Health Care Delivery System Innovation in the States

By: Leonard "Jack" Nelson III JD LLM

Jack is Professor Emeritus and faculty in the Master of Science in Health Law and Policy at Samford University’s Cumberland School of Law.


Politicians in both parties may be slouching toward another attempt at health care reform at the federal level. Republican Presidential candidates have been focused on the mantra of repeal and replace with the hope that the dissatisfaction of the Affordable Care Act will be their ticket to control of Congress and the Presidency. On the other hand, Democrats want to build on the successes of the Affordable Care by reforms increasing access to health care: Bernie Sanders favors “Medicare for All” and Hillary Clinton favors repeal of the Cadillac Tax and measures to blunt the impact of high deductibles on access to care for those who have insurance.

There is one clear lesson to be learned from the polarization over the ACA: imposing transformative change over 1/6 of the economy is inadvisable without broad bipartisan support. There is fundamental disagreement among policymakers in red and blue states over the respective roles of government and markets in private sectors in health care. This is not surprising in light of the fact that the United States is not a homogeneous nation. Different states have different histories, cultures, demographics, and socio-economic circumstances that can influence preferences for structuring the delivery and financing of health care services. It may be impossible to achieve consensus on substantive health care reforms at the federal level due to basic disagreements on the role of health insurance.

One of the key issues that Democrats and Republican disagree on is the role of “moral hazard” in health care spending. Moral hazard refers to the effect of insurance on the behavior of the insured. Thus in the health insurance context the question is whether the presence of insurance will increase health care expenditures. Most Republicans believe that moral hazard is a serious problem with health insurance, and believe that skimpier coverage will decrease health expenditures without adverse effects on health by decreasing unnecessary care and reducing prices. They typically support consumer driven health plans (CDHPs) that couple high deductible policies with tax-favored Health Savings Accounts (HSAs) to cover routine expenses.

On the other hand, many Democrats believe that the consumption of health care is primarily driven by health status rather than the problem of moral hazard. They don’t believe that providing people with more generous health insurance coverage will necessarily increase costs. In fact, many believe that increased access to preventive services could actually reduce health care expenditures. For example, Bernie Sanders favors a single payer system (“Medicare for All”), and Hillary Clinton favors measures to provide access to care without a deductible.

This ideological polarization is likely to continue. One solution to this problem is to allow increased flexibility for reforms at the state level as an alternative to the dysfunctional gridlock at the federal level. And in fact, this option is already available under the ACA in the form of a state innovation waiver under section 1332. This obscure provision authorizes the secretary of HHS to grant waivers beginning in 2017 that will exempt states from some of the specific requirements of the ACA (e.g., individual mandate and health insurance exchanges). In order to obtain a 1332 waiver, a state must establish that its innovations would: (1) comprehensive coverage to as many people; (2) provide coverage and cost sharing provisions at least as affordable; (3) provide coverage of a comparable number of residents; and (4) not increase the federal deficit.

The ACA was developed in the context of an existing health care system that includes a peculiar assortment of private and public insurance programs that are based on these conflicting approaches. It essentially doubles down on this complex and incoherent mixed system. One problem, however, with reinforcing this mixed system is the difficulty in determining which approaches are most effective in terms of reducing costs, increasing access, and enhancing quality. But decentralization could facilitate the development of more evidence-based health policy making by encouraging experimentation with diverse approaches in the laboratory of the states.

Both Democrats and Republican should consider relaxing the requirement that coverage be at least as comprehensive as the Affordable Care Act in order to facilitate experimentation at the state level. While some may argue that it would be better for Republicans to do nothing while Affordable Care implodes and then use this failure to push for a full repeal, such a strategy is not without risk. If the private insurance system is undermined, and the efficacy of alternatives to single payer have not been established, it may be easier for Democrats to push for a single-payer system that could initially be implemented under innovation waivers at the state level. For Republicans, successful demonstrations of the use of CDHPs at the state level could head off adoption of a nationwide “Medicare for All.” Retaining the ACA while clearing the way to permit states to experiment with CDHPs beginning in 2017 may be a sensible approach. And Democrats should be concerned that the ACA could be undermined by the inability to entice a sufficient number of younger/healthier persons to enroll in coverage through the Marketplace Exchanges.

Thus it may be possible for Republicans to work with Democrats to expand the possibilities for experimentation with CDHPs in the states. This cooperation could include relaxation of the requirements of 1332, and bipartisan oversite of waiver applications. This approach should be coupled with legislation that would enable states to use Medicaid funds under section 1115 waivers to establish programs modeled on the Healthy Indiana Plan that enrolls low income people in CDHPs. Innovative incremental change at the state level is the most appropriate strategy for both Republicans and Democrats at this time.


Leonard J. Nelson, III, is Professor Emeritus and teaches in the Master of Science in Health Law and Policy at Samford University’s Cumberland School of Law.