How states could get around yesterday’s Obamacare ruling

Yesterday, a federal appeals court ruled that Obamacare subsidies are illegal in 36 states. Though the problem is abstract for now — the judicial system is going to grapple with this question over the coming months — what happens if the ruling eventually becomes reality?

Maybe not much.

The court case, Halbig v. Burwell, centers on whether Obamacare actually authorized the IRS to provide subsidies to buy health insurance on exchanges that are run (or partly run) by the federal government. According to a ruling from the D.C. Circuit Tuesday morning, the answer is no.

Most people who have followed this case closely — including the lawsuit’s chief architects — think the odds of Halbig becoming the law of the land are slim.

But if it did, it could have potentially disastrous consequences for the 36 states that didn’t build their own exchanges. Getting a marketplace up and running is no small task, as difficulties with Oregon, Massachusetts and Healthcare.gov have all shown.

But there might be an easier way for states to still net subsidies without building an exchange: contract with Health and Human Services to use the federally-established infrastructure for as the backbone of new, “state-based” marketplaces.

Obamacare has some rules about who the state can delegate exchange duties to, and those rules would forbid states from contracting directly with Healthcare.gov, but it doesn’t foreclose use of the website altogether.

“A state could, for example, establish an exchange and appoint a state-incorporated entity to oversee and manage it. That state-incorporated entity could then contract with Healthcare.gov to operate the exchange,” writes Nicholas Bagley, a law professor at the University of Michigan. “On the ground, nothing would change. But tax credits would be available where they weren’t before.”

While this would be another example of the executive branch exercising some administrative muscle to “fix” a problem with Obamacare, it likely passes legal muster.

“It’s a more aggressive interpretation of statutory authority than I might be comfortable with, but it’s plausible,” says Jonathan Adler, a law professor at Case Western and one of the legal minds behind the case.

Which poses another question: would all 36 states jump at the opportunity to preserve their residents’ subsidies? Probably not. In at least one of the related court cases — Indiana v. Burwell — the administration is being sued directly by a state. Another lawsuit, Pruitt v. Burwell, pits Oklahoma’s attorney general against Obamacare on the same issue.

Furthermore, many of the states defaulting to federal exchanges are the same states that didn’t expand Medicaid. They haven’t flinched at the prospect of denying health insurance to some of their poorest residents — coverage that is fully financed by the federal government for Obamacare’s first three years. Why should we expect the exchanges to be any different?