ObamaCare Exchanges Are Limping Into Oblivion

Back on July 29, I wrote a blog entry explaining why I believe that any health insurance exchange, whether compliant with ObamaCare or not, is unlikely to thrive without huge subsidies. Recent days have brought forward new evidence that even the massively taxpayer-financed ObamaCare exchanges are facing even bigger problems than previously understood.

Most recently, The New York Times reports that Republican state senators are blocking a bill that would allow the state to establish an exchange and claim federal handouts to get it up and running. (A few weeks previously, Kansas governor Brownback actually sent a $31.5 million federal ObamaCare grant back to D.C.)

If they can’t get an ObamaCare exchange up and running in New York, of all places, where the heck will they? Only 13 states have passed pro-exchange legislation (and some of these bills don’t do much more than establish study groups).

Republican state politicians are clearly hardening their stance against exchanges. It appears that they are no longer fooled by the argument that if they do not collaborate to establish state-based exchanges, the federal government will enter their state and do it for them. Recent close reading of the law has debunked this notion. As written, the Patient Protection and Affordable Care Act (PPACA) has (at least) two clauses that will prevent this from happening.

First, courtesy of Investors’ Business Daily’s David Hogberg and the Cato Institute’s Michael Cannon, we learn that federal exchanges will not be able to funnel the gusher of refundable tax credits to individuals who enroll in them.

The gist of the argument is that the law only allows state-established exchanges to funnel the tax credits. If a state fails to establish an exchange, and the federal government steps in, that exchange is not eligible for the tax credits.

Neither Hogberg nor Cannon cite it, but it appears that they are referring to section 1401 of PPACA (on page 110 of this version), which clearly refers to section 1311 (state-based exchanges) as eligible for the tax credits, and does not mention section 1321 (federal exchanges).

Please read the section yourself. I hate to play barrack-room lawyer, but I’m 80% to 90% sure that Hogberg and Cannon are right (although I do see some wriggle room, in that the government could argue that a section 1321 exchange is a type of section 1311 exchange, established because a state failed to establish one).

Second, as I noted in a recent article, states can also stop federal exchanges by threatening to pull the licenses of health insurers which intend to participate in them (p. 58 of this version). The law defines a “qualified health plan” as one that is “licensed and in good standing in each State…”, and only qualified health plans can participate in exchanges.

So, federal exchanges have a double whammy against them. States which resist exchanges need not fear that the federal government will step in and operate one for them.

Unfortunately, as Cannon notes, the IRS has recently written proposed regulations that violate the law by asserting that tax credits are available through federal exchanges. Hogberg’s article raises the question of who would have standing to sue the U.S. government to force it to stop funneling tax credits through federal exchanges, if the IRS executes the proposed rule.

My take? Any taxpayer should have standing!

Comments (4)

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  1. Devon Herrick says:

    I expect there will be some political pressure brought to bear on state politicians. Once residents find out that they are not able to receive subsidies worth up to $10,000 or more they will demand their state leaders set up exchanges.

  2. Linda Gorman says:

    And after they demand that the exchanges be set up, watch what happens when they find out that the only insurance available looks and acts like Medicaid both in terms of medical care in its effect on the state budget.

  3. Virginia says:

    I don’t think legislative problems will stop the government from giving tax credits for a federal exchange. Since most Americans don’t understand the issue, it will probably either be retroactively changed or will be ignored until challenged in court. My own two cents on the matter…

  4. John R. Graham says:

    Thanks for your comments. Given the energy behind the lawsuits against Obamacare’s individual mandate, I have little doubt that similar energy will cause all kinds of potential plaintiffs opposed to Obamacare to seek standing to sue the federal government to stop it from funneling tax credits through a federal exchange.