Why the States Can't Solve the Health Care Crisis

One of the enduring metaphors of American federalism is that states serve as laboratories for the federal government. States are the basement tinkerers that generate ideas to solve big national problems. They are the crucibles for testing the safety and efficacy of new ideas before the whole country adopts them. State leaders, the argument goes, are closer to the people, more sensitive to local conditions, and more attuned to real social problems than are national officials.

With medical costs zooming, over 60 million people uninsured at some time over a two-year period, and the federal government slow to act, many people -- state officials foremost among them -- are looking to the states to lead us out of the mess. Indeed, some states have tried to seize the initiative, and many are debating new measures. Hawaii and Massachusetts, which both have enacted mandates on employers to provide insurance, and Oregon, with its widely publicized but not yet implemented rationing plan, are closely watched as testing grounds for the nation.

The states cannot do it alone, however, because of fundamental impediments in the federal system. When it comes to health care financing, the states lack sufficient autonomy from the federal government, on the one side, and sufficient power over private insurers, doctors and hospitals, and businesses, on the other. Federal laws governing Medicare, Medicaid, and employee benefit plans limit the options available to the states and handicap them in dealing with health care providers and employers. Achieving both universal access and cost control -- the crux of the challenge in health policy -- is simply too big a problem to be handled at the state level, given current impediments to innovation. Despite valiant efforts, most state and federal policy makers now realize that major federal reform is a sine qua non, even for state-based solutions. Fingers in the Dike
State initiatives to deal with the uninsured are "slowly but surely filling the gaps," according to a 1990 report from the Intergovernmental Health Policy Project at George Washington University. Maine put together a package with a private health maintenance organization (HMO) that now provides insurance for about 15 percent of small businesses that previously had not offered it. Connecticut recently created a plan enabling small firms to purchase lower-cost health insurance; the price reductions come mainly from lower provider fees. Twenty-four states have created high-risk pools, which insure anywhere from 2,000 to 10,000 people who have been rejected by private insurers as too sick to insure. However, while these and other state reforms provide health insurance for several thousand formerly uninsured people, they do not touch the structural features of health insurance that create -- and will continue to create -- gaps in the first place.

At the heart of the problem is a medical insurance market that gives everyone incentives to withdraw from sharing risks. The nonprofit Blue Cross-Blue Shield plans used to treat all employee groups in a region as if they were one giant group; in effect, they aggregated and spread the cost of high-risk subscribers. In recent decades, however, insurers have increasingly sought to escape from high risks by dividing up the market. They might have competed by offering better benefit packages, claims servicing, or cost-control features. Instead, they have competed primarily by judiciously selecting their "raw materials," which in the insurance business means seeking out healthy policy-holders and avoiding sick ones.

Seeking the lowest-cost insurance plans, many employers have withdrawn from Blue Cross-Blue Shield. Instead of pooling the risks of their employees with those of other, often less healthy groups, these firms "self-insure" (that is, they assume the risks themselves and use insurance companies just to process claims), or they purchase commercial policies at prices specifically reflecting their employees' risks. Commercial insurers target young, healthy groups in their marketing efforts and, to protect themselves further, often screen potential subscribers and impose limitations in coverage, such as exclusions of preexisting conditions. Increasingly, businesses are subdividing their employees into groups with more homogeneous risks, thus reducing risk-sharing even within the firm. Premiums for employee categories within the same firm can now vary by $2,000 or more. Firms are also shifting more of their work to part-time employees and contractors, for whom they are not obligated to provide any health insurance, and they are cutting back insurance for employees' dependents. As a result of all these measures, growing numbers of people are forced to pay very high prices for health insurance and are often unable to obtain any at all.

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In one of the most widely touted initiatives to deal with this problem, twenty-six states have created high-risk pools especially for people denied private insurance for medical reasons. Since high-risk pools group together people who have or are likely to have costly diseases, the premiums and uncovered out-of-pocket costs are necessarily high. Without big subsidies, the pools simply cannot provide affordable insurance for the average person. Moreover, because the pools are expensive to operate, most states limit admissions and have long waiting lists.

The insurance pools do not avoid costs to the public. Some states subsidize the high-risk pools from state revenues; others assess insurance companies based on their pro-rata share of business in the state; and some states use a combination of these two methods. Most states allow insurance companies to credit their high-risk pool assessments against their state taxes. Since state tax revenues are thereby reduced, the net effect is the same as subsidizing the pools from state general revenues.

