Legalese Puts Obamacare in Jeopardy

Source: Architect of the Capitol

Politicians rarely agree on anything, so it's probably not too surprising to learn that a countless string of negotiations, concessions, and agreements may have resulted in legalese that could jeopardize the Affordable Care Act, or at least one of the key provisions responsible for the majority of people signing up for coverage through the exchange.

The crux of it
In July, a D.C. circuit court voted two to one that Obamacare can only offer subsidies to people seeking state-run healthcare insurance exchanges, not through This week, a federal district judge in Oklahoma agreed.

That judge, Ronald White, determined that the law allows subsidies specifically for insurance bought "through an exchange established by the state". Since the exchange was established by the federal government, White argues that subsidies can't be offered to people who sign up for coverage through it.

If that decision is held up in higher courts, insurance coverage for millions of people who signed up through the federal exchange rather than through independently run state exchanges could be in jeopardy. During the first open enrollment period this past year, more than 7 million people used both the federal and state healthcare exchanges to sign up for insurance and the vast majority (nearly 90%) of those people receive subsidies that significantly lower their monthly premium payment.

Gauging the impact
Eliminating subsidies for those signing up through would likely pose a big threat to major insurers like WellPoint , which serves exchange members in 14 states, and UnitedHealth Group , which announced earlier this year it would expand its participation to include members in two dozen states.

According to The New York Times, 4.5 million of the 7 million people who signed up for insurance through exchanges and receive subsidies did so through If those subsidies are eliminated, the average monthly payment for enrollees could increase from just $82 to nearly $350.

That's a game-changing jump in cost that could derail insurance models, which set pricing based on the assumption that subsidies would encourage more healthy young people to enroll in the exchange, offsetting costs tied to older patients with pre-existing conditions.

Source: D.C. District Court

It's not over (yet) 
The judge's decision casts doubt on the viability of the federally run exchange, but not everyone agrees.

Shortly after the D.C. panel issued its decision, another three-judge panel from the 4th Circuit Court of Appeals in Richmond came down on the other side of the debate, voting that the Affordable Care Act does grant the government the right to offer subsidies in states participating in the federal exchange.

And it's unclear whether the D.C. panel's decision will hold up either. In early September, the D.C. Circuit Court of Appeals vacated the prior ruling and agreed to hear the case. The D.C.'s full court, in which the number of judges appointed by democrats outweighs the number of judges appointed by republicans, will issue its decision on Dec. 17.

That may mean that this decision will ultimately rest in the Supreme Court's hands. If that highest court agrees with Judge White, it could effectively mean the end of the centralized marketplace and force dozens of states to incur the cost (and headaches) associated with creating their own state-run exchanges.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned.The Motley Fool recommends UnitedHealth Group and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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