The Unintended Consequences of Leaving Healthcare to the States
By: Ed Dolan
Tags: Politics, Health Care Reform, Labor Market, Economics

The Unintended Consequences of Leaving Healthcare to the States

It’s stalling the labor market, and Republicans don’t seem to care

With the failure of repeal and replace at the federal level, Republicans have shifted their health care reform efforts to the state level. A key tool in the health care fight has been the push for waivers that allow states to deviate from federal standards for Medicaid coverage. Supporters of this approach argue that turning states into laboratories of health care policy will spur innovation.

As of August 29, 2018, the Kaiser Family Foundation lists 69 approved and pending waivers. Some restrict eligibility and enrollment, and some impose work requirements; others limit coverage for “behavioral health” problems such as addiction treatment and mental health, and still others impose premiums and fees with disenrollment for nonpayment.

I have argued that some of these waivers are built on bad ideas—but that may be beside the point. After all, the purpose of trial runs at the state level is not just to allow the introduction of good ideas, in the hope that they will spread; the purpose is also to prove that bad ideas are bad, on a small scale and before they do nationwide damage.

Still, it’s important to be aware that greater state-to-state diversity in health care policy carries a risk of unintended consequences. For example, significant health care policy discrepancies between neighboring states can undermine interstate labor mobility.

Why Labor Mobility Matters

Labor mobility refers to a person’s ability to change jobs to match his skills with the changing needs of an employer. Being able to do so is crucial to the efficiency of the labor market. Writing for Liberty Street Economics, the Federal Reserve Bank of New York blog, Fatih Karahan and Darius Li maintain that,

[T]he willingness of the U.S. workforce to move is a factor behind the greater dynamism of the U.S. labor market compared to Europe. While Europeans tend to be more reluctant to move to distant places within their respective countries, the idea of moving across state borders for a job has been woven into the fabric of the American Dream.

However, as Karahan and Li note, interstate mobility in the U.S. labor market has fallen substantially in recent decades. This is due in part to an aging workforce; older workers have always been less inclined to move. But Karahan and Li’s calculations suggest that only 20 percent of the decrease in mobility can be traced to demographic factors. In the graph below, the gap between the red line, which shows age-related reduction in interstate mobility, and the blue line, which shows the actual mobility trend, must be the result of other factors.

Karahan and Li, along with other teams such as one led by Raven Molloy of the Federal Reserve Board, have considered many possible causes of declining labor mobility: indirect effects of demographic change, better employer-worker relations, greater wage equality, changes in job training policies, and decreasing social trust. Yet none of these causes fully explain the decline in mobility.

The rise in occupational licensing and in employer-sponsored health insurance creates job-lock. Increased state-to-state diversity in Medicaid and other health care programs would garner similar results. The greater the diversity, the greater the risk for an employee that a move to a new state would lead to a reduction in coverage or an increase in health care costs. Even with the promise of adequate access to health care in the new state, a new resident might encounter gaps in coverage, waiting periods, or burdensome administrative requirements.

The problems experienced when attempting an interstate move with Medicaid have been well documented. The American Eldercare Research Organization characterizes the process of transferring Medicaid eligibility from state to state as “difficult, but not impossible.” As the organization’s website explains,

Much to the surprise and dismay of many, Medicaid coverage and benefits cannot be simply switched from one state to another. While Medicaid is often thought of as a federal program, each state is given the flexibility to set their own eligibility requirements. Therefore, each state evaluates its applicants independently from each other state. Those wishing to transfer their coverage must re-apply for Medicaid in the new state.

To make things more complicated, a person cannot be eligible for Medicaid in two states at the same time. Therefore, to apply for Medicaid in a new state, the individual must first close his or her Medicaid account elsewhere.

You might assume that if the job prospect in another state were strong enough, it would render Medicaid considerations irrelevant. However, that is not always the case. Under a Medicaid waiver, a household with an income well above the standard Medicaid cut-off can be affected if the family has a child receiving community-based care for special needs. A similar situation faces workers with elderly relatives who receive community-based care that allows them to live at home.

Policies regarding waivers and community-based care already differ from state to state. MedicareWaiver.org explains how complicated the situation can be:

The waiting period to get onto a waiver program can be many years, and varies by state. Unfortunately, waiver eligibility does not transfer from state to state. This is a huge problem for families who wish to move to another state. It also unfairly distributes the federally matched dollars among states because each state determines its own budget.

Giving each state more flexibility in crafting its health care policies would expose even more workers to similar problems, increasing the difficulty of interstate job moves.

The Bottom Line

Federalism has its place. Not all public policy decisions should be made in Washington. There are valid reasons to leave many areas of policy to the 50 states. The needs and preferences of the people vary from one state to another, and states can often act as laboratories to test innovations that later become more widely established. Health care policy is no exception.

However, as I have established here, decentralization of health care policy has its downside. Most importantly, it would decrease interstate mobility, resulting in a loss of labor market efficiency. For this reason and others, we must carefully consider the economic risks in any discussion of a decentralized healthcare system.