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If High Court Strikes Federal Exchange Subsidies, Health Law Could Unravel

(Photo by Chip Somodevilla/Getty Images)

Exactly what would happen to the Affordable Care Act if the Supreme Court invalidates tax credits in the three dozen states where the federal government runs the program?

Legal scholars say a decision like that would deal a potentially lethal blow to the law because it would undermine the government-run insurance marketplaces that are its backbone, as well as the mandate requiring most Americans to carry coverage.

In King v. Burwell, the law’s challengers argue that Congress intended to limit federal tax credits to residents of states running their own insurance exchanges. Currently only 13 states and the District of Columbia operate exchanges on their own; another 10 are in some sort of partnership with the federal government. Federal officials run the rest.

The court is slated to hear the case in early 2015. Should it find that subsidies in federally run exchanges are not allowed, “I don’t think there are any rosy scenarios,” said Timothy Jost, a law professor at Washington and Lee University and a supporter of the law. “It’s a complete disaster.”

The immediate impact is that the Internal Revenue Service would stop paying subsidies to those in federally run exchanges. In 2014, more than 4.6 million people were getting those subsidies but the number may grow to as many as 13.4 million by 2016, according to the Kaiser Family Foundation, (Kaiser Health News is an editorially independent program of the foundation.)

Most of those who lose subsidies would no longer be required by the “individual mandate” to have insurance, because they would fall into an exemption in the law for those who have to pay more than 8 percent of family income for health insurance premiums.

“Since a lot of people can’t afford insurance without the tax credits, you’re looking at a lot of people shedding coverage,” says Nicholas Bagley, a law professor at the University of Michigan.

Those who hang onto their coverage and pay the entire premium without help “are likely to be sicker on average than the people who shed their coverage because they’re the ones who need insurance the most,” he said.

Indeed, the insurance industry, through its trade group America’s Health Insurance Plans, argued in a legal brief for a related case that the elimination of the federal exchange subsidies could seriously undermine those markets, creating an insurance death spiral.

“When healthy individuals opt out of the individual insurance market, those who are left are, on average, less healthy (and therefore prone to higher-than-average medical expenses),” AHIP said in its brief. “A sicker pool of consumers results in higher premiums, which causes an additional relatively healthy subset of participants to drop out, which in turn results in a further increase in premiums.”

Eliminating subsidies for individuals also would eliminate the so-called “employer mandate” that seeks to require larger firms to provide coverage. That’s because the employer mandate merely requires employers to pay a fine if their employees obtain subsidies on the exchange. If there are no subsidies, there are no employer fines and thus effectively, no mandate.

Meanwhile, says Jost, “hospitals that have started to have some real relief from uncompensated care are right back taking care of uninsured people.” That problem could get worse because some people who had coverage in the old, unreformed individual market might have to drop it due to cost.

So what could be done? Some argue that states that rely on the federal government to run their health exchanges could establish their own marketplaces. But legal experts say that’s problematic as well.

“The practical obstacle is that creating an exchange is not child’s play,” says Bagley. “An exchange has to be a governmental entity or a nonprofit entity. They’ve got to be able to carry out a variety of functions,” including working with consumer assistance groups and overseeing compliance with the law’s requirements.

While some have suggested that states could create a “virtual” exchange on paper and contract with the federal government to run it, Bagley says the law on the subject is pretty explicit. “States would have to do more than just the bare minimum,” he said.

Timing and financing would also pose practical problems. The final deadline for states to apply for federal funding to establish an exchange has passed. And a decision from the Supreme Court is likely to come in late June of next year, which is after another deadline (June 15) for states to use their own funds to establish an exchange in time for the 2015-16 open enrollment season.

The political obstacles are potentially even bigger. In six states, even if a governor wanted to establish an exchange for his or her state, the state legislature has specifically taken that authority away, according to the National Conference of State Legislatures. Georgia became the seventh state earlier this year.

“What that means is that in many of these states that don’t have exchanges, state legislatures will have to get involved,” said Bagley. And many of those legislatures “are full of new members after the mid-term elections who specifically campaigned against the ACA.”

Still, some say the predictions of doom are overblown.

The main thing an anti-subsidy ruling would do is force Congress back onto the playing field to reopen the law, said health economist Tom Miller of the American Enterprise Institute.

“Congress will step in,” he predicts. “We’re going to have the kind of political give and take which was abbreviated and artificially truncated when the law was passed. It’s not a pretty process, but that’s why we have a government and we elect people.”

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Insurance States The Health Law