By N.C. Aizenman
Washington Post Staff Writer
Tuesday, November 9, 2010; 12:52 AM

Republicans' consolidation of power in state capitols is likely to expand the number of states that employ a far more limited, free-market-oriented approach to implementing the nation's new health-care law than the robust regulatory model favored by its supporters.

Although the law is a federal statute, it tasks states with administering many of its most important provisions and grants them considerable leeway.

It is up to states to run markets, known as "exchanges," through which individuals and small businesses will be able to buy health insurance plans, often with federal subsidies, beginning in 2014. States will also oversee a mostly federally funded expansion of Medicaid to cover a far larger share of the poor.

Many incoming Republican governors made their antipathy to the law a plank of their campaigns. Tennessee Gov.-elect Bill Haslam denounced it as "an intolerable expansion of federal power." Wyoming Gov.-elect Matt Mead promised to join 21 states contesting its constitutionality in federal courts. And Maine, one of the first states to set up a task force to implement the law, will now be led by Paul LePage, a tea-party favorite who vowed to work against the legislation and predicted that voters would soon see headlines about him telling President Obama to "go to hell."

Such state leaders cannot completely block implementation of the law: If they are unwilling or deemed unready to run an exchange by 2014, the legislation empowers the federal government to step in with its own version. But the law does grant states a fair amount of discretion.

The result, analysts say, is that two models are likely to appear: Democratic governors and legislatures are likely to emphasize vigorous regulation and government oversight, while Republican state leaders are likely to put greater stock in privatization and other free-market approaches.

"The character of what emerges in each state will in large measure be driven by the philosophy of its governor," said Michael Leavitt, a former governor of Utah who served as secretary of Health and Human Services under President George W. Bush and who many conservative state leaders are now consulting.

Indeed, for all the fanfare attending the GOP's retaking of the House in last week's midterm elections, the party's victories at the state level are likely to have far more immediate practical consequences for the health-care law. With a net gain of at least eight gubernatorial seats and even more state legislatures, Republicans now control both branches of government in at least 20 states, compared with nine before the elections. And although chances are slim that House Republicans can use their new power to derail the legislation as long as Obama remains in office, governors and state lawmakers can influence its shape.

For example, although the law sets baseline standards such as essential benefits that insurers must offer if they wish to sell plans on the exchanges, states can add any mandates. A state could require insurers to prove that their policies are achieving certain outcomes - high child immunization rates, for instance. Or it could allow virtually all comers into its exchange in hopes that doing so would keep costs lower.

States will also have to decide whether they will run the exchanges or outsource their oversight to a private entity.

Similarly, although the law requires states to review "unreasonable" premium increases, it will largely be up to each state to determine what that review process entails. States could require insurers to offer detailed justification and seek preauthorization for any rate increases. Or they could ignore all but the most substantial rate increases, and even then, simply require that insurers file reports detailing their reasons for the rise.

State approaches to insurance regulation differ substantially, and the range was evident in the variations among recent state applications for federal grant money that the law provides to help them develop their new rate review processes. Five states - Alaska, Georgia, Iowa, Minnesota and Wyoming - did not even request funding.

States will also be in a position to exert pressure on the federal government when it comes to the law's requirement that insurers spend 80 to 85 percent of the premiums they collect to pay medical claims or otherwise improve their customers' health. If a state thinks the requirement would cause too many insurers to drop out of its market, it can ask the Department of Health and Human Services for a waiver. Iowa and Maine have already done so, and other states are likely follow.

HHS has the final say. However, it could prove awkward for Secretary Kathleen Sebelius to turn down insurers backed by state governments.

Regardless of what regulations state governments choose to set, their willingness to commit the staff and resources needed to carry them out could also vary considerably.

"Having rules on paper and enforcing rules are not synonymous," said Alan Weil, executive director of the National Academy for State Health Policy, a nonpartisan group that has been monitoring and facilitating state implementation efforts.

Governors also face crucial policy choices when it comes to Medicaid's expansion. Do they control Medicaid costs that are already straining many state budgets by cutting the programs' reimbursement rates for hospitals and doctors? Or do they shift more categories of enrollees into managed-care programs that supporters praise as innovative and critics say risk denying needed care?

Some supporters of the law worry that Republican state leaders could sabotage it by doing just enough to stave off federal intervention, but not enough to enable the legislation's benefits to take root.

"The worst-case scenario is that a state does the bare minimum and sets up an exchange in form only that's destined to fail," said Ethan Rome, executive director of the advocacy group Health Care for America Now.

But many analysts maintain that for all their likely public posturing against the law, Republican governors and state lawmakers will have a strong incentive to work with the Obama administration behind the scenes to make sure it functions smoothly.

"I have yet to meet a governor who has said, 'I'm going to intentionally do a bad job at this to make another level of government look bad,' " Weil said. "They're accountable to the people, and the voters are too smart to let someone get away with that."

For instance, even during his campaign, Sam Brownback, the governor-elect of Kansas, modified his contention that the law is "an abomination" that "we will fight all the way," with the assurance that "we will do what the state is required to do." And even many states whose governors staunchly opposed the legislation have taken early steps such as obtaining federal grants to look into planning the exchanges.

"There's certainly been more preparation by some states compared to others," said Weil, whose organization keeps a database of state activities on implementation. "But the gap is really narrow."