Health Insurance

States lack plan for loss of Obamacare subsidies

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If you're counting on your home state to save Obamacare subsidies for residents—and their individual insurance markets—you might be in for quite a long wait.

A pending Supreme Court decision might end often-generous financial aid to 6.4 million Obamacare customers in 34 states as early as July. But experts say most of those states will be unwilling politically or unable logistically—or perhaps both—to take steps that could quickly restore that money.

And it's not clear that even the handful of states like Pennsylvania and Delaware that have taken such steps to protect those subsidies will be able to complete that effort fast enough to be in effect for 2016 open enrollment this fall.

"The odds that the states, that any one of the states, can fix this is very small," said Robert Laszewski, president of Health Policy and Strategy Associates consulting firm. "They have to start enrollment on Oct. 1. They're not going to be ready in three months."

"You're looking at at least a year," Laszewski said.

You have to have a national solution, there's no way around it ...Congress has to fix it.
Robert Laszewski
President, Health Policy and Strategy Associates

During that year, up to 8 million people would be expected to lose insurance coverage. That's because most subsidized customers would be unable to afford their insurance without the aid. And many non-subsidized customers would likewise drop coverage as their premiums skyrocketed. Prices are expected to rise, because insurers would end up having fewer healthy, subsidized customers to offset the cost of older, sicker enrollees.

At issue in the Supreme Court case is a claim by plaintiffs that the federal tax credits that help most Obamacare customers pay their insurance premiums can only be issued to customers of marketplaces set up by a state, not by the federal government.

That argument hinges on the fact that subsidies are explicitly mentioned as being available for customers of state exchanges. There is no similar language specifically mentioning tax credits for federal exchange enrollees.

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Thirty-four states chose not to set up their own Obamacare exchanges. That left it to the federal marketplace,, to handle enrollment for their residents. The Internal Revenue Service later said tax credits would be issued to those people, just as they are to state exchange customers, if their household incomes are between one and four times the federal poverty level.

The obvious solution for states that want to keep subsidies flowing to residents in the face of a Supreme Court decision invalidating them for enrollees is to set up their own exchange.

But saying that is much easier than doing so, particularly given the politically charged debate over Obamacare.

Hurdles from cost and timing

Laszewski noted that every state that has already set up its own marketplace spent at least $200 million on that project. And federal funds that helped set up the state-based exchanges have run dry, meaning that states would have to foot 100 percent of the costs, an unpalatable option for many state legislatures, he said.

Another stumbling block, he argued, is a provision in the Affordable Care Act that requires states that contract with a third-party to run their Obamacare operations to use an entity located in their state.

"The federal government doesn't qualify," Laszewski said. That would counter one popular suggestion that states could contract with to handle all the work.

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Even if that solution is legal—and history suggests the Obama administration would move to allow it—state legislatures might not be in a position to authorize it.

In a report issued in March, the National Academy for State Health Policy noted that by the time the Supreme Court rules later this month, "state legislatures in nearly all [] states will have already adjourned legislative sessions."

"Special sessions can be convened if there is sufficient political will and the funding to support the added cost," said the NASHP report. The report also pointed out that governors in at least some states may be able to authorize a state-based Obamacare exchange based on existing legislative authority.

The NASHP report lays out six different scenarios for states to protect the subsidies. The scenarios include "Traditional State-Based Exchange," "State-Designated Exchange," "Contracted State-Based Exchange," "Regional Exchange" and "State-Private Exchange."

I think there's a general consensus that it would be a very big lift to solve this quickly.
Trish Riley
Executive Director, National Academy for State Health Policy
A healthcare specialist helps people select insurance plans at the Affordable Care Act Enrollment Fair at Pasadena City College in Pasadena, California.
Getty Images

But the track record this year suggests that getting state legislatures to accept any of those solutions will be tough.

Trish Riley, executive director of NASHP, said that earlier this year, "11 states proposed legislation to create state-based exchanges."

