The Media’s Myth About Replacing Obamacare

Michael Cannon of the Cato Institute and Jonathan Adler of Case Western University have an incredible new working paper out today outlining an Achilles heel of Obama’s law – which they argue is not a drafting error at all, but purposeful.

The next shot in the legal war over the health reform law isn’t another lawsuit but an academic paper that says federal exchanges can’t give people subsidies to help pay for their coverage.

The paper, authored by Case Western Reserve University’s Jonathan Adler and the Cato Institute’s Michael Cannon, puts intellectual heft behind an argument that has been percolating among the law’s opponents.

And though the law’s supporters have dismissed it out of hand just as they dismissed the challenge to the individual mandate, the paper could be the start of a challenge that – if it’s successful – could do almost as much damage to the law.

If the courts were to accept Adler’s and Cannon’s argument, that could effectively enable states to kill federal exchanges by empowering them to cut off the subsidies. Without subsidies, the federal exchanges would not be economically viable because they couldn’t get as many people to sign up for coverage.

There’s a good deal of skepticism among legal scholars about Adler’s and Cannon’s argument. These scholars say there are good reasons to read the law as intending subsidies to be the same regardless of who’s administering the exchange. And the courts give wide latitude to federal agencies’ interpretations of a law.

And any challenge to the exchange subsidies would have to target the Internal Revenue Service’s interpretation of the law’s premium subsidies provisions. In a rule published in May, the IRS specifically said both federal and state exchanges can administer the subsidies.

That’s where Adler and Cannon use some of their toughest words – by basically calling the IRS a bunch of lawbreakers.

“The IRS rule is illegal,” Adler and Cannon contend. “It is not authorized by the text of the [Patient Protection and Affordable Care Act], nor can it be justified on other grounds.”

Their argument hinges largely on whether Congress intended federally administered exchanges to be completely equal to state-run exchanges.

Based on an analysis of the debate on the Senate bill – which became the basis of the law – and the legislative proposals that preceded it, they claim – Congress made a decision to build the law based on state cooperation. The federal government-run exchanges were meant as a “fallback, and were not intended to replace state-run exchanges.”

In fact, they write, Congress intentionally did not give the federal exchanges the power to administer subsidies because it wanted these dollars to be a sweetener to persuade states to set up exchanges themselves.

“As an inducement to state officials, the Act authorizes tax credits and subsidies for certain households that purchase health insurance through an Exchange, but restricts those entitlements to Exchanges created by states,” they write.

Bipartisan resistance to the Medicaid expansion:

While the resistance of Republican governors has dominated the debate over the health-care law following last month’s Supreme Court decision to uphold it, a number of Democratic governors are also quietly voicing concerns about a key provision to expand coverage.

At least seven Democratic governors have been noncommittal about their willingness to go along with expanding their states’ Medicaid programs, the chief means by which the law would extend coverage to millions of Americans with incomes below or near the poverty line.

“Unlike the federal government, Montana can’t just print money,” Gov. Brian Schweitzer (D) said in a statement Wednesday. “We have a budget surplus, and we’re going to keep it that way.”

The law would add an estimated 84,000 people to Montana’s Medicaid program, doubling its size, the governor said. Although the federal government would pay the vast majority of the additional costs, Montana’s health department estimates the state’s share would reach $71 million in 2019. Outside groups say the costs would be far lower than that.

The range of state leaders expressing unease suggests that implementing the law could be rough going, with divisions not always breaking along party lines.

The topic is likely to factor prominently in this week’s meeting of the National Governors Association in Williamsburg. And it has been fueled by a long list of unanswered questions about the choice now before states.

In particular, it is unclear how the court’s pronouncement that states cannot be penalized for refusing to adopt the law’s more generous eligibility standards for Medicaid in 2014 changes the rules governing the expansion …

“The answers to these questions are key,” said NAMD Director Matt Salo. “States need to be making these decisions now, and it’s hard to make them if you don’t have clarity.”

At least one governor, Democrat Mike Beebe of Arkansas, has also tried contacting the Obama administration directly.

According to spokesman Matt DeCample, Beebe is “leaning toward” the Medicaid expansion, which he said would add between 200,000 and 250,000 Arkansans to the Medicaid rolls in a state whose population is around 3 million. Not only would it bring a significant injection of federal funds to the state, but it would also be a boon to Arkansas hospitals, which are currently treating many poor people for free.

But DeCample said the governor has concerns that there be “state flexibility down the line.” So last week, Beebe asked officials at the federal Centers for Medicare and Medicaid Services whether, in the event of an unforeseen future fiscal calamity, Arkansas would be able to tighten its eligibility rules and still get the full federal match for those who continued to qualify for its Medicaid program. To date, Beebe has received no answer.

