States May Decide Fate of Obamacare Tax Subsidies After Supreme Court

By and Drew Armstrong | November 9, 2014

Even if the Supreme Court decides the U.S. can’t give health insurance subsidies to people in at least 34 states, there are some potential ways around the ruling.

The court last week said it would take up a case claiming that the Patient Protection and Affordable Care Act, also known as Obamacare, doesn’t permit people to get federal subsidies to buy insurance unless they live in states that run their own markets selling coverage. While 14 states and the District of Columbia are handling enrollment themselves, the rest leave consumers to use a federally run exchange.

The fate of the subsidies may end up in the hands of governors and state legislatures, some of which have just changed parties. Many are politically opposed to Obamacare, yet will have to decide whether they want to ask millions of Americans now getting government payouts to give them up, or even give the money back. Their options include setting up their own exchanges or finding a technical way to adhere to the law while still using the federal exchange.

“There are workarounds,” said Timothy Jost, a law professor at Washington and Lee University in Lexington, Virginia. “Obviously, states can establish an exchange. Quite a number have. But it does take some effort.”

The legal dispute before the Supreme Court centers on a four-word statutory phrase. The law says people qualify for tax credits when they buy insurance on an online marketplace “established by the state.” At least 34 states have never established their own markets, and the question is whether people can collect the subsidies even if they buy policies on the federal exchange.

Working Well

The decision to take the case was made just days before consumers begin choosing their 2015 plans on the federal exchange. While organizers must work hard to get people the information they need, the website will work very well, President Barack Obama said today on a conference call with people working on the enrollment, according to one participant who asked not to be identified because the discussion wasn’t public. A White House spokeswoman confirmed he spoke on the call and said she didn’t yet have a transcript of his remarks.

The state and midterm congressional elections on Nov. 4, in which Republicans made wide gains around the country, may make any technical fixes more difficult. Voters elected Republican governors in two states last week, bringing their total to 31, and the party now controls as many as 69 of the nation’s 99 state legislative chambers, according to the Republican State Leadership Committee.

“There is going to have to be either legislative authority or executive authority to establish an exchange,” Jost said. “We just elected a bunch of state legislators and a bunch of governors who are not very friendly to the Affordable Care Act.”

Making It Painless

If they’re willing, it may be easy. Nicholas Bagley, an assistant law professor at the University of Michigan who specializes in health-care law, said in July that the Affordable Care Act doesn’t spell out what it means for a state to “establish” its own insurance exchange.

A state that is part of the federal system may be able to simply pass legislation, or even issue an executive order, declaring that it has its own exchange — and contract with the U.S. Department of Health and Human Services to run it. To meet the letter of the law, states may have to use an intermediary such as a nonprofit agency to contract with the government, Bagley said.

Nine States

The Obama administration “will have lots of incentives to make this painless for states, and considerable legal flexibility to do so,” Bagley said at the time. “It would smooth the path toward the establishment of state exchanges if HHS could make it cheap, and offering as the back-end IT infrastructure for a state-established exchange would potentially be very cheap.”

Nine states participating in, the federal market’s website, already handle some of their own exchange functions and are considered to be in “partnership” with the federal government. While some still have Democratic governors, Democratic-majority legislatures, or both, others have turned Republican in this week’s election, complicating the decision on whether to establish a state exchange.

Hutchinson’s Dilemma

In Arkansas, for instance, Governor-elect Asa Hutchinson has criticized Obamacare while saying he won’t make any immediate changes to the state’s Medicaid expansion under the law.

Analysts who follow hospital and insurer stocks were split on predicting the outcome.

“There would appear to be rational workarounds to a potential” ruling against the subsidies, said Chris Rigg, an analyst with Susquehanna Financial Group, in a note to clients yesterday. “Given the state of D.C. these days and the additional shift in state governorships to Republicans in the midterm elections, it’s hard to predict for sure how things could play out politically or administratively.”

Ana Gupte, an analyst with Leerink Partners LLC, said she was more certain that any disruption wouldn’t be huge. She said she expects that the Supreme Court “will more likely overturn this challenge, and even if it were upheld, that it will be a temporary speed bump.”

Was this article valuable?

Here are more articles you may enjoy.