High-risk pools are, quite unintentionally, another force behind the collapse of risk pooling. Although subsidies from state general revenues do broaden risk-pooling (by requiring all citizens in a state to contribute to the costs of medical care for the very sick), other features of high-risk pools effectively narrow risk-pooling. First, these pools by definition admit only people who are likely to have very high medical expenditures; under this arrangement, sick people share their high costs with other sick people. Second, under the federal Employee Retirement Income and Security Act of 1974 (ERISA), employers who self-insure are exempt from state insurance regulation; the states, therefore, cannot require them to contribute to high-risk pools. Nor do these firms pay any premium taxes to state coffers, another exemption courtesy of ERISA. Hence, employers and their employees do not share in the medical care costs of the high-risk pool, except insofar as they contribute in other ways to state general revenues.

Third, by limiting entry into the pools to a fixed number of places, states are limiting the number of people who are allowed to pool their risks with the general public via the state subsidies and tax forgiveness. Last, and most important, the very existence of these pools as a lifeboat for people who have been rejected by private insurers reduces political pressure on private insurers to relax their criteria for providing coverage. By creating high-risk pools, states actually make it easier for insurance companies to continue their cream-skimming. Reforming the Small-Group Market
Many state efforts to deal with the access problem go under the heading of "small-business market reform," a strategy with support from just about everybody -- even the commercial insurance industry -- because it appears to solve the problem without costing a penny. 'If s the easiest target Congress has," Senator Jay Rockefeller told the National Journal. "If s a wonderful, glorious, multicolored, brilliant, magnificent sitting duck, and it's all free."

One approach is to exempt insurers from state legislative mandates to include certain benefits, such as mental health care, treatment for substance abuse, or maternity coverage, when they sell policies to small businesses. Conservative free-market advocates have long argued that the private insurance market could provide coverage to more people if insurance companies were not hamstrung by legislative requirements to include an enormous array of non-essential benefits. Some twenty-three states have passed permissive legislation of this sort, and another seventeen are considering bills. Of course, the bare-bones policies fail to provide coverage for services the state has otherwise deemed essential. Of fifteen states surveyed by the Intergovernmental Health Policy Project in 1991, only six would require prenatal care in a basic benefit package and only seven maternity care; only two would require coverage of Pap tests and only five mammograms; only four would require coverage of newborn children, only three adopted children, and only one children's preventive health services.

Advocates of the bare-bones approach have sold it politically by emphasizing that the savings for small employers come from eliminating frills such as in vitro fertilization, herbal therapy, and expensive cures at substance abuse rehabilitation centers. In fact, the bare-bones policies eliminate a great deal of primary and preventive care. Virtually all the stripped-down plans reduce the number of physician office visits and hospital days that insurance policies must cover, and they increase the deduct-ibles and copayments borne by policy-holders. State health insurance officials estimate that two-thirds of the savings in these plans come from higher out-of-pocket costs for the insured.

In the six states where marketing of these plans is already underway, employers are distinctly unenthusiastic. Blue Cross-Blue Shield introduced a stripped-down plan in Virginia in July of 1990, and by the end of 1991, only twenty-five firms with a total of 100 employees had bought it. In Washington State, 2,300 employees are covered under bare-bones plans, but half of these are in firms that were downgrading their plans rather than buying coverage for the first time. All in all, stripped-down benefits policies are unlikely to put a scratch in the uninsured problem.

Yet another strategy is to subsidize the purchase of health insurance. Some states, such as Maine, provide subsidies to small businesses that purchase health insurance, usually restricting the subsidizes to first-time buyers. Others, such as Washington, contract with a provider to offer subsidized insurance to the working poor. Still others market subsidized policies to special groups, such as pregnant women and children. Boosters of state-based solutions to the health insurance crisis often point to programs like these as successful demonstrations of what states can do.

Obviously, though, state fiscal realities limit the potential subsidies. With twenty-eight states now running in the red and governors everywhere cutting back services and laying off workers, subsidies for health insurance can hardly be expected to grow. (In fact, Michigan cancelled its demonstration program in 1991 because of the state fiscal crisis, and Massachusetts' program is in a stall.) Like the other state solutions, subsidies do not alter the market so as to make insurance affordable in the long run.

Some states have established re-insurance mechanisms whereby the state or a private insurer picks up the costs of expensive medical care for individuals or for employees of small-group plans. Connecticut assesses all sellers of small-group policies to finance the re-insurance, but many other states use state subsidies in addition. Re-insurance does ultimately spread the risk of catastrophic illness in small groups, but via an administratively complex (and thereby expensive) route. Reinsurance simply fragments the market, rather than aggregating expensive risks with cheaper ones.

