States Will Be Forced To Choose If Supreme Court Strikes Down Obamacare Subsidies

State economies could get a big boost if the Supreme Court rules that the government cannot offer subsidies through federally-run Obamacare exchanges.

In March, the Supreme Court will begin hearing oral arguments in the case of King v. Burwell, a lawsuit claiming that the Affordable Care Act only authorizes tax credits for individuals purchasing health insurance through state-run exchanges.

If the court agrees with that interpretation, the 34 states that declined to set up their own exchanges would lose the “free” federal subsidies they currently receive, but would also be liberated from the employer mandate requiring companies to offer health care to all employees working at least 30 hours per week.

According to Don Susswein, a managing director at the consulting firm McGladrey LLP, such a ruling would present states with a difficult choice between establishing an exchange in order to preserve subsidies for low-income residents and shielding companies from the mandate as a way to promote job growth.

Jonathan Gruber famously said, in effect, that no state in their right mind would give up free tax breaks,” Susswein told The Daily Caller News Foundation, and the obvious implication is that if tax credits were the only issue, states would “bite the bullet and set up their own exchanges.” (RELATED: Obama Advisor Jonathan Gruber in 2009: Obamacare Will NOT be Affordable)

However, while “some people are going to argue that it’s unfair for low-income people to lose their tax credits, there are others who will point out that there would be more jobs, and higher-paying jobs, available for those people” in the absence of an employer mandate.

In some cases, he predicts, companies might respond by physically relocating to a state without an Obamacare exchange, taking jobs with them. (RELATED: Insurance Brokers: Obamacare is Harder Work for Lower Pay)

Another possibility, especially for larger companies that do business in multiple states, would be to shift jobs around “so that all residents of non-mandate states work for a single subsidiary that is effectively exempt from Obamacare.” Because the mandate would still apply for workers directly employed by the parent company, firms would have a strong incentive to move as many jobs as possible to the mandate-free subsidiary.

Removing the employer mandate would also benefit workers whose job status is not affected, Susswein argues, because those who lose access to employer-provided coverage would see a corresponding increase in their cash wages. “If you impose a per-job cost on an employer,” he explains, “the cost is really borne by the workers in reduced cash wages.” (RELATED: Study: Obamacare Employer Mandate Will Disproportionately Hurt Low-Wage Workers)

In fact, he says, the employer mandate is an unwanted burden for many low-income workers, because “they may prefer cash, or they may prefer a less generous insurance plan,” yet neither of those options is allowed under Obamacare.

 States Will Be Forced To Choose If Supreme Court Strikes Down Obamacare Subsidies On the other hand, while states that elect to accept the tradeoff could become “magnets for jobs,” Susswein cautions that they would also run the risk of entering into a “death spiral” of skyrocketing health insurance premiums, because the requirement that insurers cover individuals with pre-existing conditions would remain in place. (RELATED: HHS-Funded Study: Obamacare Will Suffer ‘Death Spiral’ if Subsidies Fail)

As a result, states without their own insurance exchanges would become vulnerable to the “free-rider” problem, whereby “low-income individuals opt-in to the system at the last minute, only after it is clear that they have a chronic condition.” Free riders impose exceptionally high costs on insurance companies, forcing them to raise rates on healthy customers to compensate.

Susswein believes the risk of death spirals is relatively remote, though, saying, “I’m sure somebody in Congress will push to solve the free-rider problem to ensure that they’re not essentially gaming the system.”

One potential solution would be to repeal the individual mandate and replace it with a continuous coverage requirement, which would extend Obamacare protections only to individuals who remain insured “in good times as well as bad.”

“The notion of a continuous coverage requirement doesn’t shock the conscience,” Susswein asserts, pointing out that such a requirement is not only “what the individual mandate is all about,” but is also a feature of several reform bills already before Congress.

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