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Managed Care, State Legislatures and the Future of Healthcare Reform

|Includes:AET, ANTM, CI, IHF, UnitedHealth Group Inc. (UNH)

Pick your metaphor: hurricane, tidal wave, avalanche, earthquake. However you label the midterm election, it has radically altered the political landscape—though with no greater effect than at the state and local level.

Consider this report from the National Conference of State Legislatures:

    Republicans picked up 680 seats in state legislatures—the most in the modern era. The previous record was in the post-Watergate election of 1974, when Democrats picked up 628 seats...

The Alabama House and Senate, Indiana House, Iowa House, Maine House and Senate, Michigan House, Minnesota House and Senate, Montana House, New Hampshire House and Senate, North Carolina House and Senate, Ohio House, the Pennsylvania House, and the Wisconsin Assembly and Senate all have flipped from Democrat to Republican...


This is the first time in Alabama that Republicans have controlled the legislature since reconstruction. The North Carolina Senate has not been Republican since 1870. And Republicans have reportedly taken over 100 seats in the New Hampshire House. For the first time in history, the Minnesota Senate will be controlled by the GOP.

While front page news stories highlight big shifts on Capitol Hill, gridlock is the likely outcome of the next two years—or, at the very least, vigorous ideological posturing.

Not so in the state capitals where constituents challenge elected officials face-to-face on a daily basis. No longer will these officials delay resolving high unemployment and burgeoning benefit obligations.

Budgets are a mess, and there's little hope for improvement.

According to the policy organization Center of Budget and Policy Priorities: "States will continue to struggle to find the revenue needed to support critical public services for a number of years, threatening hundreds of thousands of jobs."

The organization notes that 39 states have already projected gaps that total $112 billion for fiscal year 2012. It expects that, once all states have prepared estimates, these gaps will likely expand to about $140 billion.

After education, the biggest outlay for states is health care—and Medicaid specifically. As the Kaiser Family Foundation explains, individuals tend to lose employer‐sponsored health coverage during recessions, which increases Medicaid enrollment and spending. Meantime, recessions shrink state revenues, making it more difficult for states to afford their share of the increased spending.

What's more, the federal government, facing a huge deficit itself, won't be able to support expanded Medicaid outlays as it might under stronger economic growth. At 44 percent of all grants to states, Medicaid funding is the single largest source of federal support.

Since the start of the recession unemployment has doubled, while Medicaid enrollment has increased by 6 million people. Already this year, 44 states say they will exceed enrollment and spending growth, according to Kaiser. A dozen states have experienced double-digit annual enrollment increases. In California and New York, Medicaid spending growth has increased by 24 percent and 16 percent, respectively.

And it gets worse. The October payroll report showed labor force participation dropping to 64.5 percent, its lowest percentage in a generation. Millions of potential workers simply have given up on finding a job, and are no longer accounted for in employment statistics.

While, short-term, commercial health plans such as WellPoint and UnitedHealth Group might benefit from lower medical costs on fewer employees in employer-sponsored health care, longer-term they face considerable business risk as this reduced workforce jeopardizes premium income.

For state governments, this means not just an even bigger Medicaid population in the months to come, but fewer revenues to service it. It also means confronting a commercial marketplace turning towards consolidation to sustain topline growth, and the likelihood of higher prices on less competition, as a result.

The health reform bill forces even more spending requirements on states, exacerbating a heavily strained situation. Legislatures and their constituents can't afford it.

Nor can they afford to wait for Washington to fix it.

In July, Ed Haislmaier, a senior fellow at the Heritage Foundation, proposed that state officials target a more competitive private-sector insurance marketplace. He writes:

    The best response for state lawmakers is to immediately move in the opposite direction of the new federal legislation by first determining their state’s needs and priorities, and then enacting their own reforms that increase health insurance choice, competition, and coverage while also reducing costs.

Haislmaier believes officials could establish this marketplace by creating a defined contribution option for employer-sponsored health insurance coverage; repealing unnecessary state-mandated health insurance benefit requirements; lowering barriers to market entry through statewide risk adjustment mechanisms; creating a premium aggregation mechanism that enables individuals to buy coverage using contributions from multiple employers; and providing consumers with greater price and quality transparency with respect to insurance coverage and physician and hospital services.

The health insurance exchange, Haislmaier argues, offers one of biggest opportunities for establishing consumer choice and reducing state commitments, if developed outside health reform's regulatory framework and its rigid benefit requirements.

A competitive exchange allowing consumers to choose plans best suited to their needs would help stem excessive spending and limit the accelerating trend toward a concentrated commercial marketplace, at the same time.

In fact, Congress's most effective action could be stalling the implementation of health reform to give states time to design insurance exchanges and set their own houses in order.

Just as a grassroots movement repositioned the political landscape, expect the same effect on state budget deficits. For governors and state lawmakers, as challenging as Medicaid and insurance reform will be, the obstacles are far less severe than taking on the education system.

Health care is priority number one.

For WellPoint, UnitedHealth and others, expect an environment more supportive of market competition.

Disclosure: "No positions"