The woodwork effect, outlined:

But an even bigger problem for states is what’s being called the “woodwork effect.” Harvard’s Ben Sommers and Arnold Epstein, in a 2010 article for the New England Journal of Medicine, estimated that only 62 percent of people who are eligible for Medicaid today have actually signed up for the program. As the below chart shows, participation rates are below 50 percent in large southern states like Florida (44 percent) and Texas (48 percent).

Here’s the kicker: this “woodwork” population, that was already eligible for Medicaid but not enrolled, won’t get the Obamacare 90-100 percent funding rate. Their expenses will be covered under the traditional FMAP percentage, meaning that states will be on the hook for 43 percent of the costs.

Nationally, Sommers and Epstein estimate that more than 9 million uninsured Americans were already eligible for Medicaid, pre-Obamacare, while failing to enroll. “Although only a portion of these people are likely to enroll in Medicaid” now that the program has been expanded, “adding them to the program’s rolls would nonetheless cost states billions of dollars in increased spending. Most affected would be states that currently have generous eligibility criteria for Medicaid, lower participation rates, a higher prevalence of low-income uninsured residents, or some combination of these factors.”

It’s not just red states like Texas that face this woodwork problem. New York’s generous eligibility criteria, combined with a substantial woodwork population, means that the Empire State faces substantial additional costs if these unenrolled individuals sign up for benefits. And New York is one of the states that has been most supportive of Obamacare’s coverage expansion.

These woodworkers will find it much easier to sign up for Medicaid under the program’s new rules. “It won’t be an in-person visit, it won’t be a ‘bring six forms of ID,'” University of Virginia’s Jeff Goldsmith told Rovner. “There will be an expedited – lubricated, if you will – process to get people onto the rolls, and I think that’s the part that’s giving state budget officers serious indigestion at this point.”

Republican Gov. Rick Snyder is clashing with his colleagues in the legislature on implementing Obamacare.

Snyder spokeswoman Sara Wurfel said the governor would like the House on Wednesday to follow the lead of the GOP-controlled Senate and approve setting up the exchange.

House Republicans initially blocked the administration’s efforts to tap $9.8 million in federal planning money for the exchange until the court ruled, hoping the law would be struck down. The state has been granted the money but can’t spend it without legislative approval.

Nor can it apply for additional federal planning funds if the first grant isn’t used.

Now some Republican House members say that any action on the exchange should be put off until November, when they’ll know if Mitt Romney defeats President Barack Obama and Republicans capture the U.S. Senate, making it possible some parts of the federal health care law will be repealed.

Republican governors in Florida, Louisiana, Mississippi, South Carolina, Wisconsin and Texas have already indicated they’ll likely reject the Medicaid expansion, citing concerns about the costs.

“I just don’t see that it’s in Michigan’s interest to jump aboard this train right now,” said state Rep. Chuck Moss, R-Birmingham, chairman of the House Appropriations Committee. “If the president is vindicated and he’s re-elected … then we move on.”

Even if you like your plan, you can’t keep it.

Regulations are slowly strangling HSAs. Under Obamacare, “fully insured” policies must spend at least 80 percent (small group and individual market) or 85 percent (large group market) of every premium dollar on health care related expenses (called the medical loss ratio or MLR). The remainder can be spent on administrative costs (improving health care delivery or combating fraud) and profits.

The problem is that HSAs have an MLR that is significantly lower (around 60-70 percent) by design because policyholders are paying out-of-pocket for claims before the deductible is met. The insurer spends less on both on administrative claims and health care claims, but is also able to offer the policyholder a significantly lower premium as a result. Consumers get more power over routine spending, and significantly lower premiums. That’s a win-win, right?

Not according to the Administration, which refuses to count claims below the deductible against the MLR. In response, companies would have to lower their deductibles, or cover more services below the deductible – both of which would raise premium costs for policyholders. So the Administration is, in effect, demanding that people pay more for even the most basic health care coverage – and making HSAs less competitive with other types of (more expensive) insurance.

Then we come to another key regulation, actuarial value or AV. AV is the percentage of expected health care expenses covered by insurance. Under Obamacare, the AV of plans on state health insurance exchanges starts at 60 percent for Bronze Plans, and goes all the way up to Platinum (90 percent).

Let’s say that John Q. Smith buys an HSA qualified plan for himself and his family and starts putting money aside ever year to cover future health care expenses. Does that count against the actuarial value of the plan? Again, not according to the Administration. If the insurer isn’t paying, it doesn’t count, even if the design of the plan has consumer savings built in.

So regulators are insisting that you buy a more expensive health insurance plan than the one you want (or have already, since the MLR and AV rules will lead at least some Americans to lose the health insurance they have and like today).