by Megan McArdle

obamacare logoYesterday, I outlined what we knew about Halbig v. Burwell, the case in which a federal appellate court ruled that subsidies for purchasing insurance under Obamacare can only be made available on marketplaces established by states. Now I propose to outline what we don’t know: namely, what will happen after the case winds its way through the court system.

If the U.S. Supreme Court ultimately rules for the government, the answer is, “not much; things go on as they are.” But what if the justices take the case and rule for the plaintiff?

Don’t point me to your favorite article punditsplaining to the court that it can’t possibly do this. This is the Washington equivalent of the old lady in the movies who puffs out her bosom, settles her pince-nez higher up on her nose, and huffs, “You wouldn’t DARE!” It doesn’t work very well in movies, and it works even less well on actual people who don’t have to follow your script. The Supreme Court might well dare, even at the risk of outraging op-ed columnists everywhere. “Oh, c’mon!” is not a legal argument.

That’s clearly a possible outcome, and right now, it’s the only one possibility interesting enough to explore. So let’s hop to it.

The big question is, first, how many states decide to create exchanges? I’ve heard from several people today who thought it was obvious that most of the 36 states now on federal exchanges would simply withdraw and build their own in order to keep the subsidies flowing. This seems quite possible, because voters hate losing stuff, and especially subsidies. And state legislators do love them some free money.

On the other hand, that outcome is hardly inevitable. Law professor Jonathan Adler pointed out in a conference call yesterday that Ohio would have to amend its constitution to allow the government to establish a state exchange, and barriers in some other states are high as well. State exchanges cost millions to build and to run. States can still apply for federal money to build exchanges, Adler said, but the annual operating costs have to come out of either user fees or tax revenue. In lower population states, or poor states, that might be enough to keep legislators on the sidelines. So might the fear of primary challenges, even if the administration comes up with some easy administrative workarounds to lower the cost.

In the states that don’t establish exchanges, the most likely outcome is a death spiral. For one thing, without the subsidies, fewer people would be subject to the mandate, because the cost of a policy would become “unaffordable” as the Internal Revenue Service defines it for the purposes of assessing mandate penalties. Even if that weren’t the case, without the subsidies, a lot of people would find it cheaper just to pull out and pay the penalties. The most likely people to do this? Healthy youngsters paying more in premiums than they get in health services. If they exit the exchanges, premiums will rise, and the markets will spiral downhill.

Now, on the one hand, maybe the counterexample of the blue states that still have subsidies will rush red-state legislators to pass a law constructing a state exchange. On the other hand, maybe red-state congressmen start looking at the subsidies flowing to blue states and think “that money would be better spent elsewhere.” A lot depends on the 2016 election, of course: Do voters turn out for Hillary Clinton, to protest the loss of their subsidies, or do they turn out for the Republican, to protest this unpopular, unworkable clunker of a law? I’ve seen confident opining on both sides, but since such opining lines up 100 percent with the political preferences of the orator, I don’t think either side knows the answer. Especially since the exchange subsidies will only be one piece of the puzzle: There are a whole lot of other open questions like, “Will the employer mandate ever go into effect, and how will voters like it if it does?”

The most interesting question, I think, is what an adverse ruling would do to the insurance companies. A lot of big insurers mostly stayed out of the exchanges for the first year, waiting to see how they’d develop. Perhaps because the administration has sweetened the pot considerably for insurers over the last eight months, this year, they seem to be wading in deeper, albeit still cautiously.

But what if the pot of subsidy money starts shrinking, rather than growing? That was always going to be a problem, because the risk corridor program, through which the government has funneled many of its pot-sweeteners, ends in 2016, and starting in 2019, the law changes its indexing formula in a way that may require subsidized families to pay a higher share of their income toward premiums. This problem used to look comfortably far away, giving the exchanges some time to get their sea legs. An adverse ruling in Halbig might bring it right up close where we can see it.

If insurers start to pull out, or demand huge premium increases to stay, Obamacare’s future looks cloudier. As I’ve written before, Democrats and insurers are now locked in a sort of prisoner’s dilemma, where the benefits of staying together are probably high, but the temptation to defect may be even higher. Once one stampedes, both will head for the doors very quickly. There’s no way of telling if or when this will happen, because crises tend to come in two speeds: slow motion or suddenly all at once … as the economist Rudi Dornbusch more memorably put it, “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that’s sort of exactly the Mexican story. It took forever and then it took a night.”

Here the administration’s reliance on administrative fixes to paper over problems with the law really begins to hurt it. If it looks as if a Republican might be in the Oval Office come 2017 — or even if there’s a Republican Senate in 2015 that can start forcing Democrats to take a series of embarrassing votes on the subsidies the administration has been funneling to insurers — then insurers may start getting a mite nervous, by and by.

If Halbig goes against the administration, the risk corridors are winding down, and the possibility of a Republican president looms, how hard will insurers work to keep the program going? I can tell the story either way: that they’re desperate to make it work before the Oval Office turns over, or that they finally just give up and leave the White House to wallow in a big mess. Or maybe a bit of both, with different strategies state by state. This remains the most important unknown, and interestingly, the one the fewest people are talking about.

In the end, some states will probably create their own exchanges, and many probably won’t. That wedge between the states with subsidies and the states without would leave an unstable fault line at the heart of the law, one that might cleave at any moment and destroy the whole thing.

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Megan McArdle is a Bloomberg View columnist who writes on economics, business and public policy.

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