The 40% (Maximum) Solution

Obamacare depends to a great extent for implementation on the states, and that is turning out to be a big problem. Today is the deadline for states to notify Washington that they will set up health insurance exchanges to sell policies to the uninsured. At the moment, only 15 states have opted to do so. There are five other states that have yet to announce their decisions. That means that at most 20 out of 50 states (or 40%) will have exchanges with the likelihood being that the actual number will be more like 17.

For each state that does not set up an exchange, the federal government is supposed to take that step. That, however, still presents Washington with a bunch of problems. First of all, the cost of each exchange is estimated to be somewhere between 100 and 500 million dollars per year. If the cost averages out at 300 million per exchange, that means that Washington will have to pay just under 10 billion per year on the exchanges alone. The second and much more important problem is that the Obamacare law expressly states that the federal government will subsidize policies for the uninsured only when they buy policies from exchanges run by a state. This limitation on subsidies seems designed to get the states to accept the cost of the individual exchanges; a state can get subsidies for its people if it pays for the exchange. Third, the task of organizing over thirty exchanges is daunting to say the least. The likely chaos with the exchanges and the resulting blame will all fall to the feds.

On top of all of this, there is the question of other state areas of participation. In its decision on Obamacare, the Supreme Court made clear that individual states did not have to relax the eligibility requirements for Medicaid. A state that left those requirements untouched could continued with the same federal funding as it had prior to passage of Obamacare. Enlarged Medicaid coverage is the second principal funding method for increased coverage for the uninsured. If states opt out of both the exchanges and the Medicaid expansion, we may see all of the upset and distortions inflicted on the economy from Obamacare with no increase in insurance coverage. Indeed, the end result of Obamacare could well be a major increase in the number of uninsured.

Given this result, one may wonder just why the states are staying away from these Obamacare plans. The answer is a simple one: the cost. For most states paying $300 million per year to fund an exchange is a major expenditure. On top of that, a large increase in Medicaid coverage will saddle states with future expenses of billions and billions of dollars which, once accepted, can never be cut. Washington sets the rules while the states pay the price.