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No Panic as Obamacare Subsidies Seem Safe for Future

July 24 (Bloomberg) -- Americans are unlikely to lose Obamacare subsidies any time soon, at least, and not in most states.

A three-judge panel of a federal appeals court in Washington ruled July 22 that subsidies to help people pay insurance premiums are illegal in 36 states that use the federal system. The ruling, in a case brought by political opponents of the health law, rattled advocates who painted doomsday scenarios of broken insurance markets across the country.

That probably won’t happen, health-care industry executives and analysts said in interviews. The ruling is likely to be reversed, and even if it isn’t, a way to work around the court decision might be as simple as a bit of legislation in statehouses.

“We don’t expect disruption going into next year,” Karen Ignagni, president and chief executive officer of America’s Health Insurance Plans, a Washington lobby group for insurers, said yesterday in a phone interview. “It’s going to be many months if not years of further judicial review ahead before this is resolved.”

The issue centers on language in the Patient Protection and Affordable Care Act that appears to make subsidies for insurance premiums available only in states that run their own marketplaces for coverage, called exchanges. While Democrats who wrote the law expected most states to build their own exchanges, just 14 have done so -- and at least two of those, Nevada and Oregon, hope to shut down their faulty sites and join next year.

IRS Ruling

The Internal Revenue Service ruled in May 2012 that subsidies were intended to be available everywhere. Opponents of the law living in 36 states using the federal exchange sued. Two judges on the Washington appellate court who were appointed by Republican presidents sided with the opponents, saying the letter of the law prohibits subsidies in federally run exchanges.

“There’s confusion today because the world generally wasn’t expecting it,” Robert Laszewski, an insurance industry consultant in Alexandria, Virginia, said in a phone interview. “It will subside pretty quickly. There’s not a great fear that this ruling is going to prevail, especially at the Supreme Court.”

Hospitals’ Concerns

The ruling is creating more uncertainty for hospitals, which may prompt some to cut costs or consider taking fewer patients with insurance through the Obamacare exchanges, said Michael Nolte, chief operating officer at MedAssets Inc., a technology and consulting firm for hospitals.

“I see this as a warning shot,” Nolte said. “This is another example of the financial implication of an ever changing government landscape.”

The loss of subsides would be another set back for hospitals, which will see reduced payments from Medicare, the U.S. health program for the elderly and disabled, in exchange for the promise of fewer uninsured patients through the expansion of Medicaid and the subsidies offered under the insurance exchanges. Twenty-four states have decided not to expand their Medicaid program for the poor following a Supreme Court ruling saying they couldn’t be required to do so.

‘Triple Whammy’

“Imagine if you’re in a state where you have the triple whammy -- you got a reduction in Medicare reimbursements, you didn’t get expanded Medicaid so you’ve got the same ongoing debt expenses and charity care and on top of that you’re facing the potential for the subsidies to go away,” Nolte said. “You’re looking at three levers that have all gone south.”

Fitch Ratings said in a note to clients yesterday that confusion about the ruling and whether subsidies will remain available would mean lower enrollment in exchanges next year. Ignagni called that “an early rush to judgment” and said indications are that many people who didn’t sign up this year are interested in enrolling in 2015.

Joshua Benson, a 28-year-old diabetic in Delray Beach, Florida, said he was uninsured until signing up for an Affordable Care Act plan this year. He was put in touch with Bloomberg News by Enroll America, a Washington-based advocacy group that promotes the law in 11 states including Florida.

“For a lot of people like me, it’s really saving our lives,” he said in a phone interview. “We’re just kind of scared now, because we don’t know what’s going to happen.”

The Obama administration said subsidies will continue to flow while the issue is resolved, and that it would ask the full appeals court to consider the case. A second appeals court panel in Richmond, Virginia, ruled unanimously on July 22 in a similar case that subsidies can be offered everywhere.

Going Forward

“The probabilities are that the program will go forward and you have to treat it that way,” Charles Kahn, the president of the Federation of American Hospitals, a Washington lobby group that represents for-profit hospitals, said in a phone interview. “We are pretty convinced this is going to be a clear decision of proper interpretation of intent and the IRS should provide the subsidies to all whether they get coverage through a state exchange or a federal exchange.”

Even if the Supreme Court takes the case and rules against the Obama administration -- something that wouldn’t happen for at least a year -- subsidies may continue in most states. That’s because it could be relatively easy for states in to create their own exchanges.

State Fixes

Nicholas Bagley, an assistant law professor at the University of Michigan who specializes in health-care law, said 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.

The Obama administration “will have lots of incentives to make this painless for states, and considerable legal flexibility to do so,” Bagley said in a phone interview. “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.”

State Partnerships

Nine states participating in already handle some of their own exchange functions and are considered to be in “partnership” with the federal government; some have Democratic governors, Democratic-majority legislatures or both. They would likely be quick to establish a state exchange in the event of an adverse Supreme Court ruling.

A study sponsored by the Department of Health and Human Services, released yesterday by the New England Journal of Medicine, estimates that 7.3 million to 17.2 million U.S. adults gained insurance coverage this year as a result of the Affordable Care Act.

Even Republican governors otherwise opposed to the Affordable Care Act might be compelled to establish their own exchanges, Laszewski said -- because they’ll come under enormous political pressure from voters with subsidies and from the health-care industry in their states.

“A political storm is brewing where Democrats are just wringing Republicans’ necks over this,” said Laszewski, who describes himself as a critic of the health law. “You’re going to jerk people’s subsidies away over a technicality in the bill? Shame on you.”

To contact the reporter on this story: Alex Wayne in Washington at

To contact the editors responsible for this story: Reg Gale at Andrew Pollack, Ben Livesey

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