Opting Out: Not As Simple As It Looks

“Opt-out” has become the most powerful phrase in the health care debate, thanks to Senate Majority Leader Harry Reid’s decision to include it in Senate legislation. When elected officials were searching for votes last week in favor of a filibuster-proof public option and appeared to come up short, Democratic Sens. Tom Carper of Delaware and Chuck Schumer of New York promoted the novel idea of a state-level “opt-out.” If particular jurisdictions do not like a public option, they simply can exit the government health insurance system for uninsured residents.

It is a very American idea. Our founders established the notion of federalism to allow states that felt strongly about public policy to operate under different laws and procedures. Currently, states have broad latitude to set their own rules in areas such as insurance, education and welfare. Indeed, state-level differences are so widespread that the late University of Chicago Professor Morton Grodzins described America as having a “marble cake” federalism with complex textures and contradictory policies.

On the surface, the public insurance opt-out appears to solve a number of political and philosophical problems. By being acceptable to progressive representatives and palatable to moderate legislators, the idea offers the obvious advantage of legislative coalition building. It is easier to sell the idea of a public option if people know their state does not have to participate. This compromise allows areas that are philosophically or otherwise opposed to the government offering a public insurance option to decline to participate in that system.

But there are serious logistical questions in terms of implementation. How do states opt out? Must state legislatures decide or can they use public referenda to allow voters to make the decision? Regardless of whether the venue turns out to be a legislative decision or a public referendum, we should expect intense lobbying and spending from those who feel strongly about the issue. States with conservative voters or strong private health insurance companies will face strong pressure to exit the public option.

The Arizona Legislature already passed the Health Care Freedom Act, which places an initiative on the 2010 ballot allowing citizens to vote to decide whether the state should opt out of the entire health care reform bill. Other states are considering similar legislation. This guarantees that the fight over health insurance will remain center stage in American politics through the next election.

Another consideration concerns what it means to opt out. On the insurance side, opting out presumably means that people within the state who cannot afford health insurance would not have a public option to choose from and would be limited to the private insurance companies that operate within their jurisdiction. But what about the tax revenue that would have gone to subsidize uninsured residents of that state through a public option? Will that money in exiting states go to private insurance companies?

One problem that has cropped up in policy areas where states have differential policies is how it affects migration patterns. Will unhealthy people migrate to states with a public option if their own jurisdiction opts out of the national system? States may be tempted to establish residency requirements for health care the way they did for welfare. This may make it more difficult for the uninsured to get coverage in those areas.

From a governance standpoint, the public option creates a worrisome precedent for other policy areas. If states don’t like congressional decisions on gun control, climate change or immigration, will state legislators demand an opt-out? If this were 1965 and there were a Medicare opt-out, it is conceivable we would have ended up with two-thirds of the country having Medicare, while one-third did not.

With any comprehensive reform, there always are unanticipated consequences. By using a pragmatic mechanism to solve the political problem of overcoming a Senate filibuster, opt-out proponents have created a precedent they later will regret. Opponents most likely will employ that idea in other policy areas when people are unhappy with legislative decisions. The marble cake will expand in scope throughout American federalism.