The Supreme Court surprised everyone last year when it upheld the bulk of the Affordable Care Act, and the law’s authors and supporters rejoiced. But in a crucial caveat, the Court ruled that one of “Obamacare’s” cornerstones, the expansion of state Medicaid programs, could not be mandatory. Suddenly, Health and Human Services Secretary Kathleen Sebelius got a big promotion. She wouldn’t just be the chief health regulator; now she’d also be the administration’s top negotiator with states contemplating this new choice about whether to expand. A key part of her job became convincing them that extending Medicaid to more poor people was the right choice for their residents, their budgets, and the country.
This was a surprisingly good fit. President Obama had originally wanted former Senate Majority Leader Tom Daschle for the HHS job, thinking that his legislative skills would have helped shepherd the health reform bill to passage. (Dasch-le’s vetting revealed tax problems.) In his stead, the president chose Sebelius, a former elected insurance commissioner and governor of conservative Kansas. She knows the states. She knows their leaders through the National Governors Association, where she served on the executive committee. And Sebelius knows how hard it can be to foster acceptance of Washington policies among local politicians. “It’s really helpful in the place I am now to have been on the other side of those conversations,” she tells National Journal.
After the Court’s decision, Sebelius went to work. She kept an “open-door policy” for governors, she says, meeting with many regularly to advise and cajole them—and occasionally traveling to their states. Instead of laying out a raft of new, strict rules for states to take or leave, Sebelius tried to allow behind-the-scenes negotiations. And she kept the confidences of her “former colleagues”; she declined to openly criticize recalcitrant state legislators or gloat when a GOP governor acceded. She adopted an unusually personal approach to the issue: Despite her many responsibilities running the sprawling department, she took the lead on expansion. Marilyn Tavenner, who heads the Centers for Medicare and Medicaid Services (the lead agency on the expansion), notes that Sebelius herself has said she wants to be in the room with the governors. “The secretary does a tremendous amount of that work.”
Yet the results have been disappointing. With most legislative sessions over, about half the states have committed to expanding their Medicaid programs, meaning that millions of low-income Americans, many in the country’s poorest states, will get no insurance next year when the law’s main provisions switch on. Designed to cover more than 30 million uninsured Americans, Obamacare will fall well short of its original goal, and that failure will undermine reform in other ways—disrupting the cash flow for hospitals that serve the poor, seeding confusion among those still eligible for benefits, and cementing deep divides in the health and wealth of states around the country.
The Sebelius strategy may not have unfurled perfectly at every turn. Critics say that HHS has been inflexible on certain rules and that the department has shaped too many others on the fly—unpredictably creating systems the law hadn’t considered and encouraging states to submit “waiver” applications that will allow the department to work outside the confines of its on-paper regulations. But she still may have achieved the best possible outcome. The Supreme Court empowered states to say no, and an astonishing number of them did. Even the most well-equipped ambassador with the most pragmatic possible approach couldn’t overcome deep opposition to Obamacare.
Sebelius, Arkansas Gov. Mike Beebe, and their aides were sitting at a conference table in Washington in late February when they finalized a Medicaid expansion deal they could all live with. Beebe and Sebelius, both Democrats, served as governors together; they go back years. But their agreement depended less on personal trust than on legal flexibility.Beebe always favored expansion, but he needed an approach that could pass his state’s GOP-controlled legislature.
The Affordable Care Act said that people earning below 133 percent of the federal poverty level—about $15,000 for a single person—should get insurance through expanded Medicaid. But Arkansas Republicans didn’t want a larger government program. So a team of consultants, HHS officials, and Beebe’s staffers unearthed a vague and decades-old provision in the Medicaid statute allowing its funds to sometimes be used to buy commercial health plans. In a handshake deal after that February meeting, the secretary agreed to let Arkansas use such a mechanism to cover all of its new Medicaid enrollees. Instead of offering poor Arkansans coverage under the state Medicaid program, as the law described, Beebe would let them buy private coverage at the federal government’s expense, a choice that could cost as much as 50 percent more than the conventional program, according to the Congressional Budget Office. It was an expensive solution, but at least it brought one more state on board.
