How Not to Bungle an ObamaCare Opening

(WSJ) – Republican congressional leaders were wise to propose an alternative to the Affordable Care Act this week, as the Supreme Court may strike down a key provision of the law after hearing King v. Burwell next month. The case involves subsidies to individuals who purchase health insurance on federal exchanges. The plaintiffs—four individuals who don’t want to be forced to buy ObamaCare—argue that under the explicit terms of the ACA, subsidies enabling that purchase can only be distributed in exchanges “established by the State.” The court is expected to rule by the end of June, and the plaintiffs have a good chance of convincing a majority that the subsidies are unlawful.

If the plaintiffs prevail, President Obama would undoubtedly blame Republicans for “taking away” the subsidies. And GOP governors might cave to political pressure and create state exchanges they had previously rejected. To avoid this outcome, ObamaCare’s congressional critics need to come up with an alternative that’s ready to go if the Supreme Court’s ruling goes their way. That means a plan that can pass Congress and leave the president hard pressed to veto.

The alternative proposed by Sens. Orrin Hatch and Richard Burr and Rep. Fred Upton on Wednesday would retain some parts of the law, such as protections for people with pre-existing conditions and allowing young adults to stay on their parent’s plans until age 26. But because it repeals most of the law, including both the individual and employer mandate, Mr. Obama would surely veto it.

Other Republicans are working on a plan to let states provide some kind of subsidy as long as they opt into what amounts to a full replacement of ObamaCare. This may give Republican governors a political parking space until the next election, but like the Hatch-Burr-Upton proposal has little chance of surviving a veto.

Unless Republicans advance reforms that provide some immediate relief, start to turn ObamaCare in a market-based direction, and leave Mr. Obama in a political bind, the GOP will be blamed unfairly for customers facing premium-induced pain.

One of the most meaningful reforms would be to lift the heavy federal regulation of which insurance products can be sold in the exchanges, allowing insurance regulation to revert to the states. Congress can stipulate that any state operating its own exchange can allow any health plan that previously met its insurance requirements (pre-ACA) to be offered, either on or off its own exchange. Republicans could allow this provision to sunset so they could pursue broader reforms later.

This would reintroduce competition in the design of health plans, instead of forcing consumers into the Washington-designed plan imposed in the exchanges. Right now, the only thing that varies among ObamaCare’s different metal plans (bronze, silver, gold) is the cost sharing. The actual benefits—the narrow doctor networks and closed drug formularies—are basically the same.

The workarounds that the Obama team is already considering can also give Congress and Republican governors a road map. The White House is contemplating a looser definition of what counts as “established by the State” under the original law, depending on how much leeway the Supreme Court’s decision provides. It’s unlikely the court would define this threshold. Since the term in question already exists in the law’s text, but was never defined further, the Obama team will likely try to establish a new definition in regulation.

Former Obama aides speculate that states could establish the veneer of a state-run enterprise, but default the back-end functions to Healthcare.gov. The federally supported model already provides precedent for relying on the Healthcare.gov infrastructure, even though the federal government still categorizes them as state-based exchanges.

Several states are already using this hybrid approach. Idaho and New Mexico used this mixed model in 2014. Two state exchanges that suffered IT problems in 2014 (Oregon and Nevada) have flipped to the supported model for 2015 and are now on Healthcare.gov.

States can take some unilateral latitude of their own, by explicitly coupling such a workaround to a looser interpretation of when the ACA’s tight regulation of state-based insurance products will kick in. They can dare the Obama team to cut off subsidies if states choose to take a relaxed view on the regulatory strictures, such as which mandated benefits must be included in a health plan, or how much cost-sharing can be allowed.

The best outcome would be for Congress to explicitly link any Obama administration “fix” to a regulatory setup that lets governors regain control of their state insurance markets. Congress could then couple it to indefinite extensions of other arbitrary waivers, such as the mandate on employers with more than 50 “full time” workers that they must provide coverage at work. It was set to begin in 2014. The White House delayed its full implementation until the end of the president’s term, thus skirting the economic cost.

So long as the administration redefines a “state run” exchange, it seems proper to have Congress address what requirements accompany such a redefinition. Mr. Obama will find it difficult to veto a provision that includes waivers he himself granted, gives consumers more choice, and gives back to the states some of the discretion they had, pre-ACA, over local markets.

Most of ObamaCare’s problems will remain if the plaintiffs in King v. Burwell prevail at the Supreme Court. Only some of the analgesic subsidies, designed to mask the true cost of the ACA, will go away. If Republicans start planning now, they can capitalize on a favorable decision in both political and substantive ways. But if red-state governors are forced to submit to workarounds that merely let subsidies continue to flow, their legal victory could be short-lived.

Dr. Gottlieb, a physician and resident fellow at the American Enterprise Institute, was deputy commissioner at the Food and Drug Administration from 2005-07. He also advises medical products companies. Mr. Troy, a former deputy secretary of Health and Human Services, is president of the American Health Policy Institute.