The Obamacare window technically just closed this weekend, but a new round of political headaches could just be beginning for the administration.
That’s because it’s tax season, and many Americans could soon be getting an unwelcome surprise that they owe the government a penalty for skipping health insurance coverage.
Up to 6 million Americans are expected to pay a penalty for not having coverage in 2014, according to recent Obama administration projections. The 2014 penalty for this tax season is $95, or 1 percent of family income — purposefully on the weaker side to let people adjust to this new coverage scheme. Most of the uninsured won’t actually face the penalty because they’ll qualify for an exemption, either related to their inability to afford coverage or some other hardship.
EARLY next month the Supreme Court will hear arguments in King v. Burwell, the latest significant legal challenge to the Affordable Care Act. The petitioners argue that under the statute, the federal government is not allowed to provide health insurance subsidies in the 37 states that have either declined or failed to establish their own exchanges.
Should the court decide in the petitioners’ favor, most likely in June, critics in Congress will feel vindicated. But then comes the hard part: Congress must be ready with a targeted plan to help at least six million people who would quickly lose that federal assistance, and most likely their insurance.
While several Republicans in Congress have offered serious proposals to replace Obamacare, debating a wholesale replacement of the Affordable Care Act would take months, even years. But it is essential for Congress to move fast on a short-term solution. About 85 percent of people who bought plans on the exchanges receive subsidies, and most could not afford the policies without them. If fewer people are enrolled and new enrollments decline, premiums will rise, leading to the breakdown of the exchange markets.
If the Supreme Court decides that the Affordable Care Act means what it says — that subsidies are available only if a state establishes its own exchange — then President Obama’s signature legislative initiative would be significantly weakened in two-thirds of the states.
Fortunately, there is a way out, one that President Obama, forced by the court to the negotiating table, might be willing to accept. The first step would be for Congress to pass legislation that would allow people to keep subsidies they have already received, and allow subsidies for existing policies to continue through this year so people don’t immediately lose their existing coverage.
Then, beginning in 2016, instead of subsidies to individuals, the 37 states without exchanges could receive a new, capped allotment from the federal government that we call health checks. States could use the allocation to provide immediate premium assistance to people affected by the court decision, and similar checks could be extended to others who would need insurance afterward.
The money would be distributed using the same infrastructure used to disburse funds for the Children’s Health Insurance Program, which covers nearly nine million children. States know how to manage this platform, and could use it to distribute insurance premium support. (The “checks” could, of course, be distributed as electronic credits to insurers, which would be applied on a monthly basis to offset the cost of insurance policies individuals select.)
This might sound like the same subsidies by a different name, but one advantage would be that health insurance policies supported by health checks would not be subject to the Affordable Care Act’s mandates, taxes, insurance rules and benefit requirements.
Currently, to qualify for a subsidy under the act, a health plan must cover a long list of benefits, many of which unnecessarily increase costs. Under our plan, people could apply their allotments toward the purchase of any health insurance plans or policies approved by their state. States could decide what regulations were needed to protect consumers while still providing opportunities for less expensive policies unburdened by excessive regulation and mandates. Such flexibility would also increase enrollment rates: People would be more likely to purchase policies if they had options that cost less and better fit their needs.
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Of course, in reality, should the court decide against the Affordable Care Act, there are other options. Some supporters of the law are encouraging President Obama to simply declare existing federal exchanges to be state exchanges or license them to the states — a move that would further complicate an already ungainly law and already frayed executive-congressional relations.
Others say that the 37 states without federal exchanges would have no choice but to quickly establish exchanges so that residents didn’t lose coverage, even if they were ardent opponents of the law. Some might, but it’s a good bet that many wouldn’t, at least not in time to prevent their citizens from losing coverage.
Health checks offer a politically palatable third way. They would return control over health insurance to the states, with new resources to help their residents. And they would preserve the Affordable Care Act’s present extension of coverage, which would make them more palatable to the Obama administration.
There is no way to know how the Supreme Court will rule in King v. Burwell, but it is incumbent upon both parties in Congress to be ready for the fallout should it decide against the Affordable Care Act. Health checks offer a simple, practical answer, and a start toward further efforts to reform our health insurance system.
Approaching ObamaCare With Humility
Washington can’t get out of Its own way on health care. Give states a chance.
President Obama spoke frequently of humility during last week’s prayer breakfast. Congressional Republicans could use a healthy measure of that virtue should the Supreme Court rule that ObamaCare subsidies are not available in the 37 states with federally-facilitated exchanges.
ObamaCare is the product of a yawning humility deficit. Its core conceit is that a group of very smart and ideologically like-minded people could reorganize the financing of a $3 trillion industry that touches the lives of 320 million Americans.
Its architects boast that more people have “selected a plan” this time around than during the program’s disastrous initial open season. They are quick to overlook the law’s wreckage – canceled policies, loss of employer-sponsored coverage, erroneous subsidies that will require people of modest means to repay the government with interest, and assorted other disruptions and deformations.
