Governors Can Keep Healthcare Costs Down

States can figure out how to use the healthcare law to cut costs.

A pharmacists holds prescription medicine
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Raymond Scheppach is former executive director of the National Governors Association and currently professor of practice at the Batten School of Leadership and Public Policy and economic fellow at the Miller Center of Public Affairs at the University of Virginia.

Many states are resisting implementation of the Affordable Care Act. For some it's politically motivated: The legislation passed without a single Republican vote in the House of Representatives or the Senate. Others responsible for implementation worry about financial risks in an already rocky economy. Amidst the resistance, there could be a silver lining in governors taking the lead in containing healthcare costs—a job the federal government ducked in crafting the ACA, as the healthcare law is called. But it is a silver lining that will only be realized if the federal government amply provides both flexibility and funding and governors see more rewards than risks.

Medicaid Expansion = Risk. The Supreme Court ruling that Medicaid expansion is in fact a new program now means most state legislatures must affirmatively authorize expanded coverage. The ACA asks states to expand Medicaid up to 133 percent of poverty ($30,657 for a family of four in 2012) with the federal government paying 100 percent of the costs for several years and then ratcheting down to 90 percent over the long run. Currently, states pay on average 43 percent of the Medicaid program and the federal government pays the rest.

[See a collection of political cartoons on healthcare.]

The media and advocates assume this is a slam dunk for states because the federal government is paying most of the cost. However, Medicaid has been the fastest growing program in state budgets over the last several decades, and now represents about 22 percent of the average state budget with several states spending about 30 percent and Missouri spending about 34 percent. Over the last several years this growing share of states' budgets forced significant cuts in elementary, secondary, and higher education as well as critical infrastructure like roads and bridges. There is a real fear that these kinds of cuts will slow both short and long run economic growth and job creation.

The history of Medicaid is also one of numerous federal changes in the benefits package and eligibility, which have cost the states substantially over time. There have also been a number of congressional proposals to "cap" or "block grant" federal funds. No governor wants to adopt the expansion and then find out the federal government, in the deficit reduction package of 2013 or in a subsequent year, reduced the federal share, shifting huge costs to the states.

[Read the U.S. News Debate: Is Medicaid Expansion Good for the States?]

Insurance Exchanges = Risk. The ACA also requires states to create and operate the insurance exchanges. To date there are only two exchanges in operation: Massachusetts and Utah. Both are relatively small, and it is questionable if they meet the standards of the act. Consequently, there are few best practice models to give states guidance.

Creating the system is also relatively complex and costly, requiring that individuals be referred to the Medicaid systems and interface with federal agencies to confirm eligibility. State experience in contracting the design of similar large information management systems has been fraught with bad experiences. The Department of Health and Human Services has also been slow in issuing guidance.

Healthcare Cost Control = Reward. The reward in taking on these risks is the long lost ability to rein in astronomic costs. Essentially, the law shifts accountability for healthcare cost increases from the federal government to governors and states. This is because close to 160 million Americans—or one out of every two—will be receiving their healthcare directly from the state or through a state created and operated exchange. This includes state employees, the 80 million individuals expected to purchase healthcare through the exchanges, and an additional 75 million on Medicaid.