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Four Little Words
"Established by the State"

March 9, 2015

Last week the Supreme Court heard oral arguments over whether enrollees in federally-run healthcare exchanges may receive subsidies to help pay their premiums.  It’s an interesting case and may backfire on the Obamacare drafters.

At issue are the four little words “established by the state.”  It’s just one more example of federal legislators offering a “carrot” to encourage states to take action, but this time the “stick” may be taken our of their hands!  It’s a well known practice: offer the states federal dollars (the “carrot”) so they’ll do what the federal government wants.  If they take the bait (the dollars) and then fail to do what is directed by the feds, then the “stick” is employed – telling the states they must do what the feds say or return the money -- money all too often they have already spent!

In this case the Obamacare drafters included language that makes federal dollars in the form of taxpayer-funded premium subsidies available to healthcare exchanges “established by the states.”  The idea was to get states to setup their own exchanges.  But surprise, 34 states choose not to and the federal government stepped in setting up federal exchanges instead. These states realized from the get-go that setting up their own exchanges would be a budget-buster down the road.  Now these same states are saying because the exchanges in their states are federally run the subsidies can’t be offered.  Unlike the then Speaker of the House Nancy Pelosi, they read the bill and discovered what it said!

The key architect of the law, Jonathan Gruber said in 2012: “What’s important to remember politically about this is if you're a state and you don’t set up an exchange, that means your citizens don't get their tax credits—but your citizens still pay the taxes that support this bill. So you’re essentially saying [to] your citizens you’re going to pay all the taxes to help all the other states in the country. I hope that that's a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges.”  This sounds kind of like taxation without representation for the people of 68% of the states that refused to grab the Obamacare “carrot.”

If the Supreme Court follows the letter of the law as drafted, then the people in these 34 states will still be required to have healthcare insurance but they will need to pay the full-freight without taxpayer assistance.  This means that many Americans who are already facing skyrocketing healthcare plan costs – along with their rapidly increasing deductibles – will choose to pay the tax to the IRS rather than receive healthcare coverage.  The end result could be that the Obamacare may collapse under its own weight. 

The Republicans have already floated alternative legislation in order to ease a transition away from Obamacare in case the court follows the letter of the law.

We won’t know the final decision until late June.  In the meantime the Administration is still handing out taxpayer dollar/subsidies like candy, not telling the poor unsuspecting recipients that if the Supreme Court follows the “four little words,” their premiums will go even higher!

Bill Sargent, John Gay, and Mark Mansius