Who Wins If SCOTUS Scuttles the Federal Exchanges?

In King v. Burwell, the Supreme Court will decide, by next June, whether subsidies authorized under the law can go to consumers in states that defaulted to the federal exchange (Healthcare.gov). Challengers in the case claim that the plain-language interpretation of the law makes clear that only exchanges “established by the state” are authorized to provide subsidies to shoppers. The administration has defended itself on the basis of legislative intent, claiming that the law establishes “equivalence” between state and federal exchanges.

It isn’t clear which way SCOTUS will swing, but we do know that for the Court to take the case, at least four justices had to believe the petitioners’ arguments hold some merit. As such, there is a real possibility that uninsured residents in the 34 states that relied on (or defaulted to) the federal exchange in 2014 could be denied subsidies. The Kaiser Family Foundation, relying on Congressional Budget Office (CBO) numbers, estimates that if the Supreme Court overturns subsidies on the federal exchange, over 13 million enrollees could lose coverage in 2016. (Even if the court sides with the plaintiffs, it’s unlikely the flow of subsidies would be halted immediately; a less disruptive alternative would be to suspend subsidies for the next open enrollment period, for coverage in 2016.)

Republicans have been fighting for the last four years to overturn Obamacare. What happens if, next June, they actually succeed in undercutting it?

While Republicans would cheer the result at the federal level, GOP governors who have opposed Obamacare would suddenly sit in the uncomfortable position of placing millions of their residents in insurance limbo.

Consider the two largest federal exchange states, Florida and Texas, which together notched an estimated 1.7 million subsidized enrollees in 2014, according to HHS (the real number, after subtracting dental-only policies and attrition, is undoubtedly smaller). Governors Scott and Abbott would face enormous pressure from insurers and providers to keep federal subsidies flowing. Democrats in every red state would have a field day castigating Republicans for allowing residents to lose insurance coverage—perhaps in mid-treatment for cancer or other life threatening ailments. As 2015 policies neared expiration, the media feeding frenzy would grow.

One alternative to such a scenario—one surely to receive the Administration’s support—would be for states to simply pass laws decreeing that they are “establishing an exchange,” then contract out exchange functions to the federal government. That might be the fastest, easiest option, but would also put Republican governors and legislators in the unenviable position of actively embracing Obamacare.

To avoid this, Congressional Republicans need to find a way to ease pressure on their state colleagues, sooner rather than later. Ideally, they’d replace Obamacare with one of their own alternatives, but shifting from Obamacare to an entirely new arrangement would take time—leaving millions in uncertain health insurance arrangements in the meantime. (A full-fledged replacement plan would also face a certain presidential veto.)

Better, in the event that SCOTUS overturns the subsidies, to rally instead around a policy alternative that offers states a reasonable “out” that involves neither embracing the federal exchanges, nor overturning Obamacare wholesale. Crafting a realistic solution, therefore, will require convincing at least some Congressional Democrats to support a stop-gap bill that the President would sign.

Here is where it gets complicated. Republicans need to come up with a wish list of policy reforms in return for passing legislation allowing federal exchanges to continue operating—at least until a new administration more amenable to wholesale reforms enters the White House.

Low-hanging fruit with bipartisan support might include repealing both the Medical Device Tax and Employer Mandate. Since CBO would score such reforms as revenue losers, Republicans would need offsets. One option: reduce subsidies under the law to 300 percent of the federal poverty line, which would affect relatively few people (the vast majority of uninsured earn less than 400 percent of the federal poverty level), saving nearly $110 billion, according to the CBO.

Republicans might also push other reforms, like advancing “state innovation waivers” from 2017 to 2016—making them automatic for any state that sought to claim them—along with loosening coverage and spending requirements. (Such efforts could build an elegant bridge to a true Obamacare alternative, too.)

The goal: a prudent, pragmatic strategy to loosen Obamacare’s hold on the health care system until real replacement becomes possible in 2017.

Admittedly, strategies of this sort assume Democrats will seek policy compromises if SCOTUS halts the flow of federal exchange subsidies. Democrats might instead (given the preponderance of federal exchanges in red states) sit back and let the ruling run its course, a strategy the party’s liberal base may well demand.

The real question—as yet unknowable—centers on who will shoulder the blame for a SCOTUS ruling against the federal exchanges. Republicans will, of course, blame the Administration for ramming through a flawed bill along purely partisan lines. Democrats will retort that a partisan court is splitting hairs to the detriment of millions of formerly uninsured Americans.

In any event, if conservatives quickly develop a credible “fail safe” strategy for the federal exchanges, they will not only help red state governors better understand their options, they’ll also signal their openness to the White House for some reasonable horse trading later.

Both parties can then let the 2016 presidential election determine Obamacare’s final destiny.

Paul Howard is a Manhattan Institute senior fellow and director of the Manhattan Institute’s Center for Medical Progress