State Health Policy Decisions: What Does Federalism Have to Do with It?

Milbank State Leadership Network
Focus Area:
State Health Policy Leadership The Health of Aging Populations
Mental Health
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States sometimes forge new paths in health policy. For example, Washington State recently created the first long-term care insurance law and established one of the first public options on its health insurance marketplace. Yet, in practice, many state health policy decisions are made in the context of the US federalist system — where the federal and state governments share responsibility for administration, funding, and oversight.

In some cases, federal law may preempt states from taking aggressive or new actions in the name of “national consistency.” There’s not much state officials can do in those instances except lobby their congressional delegation. But more often, federal policy sets a floor above which states may set their own requirements — and there is an interplay of requirements and incentives between the two levels. Without careful policy planning, overlapping federal and state regulations can result in chaos. But if the regulations are coordinated, states may use a combined federal–state policy toolbox to strengthen population health.

In this blog post, I provide historical context for two policy issues that have recently been advanced by federal actions: home- and community-based services (HCBS) and mental health parity. These issues illustrate the strengths and challenges associated with federal–state health policy.

Home and Community-Based Services

Until the 1990s, long-term care (LTC) for the elderly and disabled was  mainly provided in institutional care settings; home- and community-based service options (HCBS) were less available. Medicare coverage of LTC was narrowly defined and time limited, and Medicaid law identified nursing home services but not community services as mandatory. The expansion of HCBS began when federal law was amended in the 1980s to provide for federal–state Medicaid “waiver” authority, under which states can cover people at risk of institutionalization with a broader array of services, and under more permissive eligibility standards, than are covered under Medicaid state plans. The number of states with waivers allowing for coverage of more HCBS slowly but steadily increased as states navigated procedural requirements for budget neutrality and periodic renewal, as well as constraints of state funding for expansion of services.

But two federal actions — the Americans with Disabilities Act of 1990 and the US Supreme Court’s Olmstead decision in 1999 — changed the landscape dramatically.  These actions, which required accommodations for people with disabilities, and policy commitments to serving people in the least restrictive setting appropriate for their needs, motivated states to act and the federal–state Medicaid partnership became the focal point for reform.

For two decades, states have continued to expand coverage of flexible, person-centered, and community-based models and to champion “rebalancing” of LTC. This has been facilitated by waiver authority, but also new state plan options to cover HCBS services and for self-directing care.

This expanded array of federal options, combined with state policy uptake and increased utilization, has over the past 10 years enabled a sea change in how Medicaid funds are being spent.  Medicaid spending on HCBS now constitutes the majority and a growing percent of total LTC. But even with significant federal matching funds and program flexibilities, state waivers have limited capacity so there may be waiting lists and limited service availability. Few states have opted into a state plan HCBS model that would operate without those restrictions. Program flexibility alone has not let states fully meet demand and states have consistently identified the need for more federal funding to support this work.

In response to this need, and the impact of COVID-19, the American Rescue Plan (ARP) provided a one-time 10% increase in federal matching payments to states for HCBS.  This enhanced match will only be available for one year (through March 31, 2022) and must supplement, not supplant existing state expenditures.  States have considerable flexibility to design plans for use of the funds that align with local policy priorities.

The ARP is just the latest federal initiative providing new capital and pathways for states to enhance their HCBS models. Doing so now is particularly compelling not only because it is consistent with consumer preference and saves money as compared to institutional care, but it will also help to address shifts in demand as the country emerges from the COVID public health emergency. However, if states take advantage of this funding, they will also have to figure out how to sustain these investments once the federal enhanced match expires.

Overall, the combination of new legal requirements, changes in social policy, and access to federal funds and flexible program options has spurred state development of HCBS options.

Mental Health Parity

As with long-term care (LTC), mental health services were initially focused on the most complex conditions and usually treated in institutional settings. The Olmstead decision in 1999 began to change how states organized their publicly funded mental health services.  But unlike most LTC, mental health services are paid for through a mix of public and private plans.

In response to a combination of political movements, more evidence about costs and personal examples of the growing need for mental health services, more scrutiny was placed on how private health insurance decisions about mental health services were made.  It became clear that coverage and payment decisions were not guided by consistent scientific standards, and major disparities existed between the commercial insurance treatment of physical and mental health services. In response, a variety of state mental health parity laws were adopted, and at the same time, new federal requirements were applied to health coverage offered by self- insured employer groups – first large employer groups in 1996 and later through the more comprehensive Mental Health Parity and Addiction Equity Act of 2008.

Mental health parity is usually evaluated by considering medical necessity standards, prescription drug formularies, and provider participation. A health plan’s standards must be applied in a manner comparable to and no more restrictive than those used for medical-surgical benefits. Regulators review health plans policies to ensure they comply with these requirements.

This interplay of federal and state laws has advanced mental health parity standards. These forces came together most recently through the Consolidated Appropriations Act of 2021 that established more specific requirements for all health plans to document and make available their mental health coverage policies. These changes will further standardize the process and make it easier for federal and state regulators to obtain documentation.

But diligent oversight and enforcement are still needed, and this is technical, resource-intensive work. COVID-19 brought some of these issues to light when Medicare, states, and private plans adopted more flexible policies for uses of telehealth including parity between remote and in- person care payments. (Telehealth use for mental health services was gaining ground before COVID-19, and accelerated during the pandemic, with good results in terms of patient access and satisfaction.) Now Medicare, states, and health plans will need to determine whether and which of these emergency provisions to continue.

With growing mental health needs, it is even more important for private health plans to meet mental health parity requirements and for states to sustain and target their mental health parity oversight strategies.

Looking Ahead

Federal and state policy innovation to improve population health continues to evolve. For example, new federal rules regarding surprise medical bills will provide new consumer protections and also interact with current state requirements that limit these consumer charges. States don’t have to wait for federal action if they’re prepared to take on important new responsibilities on their own.  Those state innovations often become part of federal law, but until that happens states will bear responsibility — and reap benefits — for taking action on their own.