November 27, 2012 12:00 PM
All conservatives agree that the new fight against ObamaCare is in the states. Though there are two decisions states have to make soon regarding the new health care regime, the serious debate at the moment is whether states should create state-based health insurance exchanges. Prominent conservatives argue that states can beat ObamaCare and the federal takeover of health insurance by refusing to create state-based exchanges.

These conservatives argue that states do not gain any serious authority by creating their own exchanges. James Capretta and Yuval Levin argue in The Wall Street Journal:

The idea that creating state exchanges would give states control over their insurance markets is a fantasy. The states would be enforcing a federal law and federal regulations, with very little room for independent judgment.

In Missouri, conservatives have dismissed arguments to the contrary either by (1) ignoring them, (2) criticizing anyone raising concerns about the implications of ceding all authority to the federal government as “supporters of ObamaCare,” or, (3) as one state Senator said the other day, as being brought by people “lost in the minutiae” of ObamaCare.

Contrary to what these critics might say, the “ostrich” strategy is never a good idea for making public policy. Ignoring disagreements based on differing interpretations of underlying facts leads to unintended consequences. Employing straw-man or ad-hominem attacks against those who disagree with you are tactics typically reserved for President Obama. And while it might not be sexy to dive into the “minutiae” of either federal or state law, the fact remains that “minutiae” is where actual policy is made.

The basis of any dispute over whether to create an exchange is not whether ObamaCare is good policy. All conservatives agree that it is not. Instead, the basis of the dispute is factual. There are two key questions. First, how much authority do states actually have when they create their own exchange? Second, does that authority actually matter?

A close review of the actual regulations being implemented by the Obama administration regarding insurance exchanges reveals that “the idea that creating state exchanges would give states control over their insurance markets” is not a fantasy, but a reality. Admittedly and regrettably, states cannot retain full control – but the controls which they may retain are important enough to compel conservatives to support the creation of state-based exchanges. Just as important, in the wrong hands, the ambiguity of the rules being implemented by the Obama administration could be used to take states quickly toward a single-payer system. In the right hands, the ambiguity of the rules could be used to ensure maximum competition.

Before delving into the minutiae of the federal regulations, however, it is important to understand a few key principles about administrative law:

  • First, the rule-making process is pain-staking. Once a rule is in place, it is difficult to change – and once a rule get far down the rule-making process, it is highly unlikely to change.
  • Second, once a policy is written in a rule, individuals and business have a right to hold the administrative agency to complying with that rule.
  • Third, the bureaucrat given the power to determine the “facts” in an administrative hearing has all the power – even more power than the rule-making authority. The bureaucrat who determines the “facts” can make the facts fit to the rules to get the outcome desired. This is true not just for administrative law, but criminal law, family law, tort law, and every other kind of law in which decisions are made by either judges or bureaucrats. A good lawyer who knows all the judges in his or her county often chooses to disqualify certain judges because they know how the judge will rule given a certain fact pattern.
  • Fourth, courts are highly deferential to an agency’s “fact-finding.” In the real world, what this means is that once an agency finds a certain “fact,” it is nearly impossible for the individual or business owner to get an appellate court to overturn that finding of “fact.” For example, courts reviewing findings of fact by federal administrative agencies limit appellate courts to overturning such findings to when they are “arbitrary, capricious, an abuse of discretion” or “unsupported by substantial evidence.” (On first reading, one might think the “unsupported by substantial evidence” would leave a lot of room for appellate courts to maneuver. It doesn’t in the real world.)

The regulations being promulgated by HHS actually do give states significant authority over the rules of plans offered in an exchange. Perhaps even more important, for states that create state-based exchanges, the regulations permit the state itself to be the “fact-finder” when it comes to interpreting the regulations. This being the Show-Me State, it’s not enough to say these things. It’s going to take aw while, but I will also show them to you.

