By Jim Stergios and Joshua Archambault

Americans believe in second chances. The oral arguments before the Supreme Court last week were a rare opportunity to dispassionately re-examine the divisive healthcare debate of two years ago. What happens if, after the smoke clears, we get a second chance at healthcare reform?

We’ve long known that healthcare will be a central theme in the 2012 presidential contest. The High Court’s deliberations and June decision only reinforce that reality for President Obama and Governor Romney.

Unlike with the Patient Protection and Affordable Care Act (PPACA), the constitutionality of Governor Romney’s Massachusetts law has never been seriously questioned. States, not the federal government, have police powers, allowing them to require purchases (car insurance, taxes and licensure) and to pass wide-ranging public health laws and public safety laws. The Bay State law enjoys broad popular support.

In contrast, the case before the Supreme Court was brought by the majority of states. Regardless of what the Court decides, the PPACA will continue to polarize the country.

President Obama may cite Romney’s Massachusetts reform as inspiring his efforts, but there are profound differences in the size, reach and financing of the two laws. Elected just six months after the law’s passage, Romney’s successor, Democratic Governor Deval Patrick, has obscured some of those differences by taking a big government approach to implementation.

Where Romney sought an open marketplace for individuals to purchase benefit plans ranging from catastrophic to generous, Patrick has drastically limited choices and mandated minimum coverage levels beyond private-market norms.

Even with poor implementation, the Massachusetts law has yielded some positive results, including broadening insurance coverage, especially for minorities, and decreasing premiums for individual purchasers of insurance.

Candidate Romney must, however, do more than defend decisions made in Massachusetts as “a state solution to a state problem.” The governor should articulate a broader vision that respects and leverages the strengths of our federal political system. Its main points should look something like this:

Political settlement requires respect for the states. The imposition of an unknown, nationalized program on the entire country has led to 26 state attorneys general acting as plaintiffs in the Supreme Court case and broad popular opposition. The “PPACA approach” will not gain political settlement even if it passes Court muster.

The country would do well to learn from our last major federal entitlement reform: the Welfare Reform Act. In 1996, building on President Reagan’s strategy, President Clinton granted waivers to 43 states to experiment with various welfare reforms but still held them accountable for results. Governors John Engler of Michigan, Tommy Thompson of Wisconsin and Bill Weld of Massachusetts catalyzed state innovation and produced empirical evidence about what worked — and what didn’t.

Already by 1996, the public was comfortable with key elements of the federal reform proposals because they had seen them at work in their home states. Romney should propose another “great experiment,” setting out clear goals and granting states the flexibility to innovate based on their unique market structures and populations.

That vision stands in stark contrast to the Obama administration’s misinterpretation of Massachusetts’ health law, crafted to address the unique needs of a small, high-income state constituting 2 percent of the U.S. population, but nevertheless imposed on the entire country.

Cover the 2 million to 4 million Americans with pre-existing conditions who may be denied affordable insurance when between jobs. Only a small fraction of those with pre-existing conditions are between jobs. The federal government can easily address this problem by funding high-risk pools administered by the states.

States are best positioned to determine eligibility and penalties for insurers that try to push ineligible individuals, such as people with unhealthy lifestyles who do not have a diagnosed disease, into the publicly subsidized pools. Past state experiences strongly suggest that such high-risk pools can do the job at a cost of roughly $150 billion to $200 billion over 10 years, not the $1.75 trillion to $2.5 trillion required by the ACA.

Encourage individuals to seek high-value plans by being active healthcare consumers. Central bureaucracies control costs only by diminishing innovation and the quality of care. A better path is to break the federal tax preference for individuals purchasing health insurance through their employers. Rather than penalizing individual insurance purchasers, we should let all consumers control their healthcare dollars.

The prejudicial tax advantage enjoyed by those with company insurance can only be changed over time. Romney should channel refundable tax credits to small-business employees and individuals purchasing insurance on their own who are most disadvantaged under the current system.

Convert Medicaid into a per capita block grant. With broad authority over Medicaid, states can lift more people currently eligible for Medicaid into the mainstream market. States aligning regulations on benefits and premium assistance with refundable tax credit policies will give non-elderly, non-disabled enrollees the ability to choose among plans rather than be merely passive recipients of Medicaid services. The result is better coverage for the poor and reined-in costs.

If we get a second chance at the healthcare debate, we’d better get it right. These four policies – vibrant experimentation akin to what we saw with welfare reform, a right-sized plan to deal with pre-existing conditions, a level playing field for health insurance purchasers, and a thoughtful Medicaid block grant – are practical alternatives to a healthcare policy doomed to fail either in the court of law or in the court of public opinion.

Jim Stergios is executive director and Josh Archambault is director of health care policy at the Pioneer Institute in Boston (www.pioneerinstitute.org), publisher of “The Great Experiment: The States, The Feds, and Your Health Care.”