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The Mother of All Unfunded Mandates

Governor Phil Bredesen of Tennessee has expressed the fear that Congress is about to impose the “mother of all unfunded mandates” with health care reform. If there ever was a time for the states to challenge federal unfunded mandates, it is now.

The pending health reform legislation enacted by Congress will negate two decades of Medicaid reform, and will increase Medicaid spending by $438 billion over the next decade. The federal government will pick up much of the cost in the initial years; but, the states will have to eventually pay their share. On average states pay for 43% of total Medicaid costs. This means that down the road states must pick up $188 billion in higher Medicaid costs tied to increased eligibility and coverage mandated by Congress. This is the largest increase in Medicaid costs since the program began.

Governor Bredesen has good reason to worry. In Tennessee, the expanded Medicaid plan is estimated to cost the state $1.4 billion per year.

States have been using federal stimulus dollars to shore up deficits already incurred in their Medicaid budgets. When the federal stimulus dollars disappear the states will be expected to pick up their share of a greatly expanded Medicaid program.

There is concern that the states will not be able to fulfill the demands imposed by the expanded Medicaid program. Currently states set their own reimbursement rates paid to primary physicians. The average reimbursement rates for primary care physicians paid under Medicaid relative to that under Medicare is 66% for the nation a whole. However, the rate varies significantly, from a low of 36% in New York and Rhode Island, to 140% in Alaska. Many states, especially those with low reimbursement rates, are having difficulty in getting doctors and hospitals to accept Medicaid patients in the current program. It is difficult to see how these states can get doctors and hospitals to accept Medicaid patients in a greatly expanded program, without significantly increasing reimbursement rates.

It would appear that Congress is setting up the states for a perfect fiscal storm. States will confront significantly higher Medicaid costs at about the time that federal stimulus dollars disappear. Even with economic recovery it will take many years for state revenues to recover to pre-recession levels. If states are foolish enough to issue debt to cover costs in a greatly expanded Medicaid program they will put their budgets even further into deficit. This unfunded mandate imposed by the expanded Medicaid program will exacerbate fiscal crises in the states, spreading fiscal profligacy from the federal government to the states.

Fortunately state legislators are taking the bull by the horns. Twenty states have enacted legislation to defend health care choice modeled after the American Legislative Exchange Council’s (ALEC) Freedom of Choice in Health Care Act. The Montana constitutional amendment, for example, preserves the right of individuals to pay directly for medical care, and prohibits any individual from being penalized for not purchasing government-defined insurance. Any federal or state law requiring individuals to purchase health care insurance, or prohibiting an individual from purchasing health care services directly, would be declared unconstitutional.

The Vote on Taxes Committee, of which I am a co-founder, is proposing a constitutional amendment prohibiting federal unfunded mandates. With a prohibition on unfunded mandates the state could simply refuse to implement or fund such a mandate. This amendment would restore the right of states to design and implement their own Medicaid program. All states could choose to follow the lead of Florida to obtain a waiver from the federally mandated Medicaid program and use a block grant from the federal government to design and implement their own Medicaid program.

A prohibition on federal unfunded mandates would provide an important and perhaps essential constitutional basis for the states to challenge federal law under the Tenth Amendment. If a state determined that a federal law mandated a program abrogating that state’s rights under the Tenth Amendment, the state could simply refuse to administer or fund the program. This constitutional provision would allow the states to determine federal programs they wish to administer and fund, with state laws preempting federal laws.

With states determining which federal programs they wish to administer and fund the federal government’s role in those programs would recede to the provision of federal funds in the form of a block grant necessary for the federal government to meet some minimum federal effort.