Charles M. Arlinghaus

 March 2012

Summary: New Hampshire should join the Health Care Compact to allow different states to try different health care reforms. The results of those reform pilot programs may give New Hampshire the opportunity to replicate better or more efficient programs here if we choose. The compact has no cost associated with it and doesn’t require New Hampshire to expend any money or assume any liability but has the long term potential to uncover cost savings measures.

On February 15, 2012, the New Hampshire House of Representatives voted 253-92 for HB1560 to join a national Health Care Compact[1] of states asking the federal government to play a role as the federal government considers plans to change, among other things, Medicaid and Medicare.  The vote sends a clear message that states should be consulted and states should have options. As the proposal is considered by a second committee, some details are worth addressing. While any new proposal is open to misinformation and demagoguery, this isn’t nearly as complicated as it sounds. Much of the criticism and even some of the support for a compact is based on misunderstanding, or in some cases misrepresentation, of the structure and language of a compact.

The Health Care Compact that has been ratified by four other states in the form being considered in New Hampshire would only happen if the federal government and the state government both agreed. Then, only if it so chose, the state would assume administration and direction only of the specific programs it felt it would manage more effectively than the federal government, quite likely a subset of all federal programs. Although states would receive grants equivalent to the specific funding for the programs it chose to administer, they would assume no long term liabilities for federal programs that currently have long term liabilities.

The Basic Structure of this Health Care Compact

At its most basic level, the Health Care Compact being considered in New Hampshire is a petition to the federal government asking them to allow states the opportunity to take federal health care spending for specific programs and craft a state specific program to replace the federally administered program.

The Compact is a group of states who essentially sign a request to the federal government to grant them (and any other state) that authority. Importantly, the program could not take effect without the federal government granting the authority and with the state opting to administer specific program or perhaps none at all.

To administer a specific program, states would be granted the authority to replace the federal laws regarding a program (Medicaid for example) with state laws. This provision has led to the most misunderstanding. The Compact would provide that a state may “Suspend by legislation the operation of all federal laws, rules, regulations, and orders regarding Health Care….”[2] Critics prefer to end the sentence there to misleadingly suggest Compact supporters are nullifiers. Instead, the sentence continues “that are inconsistent with the laws and regulations adopted by the member state pursuant to this compact.[3]” In other words, new state laws would take the place of previous federal laws under authority granted by Congress.

What’s more, all rules would remain in effect unless suspended by state action in specific areas and for any area not suspended the state will still be “responsible for the associated funding obligations in the state.” In other words, federal laws are not “suspended” except to the extent that the state chooses to act under a compact expressly agreed to by the federal Congress.

There are three steps before New Hampshire would administer any specific health care program.

Step One: States Agree:  Although a compact could technically start “on its adoption by at least 2 Member States and consent of the United States Congress,[4]” Congress will likely pay little attention until a dozen or more states adopt the Compact in their legislature demonstrating a critical mass of support.

Step Two: Congressional Approval and Amendment: Compacts do not become effective without congressional approval. In area like this – a bit more complicated than compacts on things like mutual recognition of drivers’ licenses – that congressional debate will be fairly involved. The compact document specifically anticipates give and take with the federal government by outlining the broad structure which should underlie the final agreement — the authority to use the current federal funds in each state guided by state not federal regulation.

Step Three – Evaluation: Although a Compact would give each state the authority to act, each state would undergo an evaluation process. Different states have different skill sets and few states would immediately take over administering all health care programs. The next step would to evaluate skill levels and decide where we would most likely be able to add value in a cost-effective way.

The Fiscal Impact of a Health Care Compact

The biggest question mark for any proposal is fiscal but joining the compact itself entails no financial obligation at all. Further participation by choosing to administer some program involves limited financial risk and the potential for significant savings.

One of the most significant errors opponents make is in regard to liability and whether or not a state would have to assume any and all health care operations. The question is “if we assent to a compact, would we then have to assume all health operations, and we would not then be liable for unfunded Medicare liabilities?”

First, signing on to the Compact does not obligate us to be one of the state with a good idea. We could, and probably should, wait for promising approaches to develop.

Second, if we do opt to implement a better idea, we do not have to administer all currently federal programs. We can choose ones that make the most sense for us. For example, we might decide that since we currently administer Medicaid, we could craft our state specific rules in exchange for a block granted federal funding. This is essentially a version of how Rhode Island and Florida operate under a Medicaid waiver. Rather than the one set of rules and regulations designed to fit fifty states, they forego the regulation in exchange for a block grant.

