One Way States Could Avoid an Obamacare Disaster
Policy + Politics

One Way States Could Avoid an Obamacare Disaster

When the Supreme Court announced it would take up the King v. Burwell case, health experts, lawmakers and pundits immediately began sounding the alarms warning that an unfavorable ruling for the Obama administration would have grave implications for the entire health care law.

The case centers on whether people enrolled in the federal health exchange should receive subsidized health coverage. The plaintiff challenges language in the law that says enrollees can receive insurance subsidies when they purchase health insurance on an exchange “established by the state.”

They say that because the language does not mention the federal exchange, the Internal Revenue Service, which is tasked with administering subsidies -- should not legally be able to provide tax credits to people in any of the 34 states that have not established their own exchanges or that made an effort to do so.

Related: Obamacare 2015: Health Care Options for Consumers

If the Court sides with King, some 4.6 million people currently getting subsidies on the federal exchange would lose access to financial assistance that makes their coverage more affordable. If that happens, several major mechanisms of the Affordable Care Act, like the employer mandate and the individual mandate would be severely weakened—and could threaten to unravel the entire law. More on that here.

But don’t start writing Obamacare’s obituary yet. Legal experts say that there is at least one workaround option states could use in order for their residents to continue to be eligible to receive federal subsidies—and therefore stave off a potentially fatal blow to Obamacare.

Mark Rust, the managing partner of the Chicago office of Barnes & Thornburg, LLP, said that states currently relying on the federal exchange could pass legislation to establish their own exchange mechanism—and still use if they aren’t able to set up their own website. The language in the statute doesn’t specify that states need to create their own websites.

“The statute does not have a lot of great specifics about what states have to do to establish an exchange,” Rust said. “States could pass an act saying our exchange is going to be managed by a private organization then ask to use the federal website. It’s very simple.”

Related: Here’s What Might Happen if the Supreme Court Rules Against Obamacare

States have the option of getting money from the federal government to help them set up their own exchanges. But the deadline to receive that funding was on Friday. (Of course, it’s possible that the Obama administration could extend that deadline, though it has not done so yet.)

Still, they can set up their own exchanges without the federal funding whenever they want. And though it seems like it would be expensive—Nicholas Bagley, a professor at the University of Michigan law school went further into detail about the workaround Rust mentioned in a blog post in the Incidental Economist back in July.

“A state could…establish an exchange and appoint a state-incorporated entity to oversee and manage it. That state-incorporated entity could then contract with to operate the exchange. On the ground, nothing would change. But tax credits would be available where they weren't before,” Bagley wrote.

Of course, to pull this off, states would need the cooperation of both the governor and the state legislature—and it’s unclear whether the political makeup of each state would approve a workaround.

“Not every state would accept the invitation to establish its own exchange, even if doing so were more or less a formality. But lots of states would, especially as voters started to howl about losing their tax credits,” Bagley wrote.

Regardless, the option is there.

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