If you look at the Senate Finance Committee’s health care bill (PDF), you’ll see that it substantially increases eligibility for Medicaid.

Starting in 2014, nonelderly people with income below 133 percent of the FPL would generally be made eligible for Medicaid; the federal government would pay a share of the costs of covering newly eligible enrollees that varies somewhat from year to year but ultimately would average about 90 percent. (Under current rules, the federal government usually pays about 57 percent, on average, of the costs of Medicaid benefits.) In addition, states would be required to maintain current coverage levels for children under Medicaid and CHIP through 2019.

Beginning in 2014, states would receive higher federal reimbursement for CHIP beneficiaries, increasing from an average of 70 percent to 93 percent. CBO estimates that state spending on Medicaid would increase by about $33 billion over the 2010–2019 period as a result of the specifications
affecting coverage.

The key here is that $33 billion number. We all know that state budgets are in complete disarray, and here comes the government with a substantial unfunded bill for them to pay. But that number is deceptive. What happens when a person moves from employer-based health care to one of the regional exchanges? One thing that happens is that their employer pays a fee (this is to dissuade them from dumping their employees). But the other thing that happens is that the employee’s compensation moves from untaxable health care benefits to taxable wages or salary. The states will see a spike in income tax revenue.

Now, let’s think about something. What would happen if a robust public option was added to the SFC bill, but it came with an opt-out clause for the states? Here is how Sam Stein explains the proposal:

…instead of starting with no national public option and giving state governments the right to develop their own [the Carper proposal], the newest compromise approaches the issue from the opposite direction: beginning with a national public option and giving state governments the right not to have one…

…How such a system would work is still being debated, according to those with knowledge of the proposal. But theoretically, the “opt-out” approach would start with everyone having access to a public plan. What kind of public plan isn’t yet clear. States would then have the right to vote — either by referendum, legislature, or simply a gubernatorial decree — to make the option unavailable in their health care exchanges.

When Stein says “everyone” would have access to a public plan, he means that each state would be part of the program, not that each citizen would be eligible to take part in it. While details matter greatly, in broad outlines this proposal would be the equivalent of offering each state large subsidies to pay for their uninsured, but also handing them a big bill in increased Medicaid spending. If the states participate, they’ll not only get subsidies, but they’ll get increased income tax revenue from the shifting of a portion of their workforce from tax-exempt health care compensation to taxable wages and salary.

What would happen if, for ideological reasons, some state like South Carolina decided they simply didn’t want to participate in the public option? They’d still get hammered by the increase in Medicaid eligibility, but they wouldn’t get any subsidies, they wouldn’t see any drop in the uninsured, and they wouldn’t see any increase in taxable income.

Granted that it is a bit difficult to game out the shifting revenue streams in a bill as big as this one, and that we’re talking about a proposal that has few details, but the opt-out compromise would probably not lead to any states actually opting out.

Something similar happened with the federal stimulus bill back in the spring. Govs. Mark Sanford, Rick Perry, and Sarah Palin all made noises about declining stimulus money because it would dictate to them how much unemployment insurance they had to pay out. But, in the end, no governors were willing to turn down federal money that would just be shifted to competing states.

Now, the immediate response from the FDL crew to this opt-out idea has been to raise concerns that the insurance industry will be be able to easily buy off state legislatures all across the country (even in Blue States), and get them to, ‘either by referendum, legislature, or simply a gubernatorial decree,’ opt-out of the public option. I don’t dispute the financial clout of the insurance industry or the corruptibility of state legislators, but I see this as a rather knee-jerk reaction. I’d see a lot more validity in this critique if we were discussing an opt-in provision.

Because state legislators are already facing the necessity for brutal budgetary cuts (which definitely make them unpopular and threaten their careers) it would take quite a lot of persuading to get them to accept a huge bill from the federal government at the same time they are turning down a big wad of federal funding and killing off their taxable revenue stream.

Of course, the devil is in the details. The opt-out provision could come with even more disincentives than I’ve discussed here. Remember, the federal government forced states to raise the drinking age and establish uniform speed limits by threatening to withhold federal transportation dollars. Each state had the right to opt-out of that transportation funding but, in the end, none of them did.

I wouldn’t reflexively oppose an opt-out compromise. I’d wait to see what it looks like before deciding.