Capital Thinking Magazine

STATES: THE BANKRUPTCY OPTION

Life Support

States struggle to control health care costs

Even more than education, health care is proving to be the area states must target for cost-saving. Legislatures facing massive deficits are contending with soaring Medicaid costs and great uncertainty about the rollout of federal health care reform.

States that work with health care providers have an opportunity to help shape new delivery systems with federal support, says M. Todd Tuten, senior public policy advisor for Patton Boggs. "It is a brave new world, where the whole construct of how health care is financed and delivered will change," Tuten says.

Medicaid will essentially serve as universal health care for low-income people starting in 2014. As Medicaid rolls expand, states are seeking greater flexibility to rein in spending. "States are screaming bloody murder," Tuten says, "since they are required to maintain their current levels of Medicaid coverage. It is unrealistic for most states to opt out of Medicaid and lose their federal funding, so they are cutting optional service and trying to become more efficient."

Health care reform offers some incentives for states to improve their Medicaid programs. It will allow states, for instance, to set up new Accountable Care Organizations—groups of hospitals, doctors and other providers that can earn federal bonuses if they provide quality care at lower costs.

Health care providers must work proactively with government officials to create new delivery systems, says Patti Harper, senior director of CHRISTUS Health, a faith-based, nonprofit health care system based in Texas. "Legislators are struggling to balance their budgets," she says. "We are seeing less money go through the system, so we have to adapt for the patients we serve."

More than two dozen states might be suing the federal government over health care reform, but they've also taken more than $800 million in related federal funding and know the health care system must be made more efficient somehow, Tuten says. However, he adds, "the rhetoric doesn't always match the reality."

A View from the Statehouse

Has bankruptcy become the better option?

The nation's statehouses are so battered by plummeting revenues and soaring costs for pensions and benefits that many have struggled this year simply to balance their budgets.

With solvency likely to remain a question for several years, Congress should consider giving states the option of declaring bankruptcy, says Michael P. Richman, a Patton Boggs partner and nationally recognized bankruptcy lawyer. This option would give states a strong incentive to restructure their crushing debt, he says. "Each state could decide in the context of their economic situation whether to take advantage of the option," Richman says. "A bankruptcy process sets rules for what happens to debt in default and insolvency contexts. Without this option, there are no real ground rules."

Businesses that depend on state contracts or various forms of state aid—or that simply need a stable business climate—face tremendous uncertainty as states stumble from one exhausting budget year to the next. States have faced more than $400 billion in budget gaps over the past four years, forcing legislators to reduce the size and scope of state government in record time.

But businesses might not feel the positive effects of state efforts to reform services for some time, making bankruptcy an option worth having, Richman says. "The new risks would not be much different than the risks of doing business with any commercial enterprise," he says. "Furthermore, given market behavior, it would not be surprising to find companies offering insurance against such defaults and risks."

The long-term implications are more difficult to predict, although a bankruptcy option is probably a better alternative than a default when it comes to protecting the interests of business and taxpayers, Richman says. "If we assume states will wish to avoid bankruptcy at all costs and are likely to continue to try to balance their budgets through conventional means, it is difficult to conceive of any long-term negative effects from a bankruptcy option."

Creative Financing Checklist

With federal and state legislators loath to support new spending, cities are seeking creative sources of financing to pay for infrastructure. "The federal government won't be the kind of partner it has been, but it can provide seed funding and financing more creatively," says Victoria Cram, a policy advisor at Patton Boggs. Recent financing initiatives include:

The mayors of Los Angeles and Mesa, Arizona, have called for the expansion of a federal loan program for major, job-producing transit projects to cover up to 49 percent of total costs.
U.S. Sen. Ron Wyden (D-Ore.) wants to launch a program similar to Build America Bonds, which offered rebates for 35 percent of a municipal borrower's interest costs.
U.S. Sens. Kay Bailey Hutchinson (R-Texas) and John Kerry (D-Mass.) have proposed an American Infrastructure Financing Authority, a self-sustaining body that would provide up to half a project's costs.