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Obama's Health Beast Squashes State Experiments

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
March 31, 2010


State attorneys general are filing lawsuits seeking to prove President Barack Obama's health-care plan is unconstitutional. The litigation takes the spotlight away from something else about the states that matters.

It is that states can be laboratories where the country experiments to ascertain which mix of taxes, incentives and public administration works best when it comes to health care.

Obamacare threatens such experiments by superseding them. In doing so, the new federal program deprives the country not only of the experiments themselves but also of evidence that might cast doubt on the promises of the new legislation.

In few states is the change as dramatic as in Indiana. Several years ago Republican Governor Mitch Daniels and the legislature began wondering about the same questions that preoccupied the framers of Obama's health-care plan: why so many of the uninsured mob hospital emergency rooms, why citizens turn their backs on preventive medicine, why health-care spending expands, and how you get Americans to be aware of health-care costs.

In response, Daniels's team created the Healthy Indiana Plan, known as HIP. It was billed as subsidized insurance for low- and middle-income Hoosiers: citizens who suffer from catastrophically expensive illnesses get coverage subsidized by state and federal dollars. The state doubled cigarette taxes to pay for it all. So far, so familiar.

But Healthy Indiana features a few other interesting traits. Joining was voluntary. Participants pay a penalty co-pay if they use an emergency-room for routine health-care needs.

Spending Accounts

In addition, as part of HIP, the state created a health spending account of $1,100 per adult to be used for basic medical needs and preventive care. At the end of the year, patients can roll over what remains in the account. If they have a record of seeking appropriate preventive care, they may also get additional cash from the state for their health needs. Those who don't get the preventive care do not get those funds.

In its two-year life, Healthy Indiana has proven popular, with some 60,000 Hoosiers enrolling. Ninety nine percent said they would re-enroll.

The preventive component seems to work: Adult HIP members use emergency rooms at a lower rate than adults on standard Indiana Medicaid. They use generic drugs more frequently than the commercially insured. The program hasn't busted the budget. Some three-fourths of HIP enrollees say they are more likely to seek preventive services. In a state where one in four adults is obese, this is perhaps the most interesting news of all.

Not Perfect

Hearing the Indiana details, one is tempted to pick at them like a statistics professor. But whether Healthy Indiana is perfect isn't at issue. The issue is that an experiment proceeded.

Now Healthy Indiana will be overwhelmed by Obamacare, which will have little regard for individual budgeting and incentives. Perhaps Medicaid administrators will cut off the cash that has flowed to Healthy Indiana. Or perhaps the insurance that Obamacare offers will be more attractive and woo away HIP's volunteers. Healthy Indiana may survive in name. But the experiment, isolating the effect of a certain incentive upon a certain problem, has been aborted.

I happened to be in the Indiana state house the week that it became clear the president's plan would become law. Unsure of future funding, Daniels was already freezing new enrollment for the plan. Daniels points out that the federal law will force tax increases at the state level in Indiana and elsewhere. That's because the federal law effectively mandates expansion of Medicaid, whose costs the states help foot.

Romneycare's Costs

What about other state experiments? The most obvious is Massachusetts and the plan adopted in 2006 under former Republican Governor Mitt Romney. Romneycare resembles the new federal law in that its emphasis is on mandating insurance. Like Obamacare, the Massachusetts plan creates an exchange where customers can buy plans cheaply. It also offers subsidies, of course.

The news on Romneycare has been mixed. On the one hand, more citizens are covered now. On the other hand, the price was out of sight. Massachusetts's shortfalls are so troubling that this month State Treasurer Timothy Cahill called Romneycare a "train wreck." Cahill is now under attack for exaggerating the program's costs. But others also note the cost increase. The Pioneer Institute, a non-partisan think tank in Boston, for example, estimates that the state is spending $360 million more in 2010 than it spent on health in 2006, a greater increase than many expected.

Tainted Plan

What's more, Cahill says, politicians plugged holes in Romneycare by quietly pouring in extra federal money. The Massachusetts experiment now is tainted, and by those who wanted to prevent results that might cast doubt on the quality of any similar federal legislation.

There are yet other experiments. Grace-Marie Turner, of the Galen Institute, a free-market organization that studies health care, has pointed to North Carolina's Community Care, a program that reduced emergency-room visits. Devon Herrick of the National Center for Policy Analysis, a free-markets policy study group, points out that the Obama plan will increase Medicaid enrollment by about 89 percent, leaving few resources for pilot projects in states such as Texas.

Herrick says that the federal government may grant waivers for state pilot plans like Indiana's. But that choice will be made at the discretion of federal officials.

Across the country, other state officials are coming to similar conclusions. Americans are busy this holiday week, but we may still want to take a moment to mourn the state experiments that might have been.

(Amity Shlaes, senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.)

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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