When Sen. John McCain, R-Ariz., voted against Republicans' last repeal and replace vehicle, Graham-Cassidy, he said he did so in favor of a bipartisan process to fix the Affordable Care Act's flaws and move towards a permanent, workable replacement.

The irony is that any bipartisan deal with hope of attracting Republican support will have to start with the core of Graham-Cassidy: sending more regulatory flexibility back to the states, along with a predictable block grant of federal funding for covering uninsured and low-income Americans.

If the last seven years have taught us anything, it's that there's no one-size-fits-all solution to our thorniest healthcare challenges. So let's make a virtue of necessity, and let states decide how to deal with the ACA's individual and employer mandates, design more attractive insurance plans for younger and healthier uninsured, and increase competition among providers and insurers in a more transparent marketplace. Encouraging states to find better ways to delivering high-quality care at lower cost should be Congress' goal.

This isn't Pollyannaish talk: Governors from red (Wisconsin), blue (Massachusetts), and purple (Colorado) states are already on the record asking for more flexibility from Congress.

Consider what Graham-Cassidy is trying to achieve: Setting a national, per-beneficiary floor for covering poor and near-poor Americans by block granting $200 billion in annual federal spending, alongside relatively modest reforms for the Medicaid program based on per capita caps.

Setting a national floor for Medicaid coverage is a good idea. It would encourage red states to expand their programs, while focusing spending on those most in need. Everyone above that level should have the opportunity to find affordable coverage in the individual market. Block-granting Medicaid and exchange funding would allow states to experiment with innovative coverage plans, tailoring different options for different populations.

In fact, governors would find state-based innovation even more attractive if Congress allowed states to create "mega grants" that included exchange funding, cost-sharing subsidies, the Children's Health Insurance Program, funding for dual-eligible enrollees in both Medicaid and Medicare or any other stream of federal health spending.

As long as these grants are deficit neutral, states should be allowed to innovate around them. States should also be allowed to keep a share of any savings from slowed healthcare cost growth, as long as innovation waivers include good guardrails for reporting costs and health outcomes, especially for vulnerable populations.

In testimony before the Senate HELP Committee, Gov. Charlie Baker, R-Mass., suggested changes that could make innovation waivers more attractive and effective, including increased state flexibility for benefit design; the ability to combine savings from ACA and Medicaid waivers; and standardizing "fast-track" waivers that give states quick approval from federal regulators.

Gov. John Hickenlooper, D-Colo., echoed the theme of states as "laboratories of democracy," and also pointed to state innovation waivers as a way for states to "innovate to lower costs while ensuring that certain basic guidelines are met."

Gov. Scott Walker, R-Wis., has also written eloquently about the potential of state innovation waivers in the context of another divisive policy: welfare reform. Walker wrote that "giving the resources and the responsibility to states is the key to success with healthcare and health insurance coverage," because state leaders are more accountable to state constituencies.

Walker, Baker, and Hickenlooper represent very different states, but they have converged on state innovation waivers and block grants as the best solution in a deeply-divided Congress.

Well-designed state innovation waivers could help stabilize state insurance markets and expand affordable coverage, a liberal goal, while expanding market competition and giving consumers more affordable choices—a conservative goal.

Some interim steps might build confidence on both sides of the aisle. Congress could authorize cost-sharing subsidies and federal reinsurance for some period of time (perhaps 5 years) in return for repealing the employer mandate and sending the individual mandate back to the states (since the ACA's individual mandate doesn't appear to be working, and is deeply controversial, let the states find their own solutions). Congress should also broaden the ACA's state innovation waivers, including fast-track options for state approvals and allowing bigger block grants.

Thornier questions such as Medicaid reform might get easier if the individual market stabilized and states focused on finding ways to lower insurance costs by reforming scope of practice laws for nurse practitioners, repealing certificate of need laws, and letting insurers vary cost-sharing across different types of benefits, where competitive options are available.

States should also make it easier for consumers with high deductible plans and health savings accounts to shop for care by freeing up more data on healthcare costs and quality. If costs come down, burdens on taxpayers, employers, and patients will fall as well.

The idea at the heart of Graham-Cassidy, expanded state innovation waivers, is a serious one. States regulate hospitals, doctors, and clinics, and often do so in ways that make it harder for innovators to launch new products and services at lower cost. Block grants should offer carrots (funding) and sticks (lower long-term growth rates) that reward states that make their markets more competitive and transparent.

Focusing on competition won't solve every disagreement, but it will move the debate in the right direction.

Paul Howard (@PaulHowardMI) is a contributor to the Washington Examiner's Beltway Confidential blog. He is director of health policy at the Manhattan Institute.

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