By Melissa Attias, CQ Roll Call
February 23, 2015 -- There's no shortage of dire predictions about what would happen if the Supreme Court strikes down the system for awarding subsidies to people seeking insurance under the Affordable Care Act.
Millions more could be added to the ranks of the uninsured, the cost of coverage could rise dramatically, and insurance markets could be thrown into chaos, or at least temporary instability.
For all those hypotheticals, though, the only thing that's certain is the country will be more divided than ever over President Barack Obama's signature legislative achievement, with many states forced to quickly decide what new steps, if any, to take to reach out to those losing their subsidies.
The political and financial stakes lend high drama to the March 4 oral arguments in the third major legal challenge to the health law, a lawsuit that attacks nothing less than the financial underpinnings of its coverage expansion.
The case—King v. Burwell—focuses on whether the financial help that low- and middle-income Americans receive under the law to help cover the cost of their health coverage is contingent upon what type of insurance marketplace, or exchange, exists in their state. Challengers argue that wording in the overhaul limits the subsidies to residents of states that created their own exchanges, not the 34 that defaulted to the federal government marketplace. The lawsuit seeks to invalidate an IRS rule the Obama administration issued interpreting the law as providing subsidies in all states.
If the majority of justices agree with the plaintiffs, billions of dollars of subsidies would evaporate unless states, the administration, or Congress respond with plans that fit the contours of the changed market.
Precisely what a response would entail depends on how broadly the court rules, making demands to craft contingency plans an iffy proposition.
Leading voices on both sides of the challenge think it's unlikely the subsidies will disappear on day one, but they're also skeptical that Congress will act promptly to avoid a major disruption in coverage.
Instead, experts predict the administration will ease the process for states currently using the federal exchange to convert to their own marketplaces so the financial aid can continue to reach their residents.
Even that would leave the country divided. Democratic-controlled states and some GOP-controlled ones would likely cast the widest safety net by taking steps to keep subsidies flowing while participating in the law's simultaneous expansion of Medicaid, the federal-state health program for the poor. Other states will pick one option and provide a partial extension of coverage. And holdouts would do nothing, leaving their residents without the options available in other areas.
A ruling that leaves some states without subsidies or expanded Medicaid runs counter to the law's goal of reducing national variations in coverage, according to Jonathan Oberlander, a health policy and management professor at the University of North Carolina, Chapel Hill.
Though hospitals and insurers will put immense pressure on so-called "purple states" to establish exchanges, governors and legislators in Republican-led states like Texas who fiercely oppose the law will find it convenient to abstain.
"You will have growing division, which you already have, between participating and boycotting states," Oberlander says. "It's going to be a mess."
Should the IRS rule be scrapped, experts generally predict a lag of about a month before subsidies disappear, though that hinges on the way the ruling is worded. Justices may be able to create a longer transition period by staying the ruling until, say, the next open enrollment period for people to sign up for coverage. While that would buy some time to make accommodations, it would also be ideologically inconsistent, according to one of the architects of the challenge.
Michael Cannon, the Cato Institute's director of health policy studies, says it would be "very awkward" for the court to decide the subsidies aren't authorized but allow them to continue for some period.
When the ruling takes effect, and more specifically when people in the 34 affected states are told they have a problem, would determine how quickly the administration and Congress begin to respond. Although administration officials have brushed off congressional Republican questions about contingency plans, people on both sides of the debate believe the White House will do whatever it can to soften the blow.
One option would be issuing regulations or guidance allowing states that currently use the federal marketplace to more easily be considered to have established their own exchanges. A state would still have to take some action to assert that it's establishing a marketplace, but wouldn't necessarily have to start from scratch, allowing officials to leverage the existing federal investments in information technology.
"What would likely happen is the administration would create some sort of path by which a state could essentially take over the exchange infrastructure and deem it to have established an exchange," says Robert Bradner, a partner at Holland & Knight.
Seven states already participate in a hybrid arrangement in which they rely on the federal government but still handle some enrollment functions and likely would have the easiest time adapting to the new landscape.
Any such administrative steps to accommodate states could stoke another legal challenge that lands them back before the high court, though that would take time.
But experts say there is no obvious quick fix to keep the subsidies flowing everywhere without help from Congress or the buy-in of each state.
"Anybody who thinks this can be fixed administratively is being much too optimistic," says Nicholas Bagley, an assistant professor of law at the University of Michigan.
"There is no silver bullet," Bagley says.
There's widespread agreement that the health care landscape would have to be in complete turmoil for a Republican Congress to make subsidies available on the federal exchange.
Cannon says that would be viewed not only as extending the health law, but also as reinstating its coverage mandates, because penalties many employers face for not providing workers coverage are tied to people receiving subsidies.
Additionally, more people would be exempt from the law's requirement that individuals buy insurance if coverage becomes unaffordable.
