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Obamacare's escape hatch: the controversial way Obama could save health reform

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In the final days before the Supreme Court decides whether to rule against Obamacare and threaten the insurance coverage of millions of Americans, health-care experts believe they've found an escape hatch.

The White House has said that if the court strikes down subsidies for Americans outside the state exchanges, there is nothing they can do for those 6.4 million people.

But health-care experts say they may have just found a way: loosen the definition of what counts as a "state-based" marketplace.

"The White House has issued a bunch of rules to clarify what it means and what the standards are, but they could be relaxed quite a bit, and that, theoretically, would make it much easier for states," says David K. Jones, an assistant professor at Boston University's School of Public Health who has written on possible contingency plans.

Changing what counts as a state-based exchange would spark a new Obamacare controversy, fierce political blowback, and new legal challenges. And the White House, so far, has been steadfast in saying it doesn't have any administrative authorities to soften the blow of an anti-Obamacare ruling.

Legal experts who have studied the King case extensively say this idea is far from a ruling in favor of the law. But it also could create just enough wiggle room for the White House to take some steps to keep subsidies flowing to more states than they otherwise would.

"It's going to be hard to know how permissive HHS [the Department of Health and Human Services] will be until we see what they're willing to approve as a state exchange," says Nick Bagley, an assistant professor at University of Michigan who has also written on the issue. "But they do have a measure of discretion here."

The dividing line between "state" and "federal" exchange is a bit fuzzy

The health-care law envisioned two distinct types of health insurance marketplaces: those that the states established and those that the federal government ran.

In actuality, though, the lines between "state" and "federal" marketplace aren't totally clear. There are, arguably, five types of marketplaces operating under Obamacare right now, all with different levels of state and federal involvement.

When experts talk about "state exchanges," that's typically shorthand for the first two categories:

  • State-based marketplaces: These are the websites that states built from scratch, like Washington's WAHealthPlanFinder or California's Covered California. These are the clearest examples of state-based marketplaces, where the state has established a nonprofit or government agency to completely run or manage the Obamacare exchange. There are 14 states in this category, and they're the dark green ones above.
  • Federally supported state-based marketplaces: These are states that manage most of the marketing and outreach for their exchange and have some nonprofit or government, state-level agency overseeing those efforts. But when it comes time for shoppers to actually buy coverage, they bounce shoppers to Healthcare.gov. New Mexico's BeWellNM, for example, works this way — as do Oregon and Nevada's marketplaces. These are the light green states above.

(BeWellNM)

And when experts talk about "federal exchanges," that usually means anything down here:

  • Partnership marketplaces: For shoppers, partnership states look identical to Healthcare.gov states. All the advertising and branding sends enrollees to the national site. But on the back end, partnership marketplaces have the state insurance office playing a big role in managing plans: making sure they are in compliance with exchange regulations, and collecting data on their rates and benefits. These states had to apply to Health and Human Services to get officially designated as partnership states and, in 2015, there were seven of them in operation. They're in medium blue above.
  • Unofficial partnership marketplaces: There are seven states (in light blue above) that are doing the same things that partnership states do — managing and overseeing insurance plans — but never actually applied for the designation. In the eyes of the government, these are plain old federal marketplace states. But, for reasons that will become clear in a moment, it's helpful to carve out these states into a separate category.
  • Federal marketplaces: These are the states that have no role at all in running their Obamacare market; the federal government handles advertising, plan management, everything. There are 19 states in this category, and they're in dark blue.

The Obama administration could change the definition of a state marketplace

Legally speaking, the line doesn't necessarily have to be drawn as it is now in terms of what counts as a state-based marketplace. Some experts say the White House could, theoretically, move the line down and count the 14 states that manage the plans in their marketplace — the official and unofficial partnership states — as state-based.

This would be a controversial move, and it would near certainly face legal challenges. But in a recent Yale Law Review article, Bagley and Jones outline how it would work:

The ACA does not define what it means for a state to "establish" an exchange. Instead, the ACA grants the Secretary of HHS the authority to "issue regulations setting standards . . . with respect to . . . the establishment and operation of Exchanges."

Given these broad statutory delegations, HHS could revise its regulations and the Blueprint to provide that some states should be understood as having established an exchange, even if they never formally elected to do so....Could the regular performance of essential and substantial exchange functions, over time, constitute the establishment of an exchange? As relevant here, the term "establish" means "[t]o make or form; to bring about or into existence."

The Obama administration would be redefining the word "establish" away from a definition focused on states taking a specific action and toward one focused on a specific pattern of behavior.

"You can establish something by engaging in a pattern of conduct," Bagley says. "A good example is you may not want to establish a smoking habit, and you may tell yourself you don't have a smoking habit, but if you're going through a pack a day you probably have established a smoking habit."

To be clear, Bagley doesn't necessarily endorse this approach, nor does he expect the White House to follow it. "It would almost certainly be challenged, and I'm not sure the administration could count on a victory," he says. But if the White House's one goal is maximizing the number of states with subsidies, he also thinks it's not a totally off-the-wall approach.

The hard truth about extending Obamacare subsidies

The White House has said repeatedly that it does not have any flexibility to work around a negative decision in King.

"We know of no administrative actions that could, and therefore have no plans that would, undo the massive damage to our health care system that would be caused by an adverse decision," HHS Secretary Sylvia Mathews Burwell wrote in a February 24 letter to Congress. She reiterated that position in mid-June, days before an expected ruling.

As important as the subsidies are to the White House, what might be more important is political leverage: Its ideal outcome would be Congress striking a deal to extend subsidies in all states, not just a handful who have played a more active role in setting up their marketplaces.

A makeshift fix like this one could backfire. Not only would it lessen the pressure on Congress to act, but some states that really oppose Obamacare could just stop doing the management activities that got them established as a state marketplace in the first place. Meanwhile, there's a decent chance that this type of action could get overturned in future legal battles. A congressional fix, meanwhile, would be permanent.

"I'm not sure they want to push up against this legal boundary," Bagley says. "Their view might be that, politically, a pro-King ruling puts Republicans in a tough spot, and they don't want to relieve that pressure by taking legally questionable steps."