At the time, Sebelius had enjoyed a series of high-profile successes. Not only had she secured promises to expand from nearly every state with a Democratic governor but she’d also recently persuaded seven Republican governors to come along, too. They included anti-Obamacare firebrand Rick Scott of Florida and Jan Brewer of Arizona (who had tangled with the administration on immigration policy). The same day that Beebe announced the Arkansas deal, New Jersey’s Chris Christie, who had his eyes on the 2016 presidential election, also threw his support behind expansion.
The administration thought it was playing a strong hand. Even though the Supreme Court had allowed states to opt out of the expansion, the incentives to opt in were enormous. The federal government will pay 100 percent of the bill for the first three years, and even in later years the contribution will never drop below 90 percent. (Currently, states receive on average 57 percent from Washington.) In a period when many state economies are still shaky, expansion means a huge infusion of federal cash into local economies. Hospitals, which have powerful lobbies, exhorted their state officials to sign up. A series of studies suggested that expansion would both stimulate economic growth and save governors money by allowing them to reduce spending on health care for the uninsured. An analysis by the nonpartisan Urban Institute suggested that many of the states most opposed to the law—the poor ones in the South and elsewhere—had the most to gain.
Yet Sebelius’s success rate was worst in exactly those states. And when a GOP governor capitulated, it was sometimes because Sebelius offered more than just Medicaid funding. She granted a generous waiver to let Arizona restructure its existing Medicaid system. She gave Florida permission to move nearly all of its existing Medicaid population into managed-care plans, answering a request her department had been considering for two years. Gov. John Kasich of Ohio said he received assurances from the White House that he’d be able to split the program in two: People below the poverty line would get traditional Medicaid, while those above would receive federal vouchers to buy private plans on the exchanges. Matt Salo, the executive director of the National Association of Medicaid Directors, said it was important that states felt they were able to negotiate. “Politics 101 is: When your counterpart wants something, try to see what you can get in exchange for it,” he says, “even if you want the same thing.”
Ron Pollack, the president of Families USA, which supports health reform, says he has been impressed by the way Sebelius has balanced the strictures of the law with an openness to state realities. He rates her performance as close to ideal, despite the poor results. “Secretary Sebelius used to be a governor, she used to be an insurance commissioner, so she’s got real sensitivity to what states need,” he says. “She is a bridge because people trust her and people have experience with her.”
Still, critics say the department could have done more to sweeten the deal for skeptical states. “Their political strategy was based on, ‘Here is a bunch of federal dollars, and we will just let the raw politics of the infusion of that money prevail, and that’s all we have to do,’ ” says Dennis Smith, a managing director at McKenna Long & Aldridge, who was Wisconsin’s HHS director until February. “I think that was a huge mistake.” Wisconsin opted against expansion. Smith argues that the department’s approach was too proscriptive—barring states from asking new beneficiaries to pay more for their care and requiring states to cover a broad array of expensive benefits that exceed the reach of most commercial insurance products.
The Arkansas option went further than Sebelius’s previous side deals. After that February meeting, Beebe announced a plan to voucherize Medicaid for the new beneficiaries. They would get the federal subsidy if they enrolled on the state exchange, purchasing the same plans available to higher-income purchasers. The agreement, as he described it, raised several questions. Would HHS really approve a plan that could cost so much more than traditional Medicaid? Would the new beneficiaries be exposed to the high deductibles and co-payments in the private plans (in apparent conflict with the Medicaid statute)? What legal authority enabled the department to permit a program mentioned nowhere in the Affordable Care Act?
The decision displeased Medicaid advocates (who worried that the Arkansas plan might rob new beneficiaries of key legal protections) and some budget hawks (who noted that Congress had used Medicaid to expand health coverage instead of private insurance specifically because it was so much cheaper). But Sebelius’s call also cheered many close to the process, who thought the “Arkansas option,” and the flexibility it suggested, would be enough to entice many more states into expanding. National news reports, circulated in state capitals, described the plan as a sort of third option—not rejection, not expansion. “Any state that has until now been saying ‘no’ can use this as a way to get to ‘yes,’ ” Salo said at the time. He guessed that it might lure 10 more states to expand.
