Federalism under Obama.

• Author: Metzger, Gillian E.

TABLE OF CONTENTS INTRODUCTION I. FOUR FEDERALISM DEVELOPMENTS A. The Affordable Care Act and Health Insurance Reform B. Dodd-Frank and Financial Sector Reform C. The Recovery Act, Fiscal Federalism, and Race to the Top D. Preemption Under the Obama Administration II. ASSESSING THE OBAMA ADMINISTRATION'S FEDERALISM RECORD A. Nation Versus State, or Activist Government Versus Laissez-Faire? B. The Central Importance of Administrative Federalism CONCLUSION INTRODUCTION

At first glance, federalism would seem to have fared poorly under the Obama administration. The administration's signature achievements to date involve substantial expansions of the federal government's role, be it through new federal legislation addressing health insurance and financial sector reform or massive injections of federal spending. (1) Such expansions in the federal government's role frequently translate into restrictions on the states. New federal legislation often preempts prior state regulation, and federal spending often comes with substantial conditions and burdens for the states. Not surprisingly, many state officials have sharply criticized these developments at the federal level, often invoking federalism as their fighting flag. (2)

Yet the story of federalism's fate under the Obama administration is not so simple. To be sure, these national developments entail some preemption and new state burdens. But each also has brought with it significant regulatory and financial opportunities for the states. States play a pivotal role in implementing the new federal health insurance legislation, with responsibilities ranging from creating and operating the health insurance exchanges to overseeing premium rate increases to running expanded Medicaid pro- grams. (3) States also have increased regulatory responsibilities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which takes a notably restrictive approach to preemption. (4) Preemption by federal administrative agencies has been further curtailed by President Obama's Preemption Memorandum, issued early in his administration, instructing agencies that preemption "should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption." (5) Furthermore, a substantial amount of the stimulus funding went to the states, cushioning the effects of the financial crisis on state employment and operations and representing the greatest increase in flexible federal financial aid to the states in thirty years. (6)

Rather than assertions of federal power at the expense of the states, the central dynamic evident under the Obama administration to date is more active government, at both the national and state level. States are given significant room to shape their participation in the new federal initiatives, as well as enhanced regulatory authority and expanded resources to do so. (7) States that are eager to play a greater regulatory role and support the new federal policies therefore have much to gain. But states that choose to stay on the sidelines face the prospect of direct federal intervention or loss of access to substantial federal funds, and their ability to pursue their preferred regulatory (or deregulatory) strategies may be curtailed. (8) Put differently, federalism under the Obama administration is federalism in service of progressive policy, not a general devolution of power and resources to the states. (9) Some might dispute that granting states a role to play in advancing a policy agenda emanating from Washington represents federalism at all. (10) At a minimum, the Obama administration experience puts front and center the debate over whether federalism has any principled, apolitical basis or is instead simply invoked when it serves to advance a favored political result. (11) Yet this experience also suggests that, even in areas in which the national government has constitutional authority to set policy and federalism operates at best as a second-order concern, the result can still be substantial and potentially lasting protection of state authority. (12)

Equally significant, the experience so far under the Obama administration highlights the central importance of the administrative sphere to modern-day federalism. Critical decisions about the actual scope of state powers and autonomy will be made not in Congress or in the courts, but in the halls of agencies like the Department of Health and Human Services (HHS) and the Department of Education. (13) True, federal administrative agencies have long had substantial power over the shape of nation-state relationships, but the recent regulatory developments expand that power considerably. (14) Indications so far suggest that federal agencies have pulled back from more aggressive preemption practices and are allowing states to exercise genuine implementation discretion--indeed at times actively soliciting state partnerships. (15)

A particularly interesting feature of the Obama administration initiatives, moreover, is their use of administrative structures that not only deeply embed the states in federal program implementation but also give the states a role in setting the content of federal regulatory standards and even overseeing federal agency performance. (16) These structures raise the question of how institutional design can be used to foster greater administrative attentiveness to federalism concerns, as well as underscore the role states can play in reforming federal agencies. (17) These structures also highlight the important role that administrative law can play in supplementing political and administrative checks on federal overreaching. (18)

In Part I of what follows, I begin by describing three major legislative initiatives under the Obama administration that have substantial federalism implications: the Patient Protection and Affordable Care Act, Dodd-Frank, and the federal stimulus (officially known as American Reinvestment and Recovery Act), with particular focus on the use of stimulus funds in the Department of Education's Race to the Top program. I also describe significant moves the administration has made on the preemption front, both restricting and supporting preemption claims. In Part II, I assess the implications of these developments for federalism, emphasizing both the central pro-regulatory dynamic and the critical importance of administrative federalism.

1. FOUR FEDERALISM DEVELOPMENTS

   The most notable federalism developments under the Obama administration have occurred largely in the legislative sphere. This Part offers a description of three major pieces of legislation--the health insurance and financial sector reform measures and the Recovery Act--that are particularly significant from a federalism perspective. It also details related administrative developments that have had substantial impact on the states, including the Department of Education's Race to the Top program and the administration's position on preemption.

   1. The Affordable Care Act and Health Insurance Reform

      Perhaps the signal achievement of the Obama administration to date is the Patient Protection and Affordable Care Act of 2010, known as the Affordable Care Act or ACA for short. (19) The ACA undertakes a major overhaul of health insurance, imposing substantial new federal requirements and expanding health insurance to 32 million of the nation's 55 million uninsured. (20) Critical features of the legislation include: prohibitions on insurance companies discriminating against individuals based on preexisting conditions or imposing caps on benefits; (21) a requirement that individuals purchase insurance along with premium subsidies for those below certain income thresholds; (22) regulation of insurance premium increases and the amount insurance companies spend on non-medically related expenses; (23) expansion of Medicaid to cover all individuals under 133 percent of the poverty line; (24) extension of children's eligibility for insurance under their parents until the age of 26; (25) and the creation of new health exchanges that the states will run. (26) Of these, the requirement that individuals obtain a minimum level of health insurance--popularly referred to as the individual mandate--has generated the most attention and attack. Based on health insurance reforms adopted by Massachusetts in 2006, this requirement has provoked numerous lawsuits, including one by Virginia and another by a group of twenty-six states filed in Florida, all alleging that it exceeds the scope of Congress's constitutional authority. (27)

      Despite this attention and constitutional federalism focus, the minimum coverage requirement is not the ACA provision that on its face is of greatest significance to the states. (28) Although it preempts state legislation stipulating that individuals should not have to obtain insurance, (29) the requirement applies to individuals rather than to the states themselves. Instead, the ACA provisions with greatest direct impact on the states are the substantial expansion of Medicaid and the creation of the health exchanges. (30) The expansion of those eligible for Medicaid will add 16 million to the Medicaid rolls. (31) Ordinarily, states are required to pay a substantial part of Medicaid costs, with the federal-matching percentage varying by state. But the federal government will pay the vast majority of the costs attributable to the ACA's expansion of the Medicaid rolls, starting at 100 percent in 2014 and declining to 90 percent in 2020 and subsequent years. (32) The federal government's covering of these costs represents a significant legislative victory for the states. (33) However, states still face greater administrative costs as well as eventually 10 percent of new coverage costs. Furthermore, they are required to maintain their existing Medicaid and Children's Health Insurance Program (CHIP) eligibility and benefit...