amendments to block health care reform efforts. From a constitutional perspective these efforts are futile. From a policy perspective, however, they speak volumes. Why would Congress possibly turn to the states to implement its reforms in the face of such resistance?

Undoubtedly supporters of the Senate approach believe it to be more affirming of state’s rights. In fact, however, it would be very destructive of federal and state relations, and a wholly ineffective and inadequate approach to implementing health care reform. The House approach is likely to result in a much more harmonious relationship between federal and state regulators, and a much more effective health care reform.

The federal legislation should create a floor, not a ceiling. States that want to go further than the federal law in protecting their residents should be allowed to do so. Reforming health care should be a cooperative effort. But states that want to drag their feet should not be allowed to drag reform down with them.

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Comments

Mark Hall says:

I hesitate to sound any note of disagreement with Tim’s elegant and scholarly support for direct federal insurance regulation, since in the end I agree that this clearly would be the best course. However, I believe that a federalist solution is defensible as a policy compromise. My major source of disagreement is in the lessons I’m inclined to draw from HIPAA’s complicated approach to insurance market regulation.

I view HIPAA’s insurance provisions as a fairly successful approach to federalism – one that preserved states’ authority to tailor insurance regulations while adhering to a federal minimum standard. Certainly, there were shortcomings in some states, and a shortage of federal enforcement resources, but on the whole the scheme worked well enough.

States were given the choice of either enacting conforming laws or allowing direct federal regulation. By the 1-year deadline for action, virtually all states were in compliance, through either enactments, or by facilitating direct federal regulation. Only 2 states initially failed to enact small group market reforms, and 6 others failed with respect to individual market reforms, but about half these states facilitated direct federal regulation, leaving only a few that initially were partially uncooperative. Since then, all states have substantially complied, and as Tim notes, HIPAA noncompliance by states has generated few complaints.

The major problems with HIPAA implementation in the states were its complexity, and the miniscule resources devoted to federal enforcement. Direct federal regulation takes considerably more effort than monitoring state compliance, and HHS was barely equipped to do only the monitoring, at most. Noting the resources needed for direct enforcement of HIPAA in only a few states underscores how many more resources would be needed for direct federal regulation nationally.

Still, federal regulatory resources would be worth the cost. Regardless of whether one reads HIPAA’s history as a halfway success or halfway failure, I agree that uniform insurance standards would be better. Although the most effective route is direct federal regulation, if preserving a substantial continuing role for state regulation is a necessary political compromise, so be it.

[…] and Health Insurance Regulation Responding to Tim’s excellent post on the state’s role in implementing health insurance reform, here are my thoughts about lessons to draw from the […]

[…] Our experience of implementing HIPAA should give us pause in pursuing this route.  While the HIPAA group insurance reforms were implemented smoothly, implementation of the individual market reforms encountered problems.   Moreover, the Senate approach puts the federal government in the very awkward position of regulating the states, which in turn must regulate insurers.  Some states will implement the law enthusiastically, but a number of states have already indicated their  lack of support for reform.  Depending on the states to get the job of reform done risks implementation delays.  In some states the reforms may not be implemented at all.  Unless an administration is in place in 2014 that is deeply committed to pushing recalcitrant states aside and taking direct action, it is likely that the reforms may never be implemented adequately throughout the country. […]

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The views reflected in this blog are those of the individual authors and do not necessarily represent those of the O’Neill Institute for National and Global Health Law or Georgetown University. This blog is solely informational in nature, and not intended as a substitute for competent legal advice from a licensed and retained attorney in your state or country.

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