Some state and local pilot projects take on and pay for the administration and marketing of small-group insurance in order to enable private insurers to charge small groups the same low premiums as large employee groups. This practice, too, merely subsidizes the profits of private insurers, without changing their incentives to segment the market into smaller groups.

None of these reforms addresses the real problem of the small group market: small-ness. Insurance works by aggregating risks into large pools and spreading the costs widely. Each of the so-called small-group reforms in fact enables insurers to keep the market disaggregated, and to make profits on the administration of an inherently inefficient structure.

Most of the other state innovations to deal with the access problem follow similar lines. Typical strategies, each used by several states, include creating special state pools for some uninsured workers (but not non-workers), poor pregnant women, the disabled, or children; establishing trust funds or special accounts to cover hospitals' costs of uncompensated care; and providing tax credits or subsidies to small firms who offer health insurance. Because each of these strategies addresses only part of a large systemic problem, each stopgap measure lets the overall system continue to operate -- and to continue excluding those with high risks from full protection.

The cure for lack of insurance has to be risk-pooling. Unless we create mechanisms to re-aggregate people into large groups to share the costs of health care, we will continue to siphon money into unnecessary and wasteful insurance contraptions. Barriers to State Solutions
The big problems of health care transcend state boundaries and require more political power than state governments have. The federal Medicare program is the payer for about 40 percent of hospital costs. States and community coalitions can try to do something about controlling hospital costs, but the lion's share of the costs is controlled by a lion outside their jurisdiction. Indeed, the federal government's chief cost-containment strategy for Medicare has been to use price controls and other methods to curtail its own costs, and to withdraw from sharing the costs of uncompensated care with other payers.

Medicaid accounted for nearly 14 percent of state budgets in 1990, the second biggest line item after elementary and secondary education. Although it is nominally a federal matching program for expenditures the states decide to make, in practice the states have less and less autonomy to decide what they will spend on Medicaid, let alone how they will manage the program. Federal mandates have increased the types and income-level of people states must cover, first through the federal Supplemental Security Income (SSI) program, then through mandates built into budget acts of the 1980s. What started out in 1965 as a physician and hospital insurance program for the poor has become, through the SSI program, primarily a funder of long-term care and other services for the elderly, disabled, and blind. These three groups account for about 30 percent of the Medicaid population but 75 percent of Medicaid expenditures. Poor adults and children on Aid to Families with Dependent Children (AFDC) comprise about 70 percent of the Medicaid population but account for only 25 percent of the expenditures.

As Medicaid expenditures have grown, states have covered a declining proportion of the poor. The ratio of Medicaid enrollees to the poverty population dropped from 65 in 1976 to only 42 percent in 1989. As a result, states and their county and local public hospitals are forced to pick up the tab for uncompensated care. Meanwhile, the federal government no longer shares in those costs through Medicare.

No wonder, then, that state officials feel powerless to control their programs and their budgets. An official in Tennessee complained of "state programs being turned into federal programs," and many speak of the "federalization" of Medicaid. The executive director of the National Governor's Association, commenting on its most recent survey of state budgets, says that Medicaid requirements imposed by the federal government are "devouring virtually every new dollar of revenue and leaving little money for new programs." The survey found that state Medicaid budgets are expected to rise by 116 percent in only five years. Mandates without Power
Federal rules simultaneously require states to expand their coverage of people and services and constrain their ability to control costs. States could try to squeeze hospital and physician reimbursements. But a 1981 federal rule, known as the Boren amendment after Senator David Boren of Oklahoma, guarantees hospitals and nursing homes "reasonable and adequate rates," and a 1990 amendment requires that nursing home rates take into account the cost of services necessary to provide the "highest practicable" well-being. Also in 1990, the U.S. Supreme Court interpreted the law to allow facilities to sue states for adequate reimbursement. Such suits are on the increase, and the mere threat has made states more cautious about holding down reimbursement. States are left to find budget cuts elsewhere -- in physician services, outpatient care, immunization programs and other health services not protected under the Boren amendment, and in AFDC and General Assistance programs.

For many state officials, federal restrictions on their capacity to control reimbursement are not nearly as annoying as the federal propensity to issue mandates and then fail to provide regulations for carrying them out. A section of the 1987 Omnibus Budget Reconciliation Act, for example, requires states to monitor nursing home performance by assessing residents, staff, and facilities. But even though states were required to implement the program by October 1990, the Bush Administration did not issue final regulations by then, and, even now, there are no final or even proposed regulations for some of the provisions. States must operate in the dark.

