State Health Watch – What’s Ahead in 2018?

State health policymakers enter 2018 buffeted by unsettled insurance markets, reductions in public health and prevention revenue, and uncertain funding for Medicaid and health care delivery reforms.

Will state innovation and more flexibility to restructure insurance and payment and delivery systems be enough to reduce medical costs and safeguard access to health care? Will new federal action undermine states’ authority to regulate insurance markets and protect consumers? How will federal tax reform affect state revenue?

This year promises both change and opportunity against a backdrop of continued budget pressures in many states and the unsettling shadow of election year politics. This year, 36 governorships and 82 percent of all state legislators face elections, in addition to Congressional midterm elections. Campaigns provide opportunity for important policy debates, but they can also have a chilling effect on major policy decisions. Despite those dynamics, recent enactment of the Tax Reduction and Jobs Act plus federal changes that affect health insurance markets in every state require the attention of policymakers now.

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How will the new tax plan affect state coffers? Will corporate and income tax cuts really generate dramatic economic growth? Since 2011, 11 states enacted substantial tax cuts designed to stimulate their economies. A more careful analysis of the cuts’ impact is needed, but what happened in Kansas offers a cautionary tale. It eliminated a 6 percent income tax on businesses, which led to a 25 percent drop in income tax revenue, precipitating a budget crisis and sharp reductions in program spending.

Will the impact of federal tax cuts on the federal deficit – which CBO projects to be $1.455 trillion over 10 years — also force deep cuts in discretionary spending? What will that mean for states that currently depend on federal dollars for one-third of their total revenues? The overall budget picture suggests a continuation of state budgeting challenges in 2018 and beyond, which will limit the ability of states to backfill any federal cuts.

State budgets have faced challenges since the Great Recession and have not fully recovered. Some states are in stronger financial positions than others, but the total projected increase in state revenue for FY 18 is only 1 percent, the smallest increase since 2010 despite the stock market’s recent record highs. In 2016, while there was considerable state variation, personal income tax revenue dropped overall by 1.1 percent and states with corporate taxes saw those revenues drop 9.3 percent. States also face structural deficits, driven by unfunded liabilities for state employee pensions and retiree health plans.

The recent federal tax reform will require states to examine their own tax policies. Some changes, like the elimination of deductions, could result in more revenue, but other changes could reduce state coffers. Many states automatically integrate federal changes into their state tax policies in some measure. Of 41 states with a personal income tax, the National Association of State Budget Officers reports all but five automatically conform with federal tax law in some way as a basis for calculating state income tax. The situation is similar for the 44 states with corporate income taxes — 41 of which use federal taxable income to some degree to determine state corporate taxes. Debates about tax policies are inevitable as states weigh the pros and cons of conforming with federal reforms or maintaining their current tax rates – decisions that will significantly impact state revenues.

Impact on health insurance marketplaces and Medicaid: Faced with this political and budgetary reality — and with considerable uncertainty about future federal policies — states still need to act to provide access to health care, lower medical costs, and improve their populations’ health. The Affordable Care Act (ACA) channeled significant new federal dollars to states and reduced the nation’s uninsured rate to historic lows through subsidized private market coverage and expansion of Medicaid to more low-income adults. But funding the cost-sharing reductions that helped pay out-of-pocket medical costs for many has been eliminated as has the individual mandate. Each elimination puts a strain on the affordability and value of commercial market coverage, especially for middle-class families who do not qualify for subsidies.

Meanwhile, greater federal flexibility over the use of Section 1115 waivers to set time limits, create work requirements, and other new requirements as a condition for Medicaid coverage, and ongoing conversations about deep federal cuts to Medicaid funding, could significantly alter the program’s role in providing coverage to low-income individuals. Funding for safety net providers, such as federally-qualified health centers (FQHCs) and long-term funding for the Children’s Health Insurance Program (CHIP), remains uncertain.

Intending to spur choice and affordability in the commercial market, the federal government has eliminated the individual mandate requiring everyone to have coverage. Washington has proposed a constellation of new and proposed products, such as greater flexibility over association and short-term health plans, that could attract younger, healthier people, but would also be exempt from many consumer protections and, in some cases, state regulations. These changes could fragment the individual markets, consigning the sicker and older consumers to purchase ACA exchange products, which could effectively make that market a high-risk, high-cost pool for those who need comprehensive coverage.

These lower-cost, lower-benefit products also could put consumers at greater risk for out-of-pocket expenses and could reduce state insurance regulation protections. Whether Congress adopts bills designed to continue cost-sharing reductions to limit out-of-pocket costs for those unable to afford them (Alexander-Murray) and fund reinsurance (Collins-Nelson) to help the affordability of the individual market remains an important question in 2018. Without these investments, affordable, comprehensive individual insurance will be at risk and states will face new challenges in promoting health coverage and insurance regulation.

Can state innovation save the day? Reducing the underlying cost of health care is the cornerstone of affordability, as health care costs plague states as payers, employers, and protectors of consumers. State Medicaid programs have actively promoted payment and delivery reform strategies that reward health care value, not volume, sometimes in collaboration with commercial payers. Many are supported by Center for Medicare and Medicaid Innovation (CMMI) grants through State Innovation Models (SIM) and waiver opportunities like Delivery System Reform and Incentive Payment (DSRIP) programs, implemented through Medicaid Section 1115 waivers. As with Medicare and commercial payers, states know the challenge of changing a long-standing delivery system that developed in response to fee-for-service incentives.

CMS recently sought comments about the role CMMI should play and states await more information about possible opportunities to expand their health care delivery reform efforts. The CMMI request for information identified state-based and local innovation as one of its focus areas, and recognized multi-payer reforms, Medicaid demonstration projects, and value-based payment structures as possible state-based models that CMMI might support.

Pharmacy expenses have gained considerable attention as they are growing so quickly and unpredictably. As the 21st Century Cures Act speeds the introduction of new drugs, states continue to seek ways to address these costs for all payers and may need federal support for those initiatives

Preventing disease and promoting policies that address the social determinants of health, such as housing, income, and education, will in the long term improve health and reduce costs. Evidence shows that low-income adults who participate in the Supplemental Nutrition Assistance Program have lower health care spending than those who do not, and improving housing can lower health care costs for some experiencing homelessness. However, investments in population health and prevention need to be made now to generate savings and health improvements and build on existing state initiatives.

States rely heavily on support from federal sources such as the Prevention and Public Health Fund to maintain the state infrastructure needed to prevent chronic health conditions, monitor and respond to outbreaks of infectious diseases, support vaccination programs, and promote healthy communities. Recent federal legislation cuts this fund by more than half over eight years. States could lose more than $350 million in 2019 alone if the cuts occur, according to Trust for America’s Health. By 2023, most states would lose more than $20 million each from their state health budgets.

This coming year promises to generate considerable policy debate about access and affordability of health coverage. Many states, already juggling competing demands and tight budgets, will find themselves jockeying to meet obligations with fewer dollars and they will need federal flexibility and support to test new approaches and ideas. Looming over these discussions will be an election year that will impact the majority of state legislatures and governors. In this environment, states and the federal government will be challenged to find middle ground and produce meaningful reforms and initiatives that advance more affordable, accessible care. But as state policymakers know well, the needs of America’s families demand just that.