None of those bills passed, Riley said.

Also, in nine state legislatures, legislation was proposed to either prohibit the creation of a state-run exchange or repeal authorization for their exchange, she said.

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Those bills failed in all but two states—Arkansas and Arizona—which barred their governments from creating an Obamacare marketplace.

Health officials from different states have talked among themselves about ways to keep the subsidies flowing. One meeting, reported by The Wall Street Journal, occurred at Chicago's O'Hare Airport.

"There's been a lot of meetings like that," Riley said. "There's been a lot of conversations and discussion."

But, she said, "I think there's a general consensus that it would be a very big lift to solve this quickly."

Long political odds for most states

Nicholas Bagley, a University of Michigan law professor and health policy expert, said the states already debated whether to create their own exchange when the ACA became law. Restarting that debate, and getting a different outcome, could prove impossible, he suggested.

"The two-and-half years of scorched-earth battles in Michigan over the creation of an exchange have made the political establishment wary of reopening that question," Bagley and his co-authors said in a recent Health Affairs blog post.

Bagley told CNBC, "Right now, I would say that for most states the political challenges loom larger than the practical challenges."

If the Supreme Court kills the subsidies, "the most likely thing that the [Obama] administration is going to do is create a road map for states that wish to transition quickly to state-based exchanges, while using the platform to handle enrollment," Bagley said.

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"I am not optimistic that any states, with the exception of maybe Delaware and Pennsylvania," could set up an exchange of their own in time for 2016 plan open enrollment this fall, he said. "If you haven't already started the process, it's going to be exceedingly difficult to start that process, and get it through politically," he said.

Pennsylvania is weighing a plan that would involve leasing's enrollment and subsidy eligibility technology, with the state responsible for regulating the plans sold on the exchange and assisting customers. Delaware suggested having a "federally supported state-based marketplace" that could allow subsidies for residents in the event of a Supreme Court decision taking them away from customers.

And a bill that has already passed Maine's House of Representatives would set up a state exchange there if, and only if, the subsidies are ended for states. But the state Senate has yet to take action.

'Outrage' could be game-changer

But political and logistical hurdles could be overcome if the political pressure builds in favor of the subsidies, Bagley said.

He cited a recent example of such pressure in action. There was outcry in late 2013 when it became clear that President Barack Obama's promise that "if you like your health plan, you'll be able to keep your health plan" was not true for millions of people whose insurance plans were no longer compliant with Obamacare's minimum standards, and the administration quickly allowed insurers and states to continue those plans on a grandfathered basis.

"There weren't that many people that were affected, but there were some, and the outrage was sufficient," Bagley said. This time, 8 million are projected to lose coverage, which could lead to a louder outcry, he said.

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And, if most states don't act, pressure on the U.S. Congress to come up with a solution could ratchet higher, Bagley said.

Given Republican control of Congress, there is widespread skepticism that it would pass the simplest solution for a Supreme Court decision: amend the ACA to explicitly allow tax credits for customers on a permanent basis. But there are a number of Republican-suggested plans that would keep the subsidies flowing, temporarily, until as late as 2017.

Buck stops with Congress

Laszewski, of Health Policy and Strategy Associates, said bluntly, "The only real solution is for Congress to fix this."

He has urged the GOP to act now, before the Supreme Court decision, to keep the subsidies in place into 2017, which he said would remove political pressure off the Republicans.

"You have to have a national solution, there's no way around it," Laszewski said. "Congress has to fix it."

He expects that even if a handful of mostly small states managed to set up their own exchanges, hard-core opposition to Obamacare would prevent that from happening in Florida and Texas, where more than 2 million residents receive subsidies—or 30 percent of the total number of people nationally at risk of losing premium assistance.

Laszewski predicted Congress will have to act, but only after the Supreme Court rules, because "the explosion is going to be bigger than [Congressional Republicans] can tolerate."