Obamacare’s Crisis and Opportunity

by Charles Katebi

In March, the Supreme Court heard oral arguments in King v. Burwell, a case that could decide the fate of Obamacare in Wyoming and around the country. The case centers on whether the federal government has the authority to issue tax credits to subsidize insurance on exchanges that it has established. If the chief justices rule against the federal government, it could mean the end not just for Obamacare's subsidies, but its mandates and regulations as well. And herein lies an opportunity for advocates for patient-centered health reform to start making real changes to the way healthcare is financed and delivered.

As many health policy experts have noted, the Affordable Care Act's design and purpose rests on three basic foundations; insurance regulations, the individual mandate, and insurance subsidies. If just one of these bulwarks is removed, the entire structure breaks down.

The law's insurance regulations prohibit insurance companies from charging individuals of the same age different premiums, regardless of whether some of them have health conditions that will make their care more expensive. These "Community Rating" rules force insurers to raise premiums on healthier policy-holders in order to pay for the care of their sicker beneficiaries. Left to their own devices, younger and healthier individuals will forego insurance if their premiums become unaffordable. When healthy individuals flee the insurance market, health insurance costs are foisted on a smaller group of less healthy individuals.

This is where the individual mandate comes in. By imposing tax penalties on individuals that are uninsured, the ACA avoids the feared "Death Spiral" that occurs when costly mandates drive the young and healthy out of the insurance market. However, community rating and the law's other mandates drive up the cost of insurance, creating substantial financial burdens for lower income individuals who will be forced to purchase insurance.

The third and final foundation to the law is the federal tax-credits that subsidize the cost of premiums for individuals between 100 and 400 percent of the federal poverty line. But who are entitled to these subsidies?

The federal government argues that subsidies are available to those that seek insurance in the insurance exchanges established by state governments as well as the federal insurance exchange and has enforced the law accordingly.

There's just one problem with this interpretation; as Obamacare was written and passed into law, only those that purchase insurance on exchanges "Established by a state" are eligible for subsidies. If the Supreme Court were to rule in favor of the plaintiffs challenging the subsidies on the federal exchange, several things will happen.

The first is that millions who had signed-up for insurance on federal exchanges and received subsidies will lose them and potentially have to repay them in back taxes. As of mid-February, 7.5 million individuals that accessed insurance on the federal exchanges were eligible for subsidies. 91 percent of Wyoming's enrollees were eligible for subsidies, which on average covered 76 percent of the cost of premiums. A victory for the plaintiffs would quadruple the cost of insurance for thousands in the Equality State. It's estimated that the average recipient of insurance subsidies in Wyoming would see their monthly premiums increase from $135 to $558 if they went away.

Without the subsidies, the individual mandate becomes much harder to enforce. If the least expensive insurance on an exchange costs more than 8 percent of an individual's household income, they are no longer required to buy insurance. The Kaiser Family Foundation estimates that with access to subsidies, only 3 percent of the uninsured fall into this exemption. However, if the subsidies went away, 83 percent of the uninsured would no longer be required to buy insurance.

Without the individual mandate, the young and healthy will have no reason to purchase expensive insurance in order to subsidize care for someone else, and will drop coverage. As the younger exit the insurance market, the cost of care will have to be paid for by a smaller number of insured, which in-turn will drive more people out of the market, and raise the cost for those remaining. Take away the tax-credits and mandates, and the health insurance market falls apart under the weight of Obamacare's community rating rules.

In the event that the Supreme Court strikes down the subsidies, it will be up to Congress and state lawmakers to draw-up plans to make sure the health insurance market isn't thrown into disarray. As the Wyoming Liberty group has outlined in the Five Step Plan to Achieve National Healthcare Reform, health insurance must be transitioned back into the free market and government-run programs must be redesigned to benefit our most vulnerable citizens.