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March 28, 2013 11:17 AM The Battle Over Obamacare Moves to the States

By Ezra Klein

President Barack Obama’s Patient Protection and Affordable Care Act celebrated its third birthday last weekend. This particular anniversary was a big deal, because it was often unclear whether the law would reach it.

In the first place, it was imperiled by the Supreme Court; in the second, by Republicans’ promise to kill it if they won the White House in 2012. Over the past year, Obamacare survived both challenges, and next year it will begin its core mission of insuring tens of millions of Americans.

Republicans, however, haven’t quite given up. Their slogan, “repeal and replace,” has given way to “resist and annoy.” Unable to get rid of Obamacare, many have settled on a strategy of making it function as poorly as possible. At the national level, House Republicans have refused to appropriate money for implementation. At the state level, most Republican governors have refused to set up insurance exchanges, and many have refused to expand Medicaid, which is the primary vehicle for insuring those currently uninsured.

The question, though, is whether governors who purposefully do a very bad job implementing Obamacare will hurt the law or hurt themselves and their states. Call it the California versus Texas question.

Taking Action

In 2010, Governor Arnold Schwarzenegger of California signed into law two bills to establish the online insurance marketplace — “exchanges” — that are at the center of Obama’s health-care reform. In addition to being the first state to pass such legislation, California promptly accepted the law’s Medicaid expansion. By this time next year, when the expansion is fully under way, it’s possible that the portion of the state’s uninsured population will have declined from 20 percent to less than 5 percent.

In Texas, the situation is just the opposite. The Lone Star State isn’t lifting a finger to create an exchange, instead leaving the work to the federal government. Texas is refusing Obamacare’s Medicaid expansion, too. “The idea that we would expand and put more money and more people into a broken system is not unlike putting another 1,000 people on the Titanic,” Republican Governor Rick Perry told Forbes. “You know how this is going to turn out. And it’s going to be a disaster.”

One might observe that the health-care system in Texas, which has the nation’s highest rate of uninsured residents at 24 percent, is already a disaster. The recalcitrance of Perry and Republican state lawmakers has the potential to make matters much worse.

In the case of state exchanges, the federal government can step in to build them, though it will be a heavy lift. “They definitely did not envision this many federally run exchanges,” said Caroline Pearson, vice president at Avalere Health LLC, a health-care consulting firm. “It was considered a fallback. The idea was it would be mostly state run and in the event of an anomalous state that didn’t do it, the feds would step in.”

For the federal government, there are economies of scale in setting up the exchanges. But many of the tasks — including coaxing state computer systems to talk to one another, establishing call centers, actively managing the insurance options, and conducting advertising and outreach so people understand the benefits to which they’re entitled — would be much easier with state cooperation.

Unlike the exchanges, however, there is no fallback in the event a state refuses to expand Medicaid, which covers the poorest Americans.

Assigning Blame

Because states have so much leeway in implementing Obamacare, it’s possible that the quality of care could vary substantially from state to state. California might end 2014 with a high-performing, near-universal health-care system. Texas might end it having made an already troubled system even more of a disaster. Will that reflect on Obamacare, which is working just fine in another state? Or will it reflect on the Republicans who govern Texas?

Although Texas can legally refuse the Medicaid expansion, it can’t opt out of the subsidies provided to encourage participation on the exchanges. So while many of the state’s poorest residents won’t get subsidies for health care, Texans making between 133 percent and 400 percent of the federal poverty line will. The possibilities for confusion — and, once the situation becomes clear, anger — are obvious and immense.

Moreover, because Medicaid’s expansion was conceived in part as a new source of revenue for hospitals, Obamacare ratchets back payments — called disproportionate share payments or DSH payments in health wonk parlance — that the federal government makes to providers who treat the uninsured. Texas, for instance, received almost $1 billion in DSH payments in 2011. Under Obamacare, it will receive far less.

This is why many Republican governors, including Ohio’s John Kasich and New Jersey’s Chris Christie, surprised fellow Republicans by taking the Medicaid money. They’re more afraid of seeing hospitals close than of being criticized for cooperating with Obama. In states like Texas, hospitals could be thrown into crisis. “Safety-net hospitals that get cuts in DSH payments with the same number of uncompensated care patients are in serious financial trouble,” Pearson said. Privately, many health-care experts figure the Republican holdouts will fold, and quickly.

The law’s opponents hope this sort of truculence will harm Obamacare — and it probably will. But it will do so primarily by harming the resisting states’ health-care systems. It’s a classic example of cutting off your nose to spite Obama. And because the law can vary so much state-by-state, the dysfunction in states that fight the law will probably stand out compared with states that genuinely work to implement it effectively. Will governors who wreck their state health-care systems to make a political point look better than governors who, in the course of a single year, cut the number of uninsured in their states by perhaps 75 percent?

That’s the crucial political question. If California succeeds and Texas purposefully fails, will that create an opening for Republicans still eager to weaken Obamacare? Or will it be an opening for Democrats to exploit emerging political opportunities in states like Texas? It’s a tried-and-true strategy to regain power by exploiting the rival party’s governing failures. It’s a bit riskier to try to mount a comeback by exploiting your own governing failures.

Ezra Klein is a columnist for Bloomberg View.