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ACA ruling leaves room for states, federal government to solve exchange issue

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 Tuesday 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 Wednesday 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.”

Fitch Ratings said in a note to clients Wednesday 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.

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.

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.

State fixes

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.”

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 Wednesday 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.”


With assistance from Shannon Pettypiece in New York and William Selway in Washington.