Policy Brief

South Carolina Policy Council

1323 Pendleton St., Columbia, SC 29201 803-779-5022 scpolicycouncil.com

A State-based Health Exchange: Fast-tracking Government Controlled Health Care in South Carolina
By Dr. Jameson Taylor The state-based health exchanges have been called the most important element of the Patient Protection and Affordable Care Act (ACA). Such exchanges are highly regulated insurance markets essentially based on the Health Connector model established in Massachusetts in 2006. Specifically, the exchanges are government-controlled and government-subsidized artificial marketplaces that offer individual and small group insurance coverage for sale. All coverage must be approved by federal and state regulators and will be subject to federal and state coverage mandates. Beginning in 2014, individuals (excepting Medicaid/Medicare clients) who do not have qualified insurance coverage from their employer may purchase insurance on the exchange. The exchanges will also allow Under the Massachusetts small businesses with 50 or fewer employees to purchase small group coverage. Subsidies will be available on a sliding scale Connector exchange, to individuals and families who earn between 133 percent and coverage mandates have 400 percent of federal poverty level. Under the terms of ACA, each states exchange must be 47 as of 2010 an 18 operable by January 1, 2014. As part of this timeline, the U.S. Department of Health & Human Services (DHHS) must verify percent increase. the operability of each states exchange by January 1, 2013. In the event a state has not set up an exchange, or in the event the states exchange does not meet federal approval, DHHS will establish an exchange in that state.

gone from 40 in 2006 to

Current legislative and gubernatorial proposals Legislation (H 3738) in the House would establish a state-based health exchange in South Carolina, rather than shifting this burden to the federal government. H 3738 does the following: Establishes the S.C. Health Benefit Exchange as an agency within the office of the governor. Creates the Health Benefit Exchange Board of Directors to govern the exchange. Among other things, this agency would have the authority to:

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South Carolina Policy Council

Enforce all state and federal laws and regulations regarding the exchange. This includes the power to certify and decertify health benefit plans. Apply for and spend any state, federal or private funds available to the exchange. Charge licensing, regulatory, and other fees and assessments to participating health insurance carriers to support the exchanges operation. In addition, the agency may generate funding necessary to support its operation pursuant to this chapter. Contract with vendors (e.g., insurance companies and IT firms) to operate the exchange. Following the introduction of H 3738 in late February, the governor issued an executive order (201109) on March10, 2011, authorizing the use of $1 million in federal grant money to determine whether the establishment of a health insurance exchange would be feasible for the State of South Carolina. Already, the S.C. Department of Insurance had applied for this funding as of August 31, 2010. The governors executive order establishes the S.C. Health Exchange Planning Committee to study the feasibility of an exchange. The 12-member committee includes representatives from the Department of Insurance, Department of Health and Human Services, and the Legislature, as well as health care industry, consumer and small business advocates. The committee must meet no later than April 15, 2011, and must issue its final report to the governor by October 28, 2011.

The Health Exchange Planning Committee is not necessarily invested in establishing an exchange. Rather, the committee is to determine whether it is feasible for South Carolina to implement an exchange. If so, the committee must propose ideas for the successful operation of the exchange. (Among other things, determining whether the exchange should function as a state agency or a nonprofit.) On the other hand, the committee is also charged with reviewing alternative approaches to establishing a health insurance exchange. These approaches include strategies and policies to improve the health insurance marketplace in South Carolina should the state decline to establish an exchange.

175,000 South Carolinians have individual (i.e. nonemployer) health insurance coverage. Nearly all of these individuals will likely lose existing coverage, as will any person whose employer chooses not to offer a qualified health plan.

The executive order does not specify whether the committee should look at the option of having the federal government establish an exchange for South Carolina. This option is worth considering because if ACA is not repealed by Congress or struck down by the U.S. Supreme Court, the state will be forced to have an exchange, regardless of whether it is formally run by the state or by the federal government. The impact of an exchange on South Carolina As indicated above, a health exchange is a highly regulated, subsidized insurance market. The exchanges exist to facilitate the purchase of health insurance, which will be mandatory for nearly all U.S. citizens and lawfully present aliens beginning January 1, 2014. A health exchange in South Carolina will:

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South Carolina Policy Council

Eliminate the free market for health insurance and replace it with highly regulated, mandateheavy government subsidized insurance. Lead to the loss of existing insurance coverage for many South Carolinians, as the individual and group markets disappear and businesses drop their current employee-based coverage. Increase federal and state control over South Carolinas insurance market. Reduce quality of care as health care costs skyrocket and government officials implement costcontainment measures. Participation in the exchange is not mandatory per se, but a government-subsidized marketplace for individual coverage will virtually eliminate the private market for these products. Nearly 60 percent of South Carolinas population earns between 133 percent and 400 percent of federal poverty level. With more than half the state eligible for insurance subsidies via the health exchange, individuals in need of coverage will turn to the exchanges to buy their insurance. Eventually, the same will happen with the small, and perhaps even large, group markets especially once state law permits firms with 100 or fewer employees to enter the exchange as of 2016. (After 2017, the exchanges may open to the large group market with no restrictions.) As of 2009, 35 percent of all private sector workers in South Carolina were employed by firms with 100 employees or less, meaning more than one-third of the states workforce would be eligible for participation in the exchange as of 2016. Once the private market for insurance disappears, there will be little to prevent the federal government from instituting a single-payer, or socialized, health care system. Absent the safeguards the free market provides, this system would result in lower quality of care, less choice and, in the long run, higher costs through higher taxes. As Michael Tanner, the author of Bad Medicine, cautions:
This law represents a fundamental shift in the debate over how to reform health care. It rejects consumer-oriented reforms in favor of a top-down, command and control, government imposed solution. As such, it sets the stage for potentially increased government involvement, and raises the specter, ultimately, of a government-run single-payer system down the road.

