State Benefit Mandates and National Health Reform

NIHCR Policy Analysis No. 8 | February 2012 | By Chapin White and Amanda E. Lechner

State-level requirements that health insurers provide coverage for specific services -- from prescription medications to chiropractic care -- have generated debate for decades. On one side, opponents argue these mandates raise the cost of health insurance premiums. On the other, supporters maintain that mandates protect patients by guaranteeing access to medically necessary treatments. The passage of the Affordable Care Act in 2010 added new dimensions to this long-running dispute by establishing rules about which mandated benefits states would have to fund going forward.

Essential Health Benefits Under National Reform

Under the 2010 health reform law, states became responsible for covering the cost of any mandated benefits that went beyond a federally defined minimum package known as essential health benefits. Beginning in 2014, nearly all insurance products sold in the nongroup and small-group markets -- including policies offered through newly created state exchanges -- were required to include essential health benefits. These benefits spanned 10 broad service categories, from outpatient care and hospital stays to prescription drug coverage and mental health services.

Federal regulators gave states flexibility in how they defined the specific scope of essential health benefits. Each state could select a benchmark plan from among certain employer-sponsored health plans already available within the state. Every benchmark option on the table already covered a wide array of services, and most already incorporated many of the benefits that states had previously mandated through legislation.

How States Could Manage Mandate Costs

Federal guidance indicated that states could potentially sidestep mandate-related costs by selecting a benchmark plan that was already subject to the state's own mandate requirements -- a small-group plan, for instance. However, in some states the mandates applicable to nongroup insurance exceeded those imposed on small-group products. Since nongroup plans were not eligible as benchmark options, states with more extensive nongroup mandates faced potential financial exposure for those additional required benefits.

When a state's mandated benefits went beyond what the selected benchmark plan included, the state bore the financial responsibility for covering the difference. This created a direct fiscal incentive for states to either pare back mandates or choose benchmark plans that already aligned closely with existing requirements.

Maryland as a Case Study

Maryland offered a useful illustration of how state benefit mandates interacted with the essential health benefits framework. Analysis showed that the vast majority of Maryland's existing mandates would qualify as essential health benefits no matter which benchmark plan the state chose. The state's financial liability for retaining all of its mandated benefits in 2016 was estimated to fall between roughly $10 million and $80 million, depending on which benchmark option was selected.

Even in a scenario where states kept every existing mandate in place, the resulting financial obligation was projected to be modest relative to overall health spending. This finding suggested that concerns about mandate costs overwhelming state budgets were likely overstated, at least for states whose mandates broadly overlapped with the essential health benefits categories already required under federal law.

Policy Implications

The intersection of state benefit mandates and national health reform raised questions that extended well beyond fiscal impact. States had to weigh the political and public health consequences of rolling back mandates against relatively limited cost savings. Legislators who had fought to enact mandates for services like infertility treatment, substance abuse counseling, or hearing aids faced pressure from constituents who relied on those benefits.

At the same time, the benchmark selection process gave states an indirect mechanism for managing costs without explicitly repealing mandates. By choosing a benchmark that already incorporated most state requirements, lawmakers could reduce their financial exposure while preserving the coverage their residents expected. The Maryland example demonstrated that careful benchmark selection could limit state liability to a manageable range.

The broader lesson from this analysis was that the relationship between state mandates and federal reform was more nuanced than either supporters or critics of mandates tended to acknowledge. The financial stakes were real but contained, and the practical impact depended heavily on the specifics of each state's existing regulatory landscape and the benchmark plan it selected.

Sources and Further Reading

This analysis was originally published as NIHCR Policy Analysis No. 8 by Chapin White and Amanda E. Lechner through the National Institute for Health Care Reform, an affiliate of the Center for Studying Health System Change.