Here are some of the key powers states retain if they choose to create their own exchange, with citations to federal rules or guidance, followed by brief commentary:


  • HHS has been clear that, where states do not create their own exchanges, HHS will determine what plans can be offered through an exchange. The plans allowed to be offered in exchanges are called “qualified health plans” or QHP. Here’s what HHS has said, “In states where a federally-facilitated exchange operates without a State Partnership, HHS will carry out all Exchange Functions, including???certifying, recertifying, and decertifying (qualified health plans).” From HHS, General Guidance on Federally-Facilitated Exchanges at 4. (This document “outlines HHS’ approach to implementing a “federally-facilitated exchange in any state where a state-based exchange is not operating.” (This also clarifies that HHS will “determin[e] individuals’ eligibility for enrollment in a QHP” if a state does not create its own exchange.
  • States that create their own exchange have the power to “develop and implement processes and standards for QHP certification, recertification, and decertification within FFE parements,” “conduct QHP certification review,” “monitor QHP oversight and monitoring, including monitoring,” and “collect and display quality information.” Id. at 6.
  • By contrast, in federally-facilitated exchanges (i.e. states where the state government has abdicated its power to create an exchange), HHS conducts “all aspects of QHP certification, monitoring, oversight, and management.” Id. at 8.

The actual rules proposed by HHS, which are in the final stage of the rule-making process (a stage at which change is highly unlikely), establish the parameters under which an Exchange may operate – whether a state-based exchange or a federally-facilitated exchange. See Proposed Final Rule 45 CSR Parts 155, 156, 157, which provides the following:

  • “The Exchange must offer only health plans which have in effect a certification issued or are recognized as plans deemed certified for participation in an Exchange as a QHP.” Subpart K, §155.1000(b).
  • “The Exchange may certify a health plan as a QHP in the Exchange if – (1) the health insurance provider provides evidence during the certification process in §155.1010 that it complies with the minimum certification requirements outlined in subpart C of part 156; and (2) the Exchange determines that making the health plan available is in the interest of qualified individuals and qualified employers.” NOTE: This second provision is key. This is the type of “fact” determination of an administrative agency which an appellate court could not overturn. Whichever bureaucrat is in charge of determining the “fact” of whether “making a health plan available is in the interest of qualified individuals and qualified employers” will get to determine the health plans available in any given state. An exchange run by the Obama administration could use the second provision to severely limit competition in a federally-facilitated exchange. If Missouri creates its own exchange, the state would fight for maximum competition and choice. The ambiguity of the phrase “in the interest of qualified individuals and qualified employers” is either a blessing or a curse. If Missouri runs its own exchange, it’s an unmitigated blessing because it’s so open to interpretation and allows us to have maximum competition. If the Obama administration runs the exchange, watch out, anything goes.
  • The certification requirements in subpart C of part 156 provide that an Exchange must ensure a “QHP issuer” be accredited on the basis of (i) clinical quality measures; (ii) patient experience ratings; (iii) consumer access; (iv) utilization management; (v) quality assurance; (vi) provider credentialing; (vii) complaints and appeals; (viii) network adequacy and access; and (ix) patient information programs.” NOTE: All of these criteria are flexible. Any lawyer who has ever had an administrative law case could recognize that these standards leave open tremendous potential for a regulator to unjustly deny Missourians access to an insurance product. An exchange run by the Obama administration could use any of these criteria to limit competition in a federally-facilitated exchange. Just as with the “in the interest of” test above, the ambiguity in this rule is wonderful if Missouri creates its own exchange, and terrible if an exchange is run by the Obama administration.
  • “The Exchange must establish procedures for the certification of QHPs.” §155.1010. NOTE: In a federally-facilitated exchange, the bureaucratic hurdles for certification could be immense to limit competition. In a Missouri-run exchange, certification would be streamlined in the process of creating the exchange.
  • “The Exchange must establish a process for the decertification of QHPs???.The Exchange may at any time decertify a health plan if the Exchange determines that the QHP issuer is no longer in compliance with the general certification criteria as outlined in §155.1000(c).” NOTE: In a federally-facilitated exchange, this provision would allow the Obama administration to cancel the insurance policies of Missouri residents. In a Missouri-run exchange, local official would review the cases – and aim towards the most competitive market possible.


