How Governors Could Become America's Health Care Czars

Courts have put more and more power in the hands of states to run health care coverage—and not in the way the Affordable Care Act intended.

The health care law assumed that all states would expand Medicaid and establish state-based exchanges. But a 2012 Supreme Court decision made it easier for governors to opt out of Medicaid expansion, and 24 states decided not to expand their coverage, leaving millions of low-income people uninsured. Another round of court challenges could soon allow governors to decide whether to provide subsidized coverage on the insurance exchanges as well.

A recent set of lawsuits challenges the provision of subsidies on the federal marketplace, arguing the law specifically says they should be available on "exchanges established by the state." In Halbig v. Sebelius, the U.S. Court of Appeals for the D.C. Circuit ruled last month against the Obama administration, saying that subsidies are illegal in the states that are on the federal exchange. On the same day, the 4th Circuit Court of Appeals came to the opposite conclusion in King v. Burwell, saying it's clear that Congress intended subsidies to be available on all exchanges. Both decisions are being appealed, and the issue could go to the Supreme Court as soon as next session.

If the Halbig ruling is upheld, subsidies will vanish in more than half the states, making insurance unaffordable to many who now receive them. Governors in states currently on the federal exchange would thus be put in the position of deciding whether to switch to a state exchange and keep the subsidies, or allow residents to lose their insurance coverage.

The decision is a complex one, and particularly uncomfortable for Republican governors, most of whom are opposed to any action that would make the ACA work better. Allowing the subsidies to expire would cripple the very foundation of the law, but it could also incur the wrath of the health and business communities, along with their constituents.

An estimated 7.3 million people could miss out on $36.1 billion in subsidies if the Halbigdecision stands, according to a report from the Urban Institute released last month. This is about 62 percent of the 11.8 million people expected to enroll in the federally facilitated marketplace by 2016. Residents in the red states of Texas and Florida would lose the most: $5.6 billion and $4.8 billion, respectively.

This could throw the overall insurance market into a tailspin.

"There's a question of whether the individual market would be stable in states without subsidies," said Larry Levitt, a senior vice president at the Kaiser Family Foundation. "The individual mandate would still stand, but many wouldn't be able to afford coverage. Most of those eligible for subsidies would end up being exempt, because their insurance costs more than 8 percent of their income. The individual mandate would be very weakened, and with no ability to attract healthy people, the risk pool in states without exchanges would likely deteriorate quickly."

Yet there are hurdles that could give pause even to Democratic governors. While the Medicaid decision was simply a matter of expanding an existing program, setting up an exchange would require building a whole new infrastructure, something that has proven a major challenge for many states—and the federal government—in the first open-enrollment period.

Paying for the new exchanges would be a problem as well. States that established their own exchanges early on had access to an unlimited pool of federal grant dollars, but those that choose to switch now are essentially on their own to get the exchange up and running.

"The state has to start from ground zero; this is clearly a problem, because federal financing is limited," said Raymond Scheppach, former executive director of the National Governors Association and current professor at the University of Virginia. "There are three or four states that seem to have done a good job [setting up their own exchanges], but a lot have not. The average governor looks at it as politically risky and financially risky."

"The whole health care community is going to want the state to do an exchange; … there would be a fair amount of pressure. [Governors] will have to compare that with the financial risk and the political risk of failing. Then for the Republicans, you have all the national politics playing out."

Experts say if it came to this, the administration would be sure to alleviate some of the burden, either by allowing states to subcontract from the federal system or borrow from another state's exchange.

"The bar has continued to evolve; it's easier and easier to become a state exchange," said Joel Ario, former director of health insurance exchanges at the Department of Health and Human Services and current managing director at Manatt Health Solutions. "So far, the [HHS] secretary has been pretty flexible, if you as a state are willing to cooperate. In that light, it becomes a matter of ideology for governors to stick their feet in the sand and not move."

The political pushback for that kind of opposition could prove significant, particularly as the group of people affected would be larger, and possibly more politically active, than those who missed out on Medicaid expansion. Yet it's unlikely that this would come into play before the next election, experts say.

"I doubt there will be any real tangible effect before midterm elections," Levitt said. "[The case] would have to move pretty quickly for that to happen; for now it's more political noise than anything that matters for real people."

But while the issue's impact on midterms is fuzzy, election results will have a major impact on health coverage for millions of Americans if the decision is ultimately upheld.

"The [Halbig] case has already gotten much further than many expected to begin with, and the [2012] decision [on Medicaid expansion] was a surprise," Levitt continued. "No one is going to go broke betting on Obamacare outcomes at the Supreme Court."

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