Were we to choose to administer Medicaid, we would not also be compelled under the Compact to administer other programs (like Medicare). The federal program as it exists then would remain in effect

The False Liability Issue

If our pilot program didn’t work or didn’t yield the results we wished for, we could “withdraw from this Compact by adopting a law to that effect….[5]” The withdrawal would be effective six months after we gave notice of our intent to suspend. If we were able to administer the program more efficiently than the federal government had, we would benefit from the savings realized. On the other hand, if we discovered we were in over heads, or the program didn’t work as well as the pilot we’d observed in another state, our financial risk would be minimal because of the ability to stop with six months notice.

The liability language in the withdrawal mechanism, though, has led to some confusion. The compact provides “a withdrawing state shall be liable for any obligations that it may have incurred prior to the date on which its withdrawal.[6]

The liabilities mentioned are not long term liabilities of the kind associated with Medicare. They are the typical liabilities associated with any program of this sort. For example, an insurance company would still have an obligation for covered procedures that occurred prior to the termination date of a policy. Similarly, a state would not be able to walk away from bills already incurred but not yet reimbursed. New Hampshire’s own self-insurance plan for state workers includes a similar accounting provision.

In fact, the long term obligations associated with a program like Medicare are exactly what an approach like a Compact is designed to address. Nationally, many competing proposals are being considered. Allowing many states many different options allows greater experimentation with potential long-term solutions. That experimentation will allow states to learn from each with some states acting early and some watching the various pilot programs before deciding whether or not to act.

The Virtue of Doing Nothing

In fact, in New Hampshire’s case we should move cautiously forward. We should petition the federal government to give states authority if they choose to exercise it and then wait and see what other states do. Even though all fifty states would be granted the choice by Congress, only six or eight would exercise that choice but each of those states would amount to a pilot program – and very different pilot programs that should teach us something.

In fact, this is the whole point of a compact that gives each state the authority to try different things. “Laboratories of democracy” has become one of the most hackneyed phrases in American politics but Louis Brandeis’ original thought is at the heart of a health care compact. Brandeis said “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.[7]

New Hampshire may well not yet be up to the task of coming with useful reforms in all areas but other states may well be. Texas would probably try something more market-oriented, Vermont would almost certainly create a single-payer plan and become a teeny version of Canada.

Perhaps Vermont or Oregon or whoever tried single payer would prove it a failure but perhaps they would not. On the other hand, the New Hampshire way is to watch carefully what other states do and then import the best pieces into our system. Allowing other states to pilot innovative programs – only if they choose to do so –will help us all.

Who Decides What is a Good Idea?

Some will worry that nothing in a compact prevents states from doing something stupid but that’s just the point. We want to allow states to craft their own pilot program with as much latitude as possible. They should use their judgment to replace Washington’s. And New Hampshire should watch the results to reap the benefits.

Today, the federal government decides collectively what is and what isn’t a good idea. They then impose on all states that idea which might be good for New Jersey but not for New Hampshire. Under a multi-faceted approach, different states will evaluate what each other state does. The best experiments will be adopted by many other states. The less promising idea will be abandoned after a year or two. But those pilot programs which Brandeis anticipated are not possible under the current system without a Compact being adopted.

New Hampshire should join in a compact with other states to at least allow the potential for any state which thinks it might have a better idea to experiment with it. There’s certainly no risk to our fiscal order by letting Texas or Vermont try something. At the end of the day, that’s the only commitment we make when we join a compact.


[1]This paper capitalizes Health Care Compact when referring to the specific proposal that is being considered in New Hampshire in 2012 as House Bill 1560, and has been passed in substantially similar forms by four other states as of this writing.

[2] Text of proposed HB1560 (2012) proposed RSA 137-L4

[3] Text of Proposed HB 1560 (2012), proposed RSA 137-L4, emphasis added

[4] Proposed HB 1560 (2012), proposed RSA 137-L7

[5] Text of proposed HB1560 (2012), RSA 135-L9

[6] Text of proposed HB1560 (2012), RSA 135-L9.

[7] Interestingly Brandeis never used the phrase laboratories of democracy. The quote is from the end of his dissent in the 1932 Supreme Court Opinion in New State Ice Co. v. Liebman. Brandeis would have allowed a state to keep Mr. Liebman from selling ice without a license.