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Premium Subsidy Fight Creating Uncertainty for Hospitals, Health Plans

 |  By John Commins  
   July 30, 2014

A pair of conflicting rulings regarding tax credits for those who buy health insurance on the federal marketplace is a "credit negative" for health plans and not-for-profit hospitals, Moody's Investors Service says.

Not-for-profit hospitals and health plans may feel the economic effects of the uncertainty created when two federal appellate courts last week issued conflicting opinions on a key provision of the Patent Protection and Affordable Care Act.

In a 2–1 ruling in Halbig v. Burwell, last week, judges on the D.C. Circuit Court of Appeals last Tuesday said that specific language in PPACA does not authorize the Internal Revenue Service to extend tax credits to an estimated 4.7 million people in 34 states who bought coverage through the federally facilitated Healthcare.gov exchange.

On the same day, the Fourth Circuit Court of Appeals in Virginia issued a conflicting ruling on essentially the same case, saying that the tax credits were legal. The case is expected to be heard by the U.S. Supreme Court.

The tax subsidies are a key provision of Obamacare that keeps health insurance affordable for millions of people, and the uncertainty created by the rulings is a "credit negative" for health plans and not-for-profit hospitals, Moody's Investors Service said.

If the Supreme Court rules that the subsidies are illegal, Moody's says it would be "an unambiguous credit negative" for hospitals in states that relied on the federal exchanges.

"Of the approximately 5 million polices sold on the federal exchanges, the federal government has reported that between 80% and 90% of these policies were issued to lower or moderate income individuals with some portion of the premiums paid for with federal subsidies," Moody's said.

 

The new revenue that was expected from insured patients is supposed to mitigate reimbursement cuts for hospitals from all payers, and supplemental cuts to Medicare and Medicaid disproportionate share payments.

"Given the higher amount of uncompensated care that not-for-profit hospitals provide, they are at greater risk to lose revenue than for-profit hospitals should the DC Appeals Court ruling be upheld," Moody's said.

Eliminating the subsidy would also be a credit negative for health plans because it would reduce the number of policies sold on the federal exchanges, which would then skew towards a less-healthy population, Moody's says.

"These lapses could occur because policyholders may no longer be able to afford the premiums for these policies without the financial assistance provided by the premium subsidies," Moody's said.

The ruling has also prompted insurers to rethink expansion and pricing for the 2015 enrollment period, even as many insurers have already submitted plans and premium rates for 2015 to the Centers for Medicare & Medicaid Services.

"If subsidies are no longer available in the 36 states that rely on the federal exchanges, the profile of the potential insurance purchaser in these states would drastically change," Moody's said. "Under a no-subsidy scenario, insurers would expect the exchanges to attract a less healthy population because only those who most need insurance coverage would likely purchase an unsubsidized health plan. As a result, insurers have indicated that if the ruling were upheld, it would lead to higher premiums."

Unless the legal battle is resolved before the next enrollment period, which may be unlikely, Moody's anticipates that some insurers will either revise their premium submissions or withdraw from some exchanges during the enrollment period later this year.

The Obama administration last week said the subsidies that are now in effect will continue through the appeals process.

Brendan Buck, spokesman for America's Health Insurance Plans, says the health insurance industry "certainly is aware of what the impact would be in terms of what it would do to the risk pool and the effect on affordability."

"That said, it is a long way off until this is resolved and in the meantime we are remaining focused on doing our job of delivering affordable care and access to consumers," he says.

John Holahan, a fellow at the Urban Institute's Health Policy Center, says eliminating the tax subsidies would exacerbate already significant disparities in access to healthcare from state to state.

"I don't think anyone intended that this would be health reform for Blue States but that is what seems to be turning out, between the Medicaid decision and this," Holahan says. "Even though it was conservatives behind this lawsuit, the real impact of this would be on the conservative-learning states that will have more uninsured."

"It affects people. It affects state economies. Between the Medicaid expansion and this they are giving up a boatload of money and then there are already big disparities in insurance coverage and the quality of healthcare and those disparities will just expand."

John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.

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