According to DHHS, ACA will also force many consumers in the individual and small group markets to switch insurance plans. The agency estimates that none of the current plans in the individual market will be grandfathered while two-thirds of current plans in the small group market will disappear by 2013. The result is that nearly everyone in these markets will lose their existing coverage, serving as an added incentive to purchase coverage on the exchange. Under H 3738, South Carolina would take responsibility for running its own exchange. If the state does not establish an exchange, the federal government will establish and operate the exchange. But, observes Michael Cannon, director of health policy studies at the Cato Institute, the end result will be the same. Who administers the exchanges is unimportant, writes Cannon. What counts is who writes the rules that govern them. Those rules will be written entirely in Washington. These rules include the imposition of various coverage mandates, otherwise known as Essential Health Benefits, as stipulated by DHHS. Finally, while federal officials claim that policies purchased on the exchange will be less expensive, they neglect to point out that federal subsidies for these plans come out of taxpayer pockets. As detailed in our previous review of ACA, the federal health care mandate imposes almost $700 billion in new taxes. Given the expense associated with ACA, it is likely that cost-containment measures will

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South Carolina Policy Council

be implemented, with a corresponding reduction in quality of care. Its also worth mentioning that any federal support for the exchange dries up after January 1, 2015. Repealing ACA Creating a free market for health care in South Carolina, no doubt, requires repealing ACA. That said, the best way to refute the federal approach to health care is to show how free market health care reform can make South Carolinians healthier, freer and more prosperous. The first phase of this reform would entail:1 Not establishing an exchange and thus shifting this burden to federal administrators.* Returning any discretionary federal dollars stemming from ACA, including the $1 million planning grant to set up a state-based exchange.*2 Holding hearings on ACA and educating taxpayers about free market alternatives.* While some opponents of ACA believe the state-based exchanges can be used to minimize the detrimental impacts of the federal health care takeover, this is a risky wager. Warns John Graham of the Pacific Research Institute:
President Obama and Secretary Sebelius want to eliminate private choice of health insurance in favor of a government monopoly. If advocates of repeal fail to succeed by January 2013, Secretary Sebelius will surely sweep away any consumer-friendly accommodations with a vengeance. Indeed, her next surge of waivers will likely be to states like California, which wish to impose single-payer health care.

Even more important, South Carolina is a key plaintiff in Florida v. HHS, which challenges the constitutionality of ACA. Implementing a state-based health exchange undermines the creditability of this lawsuit, as well as the January 2011 federal district court ruling voiding ACA as unconstitutional. Accordingly, lawmakers in some states have abandoned any attempt at reforming ACA and chosen instead not to set up an exchange. These include Rick Scott of Florida and Bobby Jindal of Louisiana. Idahos legislature also recently voted to reallocate federal funding originally intended to set up an exchange while Georgia governor Nathan Deal decided to put on hold legislation that would have established an exchange. A free market for health care in South Carolina Insofar as ACA is the logical result of years of government interference in the health care market, repealing the federal health care mandate is not enough. South Carolina consumers and taxpayers can benefit immediately from a concrete plan of action aimed at showing how the free market can dynamically address problems related to rising health care costs, the problem of the uninsured, low health care outcomes, and high Medicaid spending.

*Governor has authority Legislature has authority 2 The state has already begun spending this money, but most of it remains untapped.

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In particular, the states 29 coverage mandates have driven up the price of insurance by an estimated 30 percent and also made it easier for one carrier to dominate the health insurance market. These problems can be remedied by the following reforms: Creating a free market for health insurance now. By permitting the sale of mandate-free health insurance policies to any consumer and allowing carriers licensed in other states to sell these policies in South Carolina. At least six states allow select consumers (e.g., the uninsured) to purchase mandate-free health insurance policies; 13 states allow for the sale of mandate-lite policies. Lifting regulatory burdens now. By eliminating Certificates of Need (CONs), as has already been done by 14 other states and the federal government. Another regulatory reform worth considering is encouraging health care sharing ministries (cf. S 742), which allow consumers to privately pool medical risks and benefits. Cutting taxes now. By creating a 100 percent state income tax deduction for out-of-pocket insurance premiums and providing for wholesale tax relief. Reforming Medicaid now. By eliminating all optional services and discretionary coverage mandates (such as chiropractic care). The state should also seek Medicaid waivers that allow for the creation of a Medicaid Marketplace. In this regard, Florida and Rhode Island have been leaders.* o Florida, for instance, currently allows Medicaid participants to use Medicaid funds to purchase employer-sponsored insurance. o Florida also offers Medicaid clients Reverse Health Savings Accounts that encourage the responsible use of health care dollars. o In late 2009, Rhode Island obtained a waiver allowing for the creation of a Global Consumer Choice Compact. This initiative has reduced Medicaid spending by $110 million without reducing eligibility by: Capping state/federal Medicaid funding over five years. Giving the state flexibility to modify benefits. Encouraging care management reforms and home/community-based treatment options. Implementing performance-based contracting and reducing waste and fraud.

To learn more about what South Carolina can do to reform health care, see Push Back: State Tax Reform Can Ease the Pain of the Federal Health Care Takeover
Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation. Copyright 2011 South Carolina Policy Council.

South Carolina Policy Council 1323 Pendleton St., Columbia, SC 29201 803-779-5022 scpolicycouncil.com