  • Under ObamaCare, QHPs must include “essential health benefits” (EHB) which are to be determined by a “benchmark plan” – basically one of ten popular plans within a state. States which create their own exchange “are permitted to select a single benchmark to serve as the standard for qualified health plans inside the Exchange operating in their State and plans offered in the individual and small group markets in their State.” From HHS, Essential Health Benefits Bulletin at 9.
  • If a state creates its own exchange, HHS has declared it will let it choose the benchmark plan, proposing “that EHB be defined by a benchmark plan selected by each State. The selected benchmark plan would serve as a reference plan, reflecting both the scope of services and any limits offered by a ‘typical employer plan’ in that State.” Id. at 8.
  • HHS limits a state’s choices in picking a “benchmark plan” to one of the following ten: “the largest plan by enrollment in any of the three largest small group insurance products in the State’s small group market,” “any of the largest three State employee health benefit plans by enrollment; “any of the largest three federal plan options by enrollment,” or “the largest ensured commercial non-Medicaid HMO in the state.” Id. NOTE: This is huge. Michael Cannon has urged states creating an exchange to submit a request for a “benchmark plan” which the state knows HHS will reject, but which is affordable, to expose one of the large fallacies of ObamaCare – that there’s an effort to bring costs down. I like this idea. Moreover, I like doing it, getting rejected, then requesting a waiver and putting pressure on the Obama administration through a draw-out public battle to accept an idea that will actually reduce costs.
  • HHS clearly states, “If a State does not exercise the option to select a benchmark health plan, we intend to propose that the default benchmark plan for that State would be the largest plan by enrollment in the largest product in the State’s small group market.” Id. at 9. NOTE: If Missouri doesn’t do it, Kathleen Sebelius chooses instead.


  • PRICE-SETTING BY THE FEDERAL GOVERNMENT The rules provide, “The Exchange must ensure that a QHP issuer submits a justification for a rate increase.” Proposed Final Rule 45 CSR Parts 155, 156, 157 at §155.1020. NOTE: Under this section, the entity running the exchange can deny a private business the right to price their product as they see fit. Price controls have no place in a market-based society. In a federally-facilitated exchange, this provision would allow the Obama Administration to function as a centralized price-setter for health insurance rates. The Obama administration could use this regulation to run many insurance companies out-of-business, ultimately leading to a single-payer system. In a state-based exchange, Missouri would allow market forces to work so as not to cripple insurance companies and to have robust competition. The Obama administration approach to deny increases would look good at first – until they run competition out of the market and we’re stuck with just a few or a single choice – at which point we will reach Barney Frank’s Nirvana – and once we get to that point, here comes single payer. There’s no going back.
  • RESTRICTING GEOGRAPHICAL AREA The rules provide, “The Exchange must have a process to establish or evaluate the service area of QHPs to ensure such service areas meet (certain criteria).”Proposed Final Rule 45 CSR Parts 155, 156, 157 at §155.1055. NOTE: In a federally-facilitated exchange, this provision would allow the Obama administration to forbid certain companies from offering their products in certain regions – or forbid companies from offering their products at all. As with the price-setting rule, allowing the Obama administration to make these “fact-finding” decisions would open the door for the evisceration of a competitive private market for health insurance in Missouri.
  • REPLACING INSURANCE AGENTS WITH ACORN ObamaCare invents a new health insurance concept called “navigators” – those organizations or persons permitted by law to receive compensation for steering consumers to health insurance plans within an exchange. “Navigators” can be health be a number of different types of entities, including private businesses and also community action groups. The rules provide, “The Exchange must establish a Navigator program consistent with this section through which it awards grants to eligible public or private entities or individuals” and such standards must “be designed to prevent, minimize, and mitigate any conflicts of interest, financial or otherwise,” and “ensure expertise in the needs of underserved and vulnerable populations; eligibility and enrollment rules and procedures; and the range of QHP options and insurance affordability programs.” Proposed Final Rule 45 CSR Parts 155, 156, 157 at §155.210. NOTE: In a federally-facilitated exchange, this provision would allow the Obama administration to certify ACORN as a navigator and reject insurance agent entrepreneurs as the same. If Missouri created an exchange, we’d have an open process for “navigator” qualification which would not shun entrepreneurs.

These are some, but not all, of the important powers states can retain by creating their own exchanges.1 These powers are not illusory. If used properly, they can allow Missouri and other states to mitigate the damage of ObamaCare. (mitigate, not eliminate.) If used improperly in a federally-facilitated exchange, they can easily take us down a short-path to single-payer.

Opponents have also argued that even if states have authority today, it could later be taken away by the federal government. However, that argument is misplaced. Fear that authority might be ripped away in the future is not justification for abdicating that authority today. Moreover, history and federalist principles suggest that (1) once the federal government establishes an exchange, it’s unlikely it would let a state take it over far down the road; and (2) once a state establishes an exchange, it might be nearly practically and legally impossible for the federal government to take it away.