When states want to experiment with innovative ways of managing their health expenditures, they need to get a waiver from normal federal program rules. Precisely because Medicaid is a joint federal-state program, designed originally to induce states to make greater fiscal efforts on behalf of health care for the poor, it has certain national standards for state programs. These include not only eligibility conditions and minimum service packages, but other design requirements, such as offering recipients a free choice of medical provider, making all program rules applicable across the state, and using particular forms of provider reimbursement.

While often laudable and highly effective, national standards also seriously constrain the ability of states to experiment. If a state wants to conduct any kind of an experiment on a community or county level, for example, it needs a waiver from the "statewideness" requirement. If it wants to experiment with more centralized budgeting and planning by combining all revenue sources for health care, it needs waivers to include Medicare and Medicaid in its plans. Moreover, the federal government requires that all state experiments be budget neutral for the first year to qualify for a waiver.

The federal waiver process has, by all accounts, been at best a discouragement and at worst an obstacle to state innovation. Even though the 1981 Omnibus Budget Reconciliation Act encouraged states to experiment with different cost-containment strategies and authorized waivers to permit states to limit recipients' choice of providers, subsequent congressional acts and amendments gave conflicting signals to the states. The 1985 Consolidated Omnibus Budget Reconciliation Act permitted states to provide case-management as an optional service, without seeking federal waivers, and gave an extraordinarily broad definition of case-management. But when the National Governors Association surveyed state officials in 1986 about their plans to implement case-management experiments, many indicated they were "waiting for guidelines and regulations" and that they were uncertain how the federal government might interpret statutory language and administer its review of state plans.

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Perhaps the most vivid example of how the federal waiver process puts the brakes on state innovation is the current Oregon plan to deny Medicaid coverage for certain medical procedures deemed not cost-effective. Under the plan, Oregon would be the first state to manage the cost/access dilemma by explicitly refusing to fund some expensive procedures and using the savings to insure more people for primary care. Oregon leaders conceived of the plan as incremental. Initially, the service exclusions would apply only to poor adults and children in Medicaid, but not to the elderly, disabled, and blind recipients of Medicaid (nor to state employees or anyone else in the state). Since the Oregon plan calls for eliminating some services from the federally specified basic Medicaid benefit package, the state must have a waiver to implement it. After the Health Care Financing Agency (HCFA) indicated its reluctance to use its administrative authority to grant a waiver for such a major change, the state turned to Congress for a legislative waiver. Oregon hired ICF/Lewin, a national consulting firm, to write its waiver application, and turned to Senator Bob Packwood for help in Congress. The Senate Finance Committee voted in favor of a waiver, and the debate moved to the full Senate for consideration as part of the 1989 budget bill.

Once the waiver request entered the congressional arena, it became highly visible. Sara Rosenbaum, then Director of the Health Division for the Children's Defense Fund, saw inequities for poor women and children and teamed up with Representative Henry Waxman of California to oppose the waiver. National organizations such as the American Academy of Pediatrics, the National Association of Community Health Centers, and the Association of Catholic Hospitals lined up with opponents of the Oregon plan. The Oregon waiver was dropped like a hotcake from the 1989 budget bill and continues to be embroiled in national politics.

There is much to criticize in the Oregon plan [see Bruce Vladeck, "Unhealthy Rations," TAP, Summer 1991], but holding aside its merits, one dramatic lesson is surely that states are not their own masters in the making of health policy. Medicaid is the biggest state program addressing the health problems of the poor, yet federal regulations ensure that states cannot innovate without national political support.

States are so hungry for solutions to the problems of health care for the poor that they sometimes pick up an innovation before it has gotten off the drawing boards in its home state. For example, the Colorado, Ohio, and Michigan legislatures have debated proposals patterned on Oregon's. "We recognize that Oregon hasn't finished the process," an aide to a Michigan state legislator told Linda Demkovich of the Intergovernmental Health Policy Project, "but it's important that we start dealing with those same issues." The Big Sleeper: ERISA
Although never conceived as a piece of health legislation, the Employee Retirement Income Security Act of 1974 indirectly had a major impact on the American health insurance system, perhaps more than any other legislation since Medicare and Medicaid. By exempting firms that self-insure from state insurance regulation, as well as from state premium taxes, ERISA gave employers a strong incentive to exit from the commercial and Blue Cross-Blue Shield insurance markets. In 1974, self-insured plans covered only 5 percent of people with employee health insurance; now they cover over 50 percent.

