Replacing the ACA should begin with the states

With federal progress on reforming the law unclear, states could move into a primary role.

By Yevgeniy Feyman

We are now into the eighth year of Republicans beating the anti-Obamacare drum. Yet in 2017, with the White House, the House and the Senate under GOP control, the possibility of eliminating the Affordable Care Act is real. Already, several ideas that repeal — some of which also replace — the ACA have been put forward by legislators.

The reality, however, is that wholesale repeal without a substantive replacement plan may not be the best approach. Fortunately, the ACA contains within itself a basic framework for altering the law and identifying what works best. Recent proposed legislation builds on this possibility and represents one of the most interesting policy ideas in recent memory.

To understand this framework, it’s important to understand how much the ACA relies on states and other local actors, including hospitals, to carry out its directives. State Innovation Waivers (also known as 1332 waivers) are particularly strong examples of the ACA’s hidden federalism. These waivers permit states to waive various parts of the law, including the individual and employer mandates, the law’s subsidy structure, and the exchanges themselves. In turn, states would receive the waived funding as a block grant and can develop a different set of regulations and rules of the road, so long as they provide equivalent protection to beneficiaries, cover at least as many people as the ACA, and remain deficit neutral.

Additionally, the law established a process by which to submit both 1332 waivers and Medicaid waivers together, suggesting the administration would evaluate the effects of both waivers simultaneously.

These waivers weren’t perfect. Indeed, there were many parts of the ACA that couldn’t be waived, such as the law’s restrictions on insurance premium variation and various employer-market changes. But the Obama administration made 1,332 waivers even less attractive by amending prior guidance to deficit neutrality provisions, requiring that it be evaluated in a silo — meaning, that if a state wanted to spend more money on its Medicaid population and less on its privately insured population, the proposal would not pass muster.

This, of course, makes little sense. The federal government should be agnostic about where savings come from as long as it all balances out in the end. An immediate change that the Trump administration should undertake is clarifying that deficit neutrality, for the purposes of these waivers, will be evaluated across all affected programs.

But changes from the executive branch are necessarily limited. The waivers are also restricted by the ACA itself. This, ultimately, is why legislation is needed to give states the flexibility to experiment.

Fortunately, it appears that policymakers are listening. Indeed, the Patient Freedom Act — proposed by Sens. Bill Cassidy, R.-La., Susan Collins, R-Maine, Shelley Moore Capito, R-W.Va., and Johnny Isakson, R-Ga. — attempts to do just that. The proposed legislation would give states one of three options, which include keeping the ACA as-is or taking a block grant of the exchange and Medicaid funding to distribute among those who would otherwise be eligible for either program.

This implicitly acknowledges that different approaches will work best for different states, while still attempting to standardize both tax credits and Medicaid eligibility differences between states. Of course, the bill isn’t perfect. Under current language, it appears that tax credits wouldn’t be adjusted for income; it would make sense to provide more assistance to those who truly need it. But to the proposal’s credit, it also acknowledges that there is more to health outcomes than insurance coverage and includes a population health block grant to states as well.

Policymakers and analysts should take this proposal seriously and consider it on its merits. Sending greater authority to states, with appropriate safeguards for vulnerable populations, can be a powerful way forward on health policy. It would allow the New Yorks and Vermonts of the world to pursue progressive reforms, while allowing other states to potentially experiment with more consumer-driven approaches.

Learning by doing is the only way we can truly develop a patient-centered healthcare system.

Yevgeniy Feyman is an adjunct fellow in health policy at the Manhattan Institute and author of the new report, “State Waivers: A Federalist Rx for Obamacare Ills. A version of this piece originally appeared at the Washington Examiner.