First, as critics have pointed out, we do not know how long the federal government might allow this opportunity to remain open. When Social Security was first passed, states and local governments had the authority to opt-out for their employees. Many did – and their workers have benefited as a result. But the exception was closed in 1983. See State and Local Government Retirement Programs: Lessons in Alternatives to Social Security, CATO, 1999. The very same could happen here. Once the Obama administration creates Missouri’s exchange, wrestling it away from the federal government could be next to impossible.

Second, if Missouri creates a state-based exchange, there’s a strong constitutional argument that the federal government could not ever commandeer the exchange in the future. Supreme Court case law is clear that, under the Tenth Amendment, the federal government cannot commandeer state or local employees to carry out exclusively federal tasks. See Printz v. United States, 514 U.S. 549 (1995). Could the federal government constitutionally take over a regulatory structure set up and paid for by a state government against the wishes of that state government? I would think not, but no case comes to mind because I don’t know of any historical precedent for such an action off the top of my head. As a result, I believe that if a state creates its own exchange, it will retain control of it as long as it so desires.

Critics have also argued that doing anything to implement a state-based insurance exchange would violate the will of the voters. I disagree with this premise based on (1) the actual language of the two referendums, and (2) the facts of this controversy. We cannot stop a health insurance exchange from being implemented in Missouri. The Obama administration has made clear that it will move forward on its own if states do not enact their own exchange – and federal law requires as much. Either Missouri enacts its own exchange, or President Obama and Kathleen Sebelius do. If Missouri takes charge, we can ensure the maximum amount of competition possible within a bad system that we did not create. If President Obama and Kathleen Sebelius take over, they can use the ambiguity of the rules to eviscerate competition and send us down a quick path to single-payer health care.

Given those two choices and the facts outlined above, what do you think Missouri voters would choose and have chosen? Would they choose a marketplace run by Missourians intent on maintaining competition and free enterprise, or one run by unelected bureaucrats in the Obama administration who could use it to create a completely government-run health care system? I believe the answer is obvious. Missourians have chosen and would choose the lesser-of-two-evils, a state run exchange that maximizes competition and keeps control away from the Obama administration.

Elected officials have a responsibility to examine the “minutiae” of state and federal policy. As anyone who has spent a moment working on legislation, changing a single word in a 200 page bill can completely change the policy outcome. As a result, Missouri lawmakers must be vigilant to actually read the bills and regulations they’re talking about lest they become state-based versions of Nancy “But we have to pass the bill so that you can find out what’s in it” Pelosi.

I believe my charge is to protect the citizens of the state of Missouri by defending free enterprise. And, in this situation, where we are left with a bad choice (creating an exchange) and a horrifying choice (abdicating our powers to the Obama administration), I’m going to take the one that will lead to the least harm to free enterprise in the long-term. Based on my review of these regulations, conservatives who work to prevent creation of a state-based exchanged, while well-intentioned, are inadvertently falling into the trap of letting President Obama run these exchanges and catapulting our country toward a completely socialist heath care system.

At the moment it appears that Missouri will in fact cede our last remnant of state sovereignty in the health insurance market over to the Obama administration. In 2011, the Missouri House unanimously passed legislation to create a state-based exchange. The bill then passed unanimously through the Senate Small Business, Insurance, and Industry Committee thanks to the leadership of the committee’s chair, Sen. Scott Rupp. Though the Missouri House would likely pass a similar bill again, there are several Senators who will likely prevent a vote from ever occurring in the Missouri Senate. These Senators are well-intentioned. But I firmly believe a review of the existing state of facts reveals they are plain wrong on the issue.

I pray that my analysis above is wrong and that there will be minimal harm from these Senators’ decision to give up Missouri’s last bit of sovereignty. However, based on my own experience in administrative law and a review of the actual regulations, I think these well-intentioned Senators and conservatives elsewhere are inadvertently taking us down the road to health care serfdom. To prevent that from happening, I will continue to attempt to appeal to these Senators with logic and the facts outlined above. The stakes are too high to do anything less.

1Proposed Final Rule 45 CSR Parts 155, 156, 157 clocks in at 644 pages, so I could include more, but I believe these are the most important.

Representative Jay Barnes is a Republican representing the 114th District in Missouri.

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Contrary to what these critics might say, the “ostrich” strategy is never a good idea for making public policy.

Just as important, in the wrong hands, the ambiguity of the rules being implemented by the Obama administration could be used to take states quickly toward a single-payer system.

At the moment it appears that Missouri will in fact cede our last remnant of state sovereignty in the health insurance market over to the Obama administration.

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