For about a month during peak state-budget season, politicians across the country began thinking that everything was on the table. The Florida Senate began exploring its own private-expansion model, which would involve neither Medicaid nor the exchanges. Tennessee Gov. Bill Haslam’s office contacted HHS and made a series of eleventh-hour demands that officials told the governor they couldn’t honor. Now, neither of those states looks likely to expand.
Finally, at the end of that month, HHS laid out clear rules about what would and wouldn’t be allowed by states pursuing an “Arkansas option.” (For the most part, they gladdened Medicaid advocates and disappointed conservative would-be reformers.) Sebelius defends the delay, saying the month of uncertainty didn’t derail states committed to expansion but gave them an opportunity to present the department with their own ideas. “Beyond what you saw as a month delay were probably daily conversation with not only Governor Beebe but others,” she says. “To me, that was a better way to try to navigate this process than shipping out massive rules and regulations.”
Sebelius says her objective—as a former state official who knows how little local politicians like directives from on high—has been to give governors and legislators room to take ownership of the Medicaid expansion. “What we’re trying to do, particularly in the Medicaid space, is not issue a lot of edicts: ‘You absolutely cannot do x, y, and z.’ ‘You absolutely must do these four things,’ ” she says. “This is, frankly, driven by a lot of my sensitivity to states wanting to feel that it’s their program, it’s tailored for them—particularly in some of these more partisan legislative processes—that they are not being told by Washington to do something.”
Some states were never going to expand. Tony Keck, the director of health and human services in South Carolina, says an expansion didn’t fit with Republican Gov. Nikki Haley’s view of the best way to improve the health of the state’s poor. His state would have been open to new Medicaid financing schemes, Keck says, but not if these required them to cover new people. “They want to get as many people health insurance as possible,” he says. “We think that’s the wrong way to address the question.” Asked if he could think of a concession Sebelius could have made to induce the Palmetto State to join, he couldn’t name one.
The Arkansas example may have showed Sebelius at her most flexible and conciliatory, but it also showed the limits of her power. She had made major sacrifices—cost, structure—to help Beebe, an unusually cooperative partner, win over the GOP-controlled Legislature that was reluctant to expand a government program. “For whatever reason, philosophical or whatever, many of them preferred the private-insurance approach much better than the standard Medicaid approach,” Beebe tells National Journal.
And while Sebelius could at least devise a plan to win over those lawmakers, she had no such luck in certain other states where legislators were less interested in negotiating. The Republican governors of Florida and Ohio endorsed Medicaid expansion, but state legislators, often those aligned with the tea party, refused to follow suit. This was perhaps inevitable: They know less about health policy than their governors (who have expert advisers and entire health departments at their command) and worry more about primary-election challenges from the right. Many will simply never be persuaded to vote for an Obamacare program or an expansion of Medicaid, which they see as deeply flawed. In other states, impossible vote counts may have prevented governors from taking the political risk in the first place.
There’s not much Sebelius can do about that. “Some of it was waiting for who was going to blink first, and I think we all thought that the states would blink because of the amount of money on the line. And that just isn’t how it worked out,” says Caroline Pearson a vice president at Avalere Health, who has been closely tracking state developments. Pearson estimated in February that only five states would be holding out by year’s end. Now she counts 23 in favor and only three still in play. “Governors win elections by making the case, ‘We improved the economy; we extended health care to our residents,’ ” she says. “The arguments that get legislators unelected is, ‘They took the following vote in support of Obamacare.’ ”
Sebelius may get another chance after Election Day. Next year, half the states will start their expansions, the rest of the law will roll out, and the secretary will keep talking to governors. The implementation won’t look like the one Congress or the Obama administration had anticipated, but decisions about Medicaid can keep coming. “There is no timetable,” Sebelius says. “The door is open.” At this point, she’s just hoping more governors will walk through it.
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