Instead, GOP leaders could try to leverage a ruling against the administration to advance some of their other health law-related priorities, such as repealing the employer mandate or the excise tax on medical devices.
They also could opt to provide states with a short-term transition period to decide on a path forward.
Leading conservative voices are urging Republicans to use a ruling to put their own health policies in place, and to have plans ready well ahead of an expected decision in June.
Key senators have started discussing possible contingency plans, and House Majority Leader Kevin McCarthy of California formally announced the formation of a working group in late January to sort out the issue alongside the broader replacement effort.
But there's an intraparty debate about what the best approach would be with Obama still wielding the veto pen.
Scott Gottlieb, a resident fellow at the American Enterprise Institute, recognizes that governors are going to be under immense pressure to keep the subsidies flowing, particularly if the administration provides a workaround.
Gottlieb thinks Congress should pass legislation that provides additional flexibility for federal exchange states that decide to use a new administrative process to be considered state exchanges.
That flexibility would include language to free the marketplaces from federal regulations so that old plans not in compliance with the health law's coverage requirements could continue to be sold.
In an op-ed with American Health Policy Institute President Tevi Troy, Gottlieb wrote, "So long as the administration redefines a 'state run' exchange, it seems proper to have Congress address what requirements accompany such a redefinition."
Heritage Foundation senior research fellow Edmund F. Haislmaier thinks Congress should instead tackle the way the subsidies are designed, which he terms narrowly limited and over-complicated.
Lawmakers could offer a simpler design and follow up by looking at provisions that raise costs, he says, citing one requirement that plans can only charge seniors up to three times more for premiums than younger people.
On a practical level, Haislmaier doesn't see reinstating subsidies in the federal exchange as helpful.
"It's like plugging the hole in the roof while the basement's flooding and the dining room's on fire," he says.
The inability of Republicans to agree on a plan to replace the health law makes it clear that bringing the diverse GOP caucus together to rally around one approach will be an uphill battle. In the end, Congress could do nothing, leaving the issue for the administration and states to sort out.
"People who are really desirous of repealing the law might just say, 'Terrific, great—this is not my problem,'" Bradner says.
States wouldn't be so lucky, and would probably face fierce lobbying from insurers and the hospital industry to ensure that subsidies keep flowing.
Representatives of both health industries submitted friend-of-the-court briefs ahead of oral arguments urging the justices to side with the Obama administration, on the grounds that the challenge could significantly harm Americans in federal exchange states.
"Experience in the states clearly demonstrates that enacting health insurance reforms without ensuring broad participation, particularly among those who are young and healthy, will have major consequences for individuals and families," Karen Ignagni, president and CEO of America's Health Insurance Plans, said in a statement.
The problem is that without subsidies bringing down the cost of coverage, healthier people who find premiums unaffordable may decide it's not worth it to continue paying for health plans. Enough defections would skew the risk pool of enrollees toward older, sicker people who are more likely to maintain coverage.
"This is very serious stuff," says Timothy Jost, a law professor at Washington and Lee University. "These people are trying to blow up the non-group health insurance market in the United States because they hate the Affordable Care Act so much."
Although insurers included an opt-out clause in their agreement with the federal exchange that could allow companies to leave if the subsidies disappear, it may not have a tangible effect.
Robert Laszewski, president of Health Policy and Strategy Associates, an insurance industry consultant, says the provision "doesn't mean anything" because of cancellation notice requirements at the state level and federal constraints established by the Health Insurance Portability and Accountability Act.
Laszewski expects insurers to stick with the status quo long enough to see whether affected states would decide to set up their own exchanges, noting that a financial backstop established under the health law will protect carriers through 2016.
Health plans eventually have a huge decision to make if a state opts not to act, he adds.
Beyond pressure from industry stakeholders, Democrats are sure to take to the hustings and highlight anecdotes about individuals facing higher premiums as a result of the decision.
A recent Urban Institute report estimated that average premiums in the non-group market would rise by 35 percent, while RAND Corporation projected a 47 percent boost among individual market plans that comply with the health law.
Democrats could also use an expected increase in the number of uninsured Americans to bolster their argument, though Haislmaier says he thinks the effect of the ruling and the general role of exchange coverage are being overstated.
For the first nine months of 2014, he says the net increase in private health coverage was only 893,000 people after accounting for a drop in employer-based insurance.
As has been the case with the Medicaid expansion, some states may ultimately opt to set up their own exchanges while others continue to refuse, leaving disparities across the country.
But when the finger-pointing begins in Congress, Laszewski thinks Republicans will lose the blame game, noting that the reverberations of the decision could even reach wealthy Americans covered through plans outside of the exchanges.
"I don't think they have any concept of how much trouble they're going to be in," he says.