The very same ERISA exemption that promoted the break-up of large risk pools in health insurance also prevents state governments from rectifying the disintegration. Because they cannot regulate self-insured businesses, they cannot reach the major insurers. This exemption has drastically curtailed the possibilities for state reforms.

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Hawaii offers the crucial lesson here. In 1974, slightly before ERISA was passed, Hawaii passed its Prepaid Health Care Act requiring employers to provide coverage at least as good as a state-defined benefit package, and to pay at least half the cost of coverage for its employees. When the state tried two years later to increase the benefit package by adding treatment for substance abuse, Standard Oil Company of California sued, claiming ERISA preempted the states from regulating self-insured companies. The U.S. Supreme Court agreed with Standard Oil in 1981. Hawaii managed to negotiate a special congressional exemption from ERISA permitting it to keep its original plan and benefit package in place, but it can make no further changes in requirements on self-insured companies. At the time, Congress made clear, too, that its one-time exception to Hawaii would be unavailable to other states.

The Supreme Court interpretation of ERISA, combined with congressional unwillingness to extend the Hawaii precedent, means that states have almost no leverage over employers. A few states are trying to craft legislation to require employers to provide health insurance without violating ERISA, by offering employers the option of "playing" or "paying." (Employers may either buy health insurance that meets state criteria, or pay into a state pool to cover people without health insurance.) So far, only Massachusetts and Oregon have play-or-pay laws on the books, and both have delayed carrying them out until at least 1995. No play-or-pay law has yet undergone the judicial scrutiny sure to come from a business challenge.

As more states have run up against ERISA in their attempts to extend health insurance, Congress has begun to face up to the problems it unwittingly created with ERISA. The HealthAmerica proposal introduced by the Senate Majority Leader George Mitchell, though primarily relying on a play-or-pay approach to expand insurance coverage, includes an option for states to experiment with a single payer system, and even offers some federal planning money and technical assistance. The bill would override ERISA. (President Bush's "Comprehensive Health Reform Program," by contrast, would actually extend the ERISA exemptions to small businesses that buy commercial insurance, thus further undercutting states' ability to regulate insurance.) Big Problems Need Big Innovators
Even if the federal government were not an obstacle, there are still reasons why states might not be able to craft and implement successful solutions to the challenges of health policy.

Probably the most widely used metaphor in health policy is the balloon. Squeeze health care costs in one part of the system and they whoosh to another. If one payer musters the power to constrain its hospital costs (say, by firmly fixing its hospital rates, as Medicare did, or by getting a state to cap its hospital rates as Blue Cross-Blue Shield did in New Jersey), hospitals shift their costs by charging more to other payers and self-paying patients. If a state manages to establish an effective means of hospital cost controls, physicians move more of their work out of the hospital to offices, walk-in clinics, and outpatient surgery centers. If states try to increase employers' share of health care costs and citizens' access to services by requiring all insurance policies to include certain benefits, employers switch to self-insurance, where, because of ERISA, they are not subject to state regulations. The lesson of the balloon metaphor is that it is impossible to regulate the health system effectively if you can only regulate a part of it.

In health policy, the fates of the key interests -- hospitals and physicians, commercial and non-profit insurers, business and state government -- are inextricably intertwined, and each player is exquisitely sensitive to proposed policy changes. Because the stakes for each group are so high, even a temporary loss seems unthinkable. From the point of view of state governments, permitting temporary losses might mean destruction of institutions -- hospitals that go out of business, physicians who flee the cities, insurers who stop writing business in the state, or employers who move their operations and their jobs out of state. In this type of political contest, one player in the system can block a proposal and effectively bring the situation to a stalemate.

States are hamstrung in part by being "only" states. In a federal system, political actors who are unhappy with a state regulation always have the possibility of exit, and the threat of exit is developed to a fine art. If a state tries to regulate insurers (and states are the only jurisdiction with authority to regulate insurers), insurers can and do threaten to withdraw from the state. Insurers used this tactic when a f ew states and Washington, D.C., tried to prohibit health and life insurers from using AIDS antibody tests, and succeeded in rolling back every state prohibition except California's ban on using AIDS tests in health insurance underwriting. When Massachusetts was trying to legislate its play-or-pay law in the late 1980s, the threat of exit by both business and insurers was an omnipresent, if usually unspoken, factor in the bargaining. States simply do not have the clout to push business and insurers around.

Threats of exit can be so potent that state policy makers are discouraged from even attempting reforms. Even states with healthy economies that have the fiscal potential and political will to increase their taxes feel impotent to proceed. The director of Maine's state planning office noted that even though states have the formal power to raise property and sales taxes, they are "constrained in how aggressive [they] can be. We can't go to a 6 percent sales tax when New Hampshire doesn't have one."

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The corollary of the exit threat in a federal system is the "magnet fear." States fear that by offering more generous benefits to the poor than neighboring states, they will actually induce more poor people to move into the state. Indiana and neighboring Illinois seem to be a case in point. Officials in both states agree that some people have moved to Indiana because its high-risk pool is easier to join than that of Illinois. Indiana has no waiting list, no ceiling on enrollments, and only a ninety-day residency requirement. Observers of Hawaii's unique program invariably note that because the state is in the middle of the Pacific Ocean, legislators did not need to worry about attracting uninsured poor people from the continent.

The striking thing about all the "universal access" reforms is that they are conglomerations of different insurance plans, with multiple insurers, eligibility rules, benefit packages, and arrangements with providers. It is common wisdom now among health policy analysts that such aggregations generate huge administrative costs to pay for all the personnel and paperwork necessary to keep everybody and everything sorted into its proper compartment. Steffi Woolhandler and David Himmelstein estimate that as of 1987 $96 billion to $120 billion, or 19 to 24 percent of annual health expenditures, went to administrative expenses, including insurance overhead, hospital and nursing home administration costs, and physician billing costs. These estimates do not include the costs of burdensome paperwork that patients, especially Medicare recipients, must perform.

Large public insurance programs are notably more efficient than the fragmented U.S. industry. While overhead for the U.S. private industry has been estimated at 11.9 percent of premiums, the Social Security Administration spends about 2 percent of its revenues on overhead, and the national insurance system in Canada only 1.2 percent. Other nations with unified insurance programs (Canada, Britain, Sweden, Japan, France, and even Germany with its 1,100 sickness funds) manage to provide greater access to health services for far less money. Who Champions the States?
Our health policy system is federally dominated, notwithstanding the reigning ideology that celebrates state and local innovation. All the vibrant hustle-and-bustle of health insurance reform at the state level is testimony to the optimism and dedication of state officials, not to mention dire necessity. But no one should be lulled into thinking states can control all the pockets of the health care cost balloon or reconstitute the splintered insurance market into a viable, large risk pool.

States cannot hope to curtail harmful insurance underwriting practices unless they band together -- or unless the federal government does it for them. As long as they continue to fund high-risk pools, subsidies to small businesses or uninsured individuals, and special insurance plans for special constituencies, they only contribute to the fragmentation of risk pools, thereby enabling insurers to continue using risk-selection as their prime cost-saving strategy, and fostering the expansion of administrative costs.

Even the President's plan, otherwise an ode to free markets, recognizes the inability of states to halt the erosion of risk pooling. The plan proposes a federal prohibition on some of the worst industry risk selection practices: cancelling policies once the holders become sick; refusing to insure sick members of small employee groups; and excluding coverage for preexisting conditions. The plan would also put some limits on insurers' ability to differentiate prices according to people's health status, although it is vague on how the limits would work. Still, the transfer of even that much jurisdiction over insurance to the federal government is remarkable for an administration committed to reducing federal regulation.

If the Bush plan recognizes the need for greater state clout over insurance industry practices, it is not inclined to enhance state power vis-a-vis business. As already noted, it would extend the ERISA exemptions to small businesses, removing more of the insurance market from the reach of state regulation. Of course, conservatives think state-mandated benefits are the major cause of lack of coverage, so releasing business from their grip should be a good thing.

However, the President's plan is nearly silent on what benefits would have to be included in the basic package it would extend to people through tax credits and small group reforms. The few illustrative examples of basic benefit packages, which are carefully billed as examples, not requirements, include plans that provide only three physician visits a year or only fifteen hospital days a year, and plans that make no mention of maternity and prenatal care or of prevention. Under the President's plan, states may not be able to guarantee access to insurance worth having.

In theory, states should be an ideal jurisdiction for large health insurance risk pools, but to carry out serious reform in the face of the existing insurance system, the states need federal legislation to empower them. Without jurisdiction over self-insured employers or the clout to clamp down on insurance selection practices, the states can only tinker. The idea that the solution to the health care crisis will appear in the states, as if they could act on their own like true "laboratories of democracy," is a fantasy.

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