A law that is minutely prescriptive too often got its prescriptions horribly wrong. Its flaws will reach the point of absurdity should the Supreme Court rule that its attempt to subsidize health insurance made most health insurance subsidies illegal.
The case of King v. Burwell would be a simple one, but for its social and political implications. The Court is examining a defect in the law, one of many in what is perhaps the most poorly drafted statute in U.S. history. The provision in question provides that subsidized health insurance coverage is available only through an exchange “established by the state.”
The IRS effectively rewrote the law to allow subsidies to be paid as well through the 37 exchanges that were not “established by the state,” but by the federal government. In defending the agency, the Justice Department in essence argues that the IRS can change laws so that they conform to what Congress must surely have meant to write, rather than what they actually wrote.
The Court should instead base its ruling on the bedrock principle that only Congress has constitutional warrant to correct its own legislative blunders. If it does, health insurance subsidies will no longer be available to millions of people who live in states with federal exchanges, presenting 37 Governors with a stark choice between two unpalatable options: submit to ObamaCare’s flawed framework by establishing state exchanges or let their constituents forfeit subsidized coverage.
Democrats will pressure Governors to establish such exchanges while also pushing Congressional legislation to authorize the provision of subsidies through federal exchanges. Republicans are floating alternative proposals that would subsidize coverage for low-income people and those with pre-existing conditions, while stripping ObamaCare of mandates and relaxing some of its other requirements.
These proposals will meet with criticism, some of it justified. Getting the right subsidy in the right amount to the right person (or the right insurance company) on a monthly basis is tricky business. The Administration had 3-1/2 years from the law’s enactment to the launch of the exchanges to get it right. They didn’t. Erecting an alternative federally administered system in a matter of months would risk a similar fate.
Perhaps what is needed is not an alternative national system at all. ObamaCare’s serial pratfalls have led millions to question the federal government’s capacity to administer the law. A judicial smackdown five years after the law’s enactment will reinforce the view that Washington can’t get out of its own way on health care.
Republicans should embrace this sentiment and argue that health care is too important to be entrusted to the people who brought us ObamaCare. They should advocate that Governors be empowered to advance alternative ways of expanding coverage, springing them from ObamaCare’s take-it-or-leave-it trap.
Congressional Republicans could accomplish this by advancing a bill to provide capitated allotments to states that would be based on the amount of refundable tax credits that its residents received during 2014. To qualify for an allotment, a state would be required to develop a plan for providing affordable coverage to low-income residents and those with pre-existing conditions. Each state would decide how best to achieve these objectives, with the results subject to rigorous evaluation.
States that already have set up exchanges could keep them and those that have not could still establish them. But they also could instead choose to be freed from ObamaCare’s one-size-fits-all rigidities by opting to receive allotments. These allotments would provide the resources to launch innovative and effective alternatives to ObamaCare tailored to their state’s unique characteristics. If some states institute defective regimes, the damage would at least be quarantined and not induce national contagion.
Resisting the temptation to develop comprehensive national legislation will prove no easier for Republicans than it has been for Democrats. But if ObamaCare has taught us anything, it is that the good intentions behind sweeping legislation are often overcome by unintended consequences. The humility that might engender perhaps will make them think twice about devising a national regime of health insurance subsidies and instead give each state the opportunity to fashion programs best suited to their circumstances.
By Tom Miller and Grace-Marie Turner
One of the mechanisms through which the Affordable Care Act (ACA) expands access to health insurance is through tax subsidies provided to individuals to help offset the cost of health insurance. These subsidies are only available if people purchase highly-regulated and -mandated policies that are sold only through government-run insurance exchanges.
The law’s formula for determining the amount of these premium subsidies specifies that people are eligible for them if they are enrolled in qualified plans offered in “an Exchange established by the State under [section] 1311 of the Patient Protection and Affordable Care Act.” However, only 13 states are operating state-based exchanges this year. The rest are relying on exchanges created by the federal government. In 2012, the IRS wrote a rule that allows the subsidies to flow through the federal exchanges as well.
The Supreme Court has agreed to hear a case, King v Burwell, challenging the illegal IRS rule which, despite statutory language to the contrary, authorizes people to get subsidies in the federal exchanges. Petitioners argue that the law clearly restricts the subsidies to state exchanges; that this gives states an incentive to create their own exchanges; and that administrative agencies like the IRS cannot alter legislation without statutory authorization by Congress. Respondents say that “established by the State” is at worst a drafting error, not a reflection of legislators’ intent, and that Congress wanted subsidies to be available to citizens in all of the states.
The Supreme Court justices will hear oral arguments in the case on March 4, and the justices will privately cast their initial votes soon afterward on whether they believe the law allows the subsidies in the federal exchanges. If the justices decide that the IRS acted illegally in opening federal exchanges to subsidies, citizens in states that have defaulted to the federally-created exchanges soon would be ineligible for the subsidies. As a result, most would begin to face the full cost of the unsubsidized premiums on their policies and would be more likely to drop their health insurance coverage.
The Obama administration’s goal is to enroll 9.1 million people in health insurance this year in the 37 states where it is operating federally-facilitated exchanges. Because an estimated 87 percent of people enrolled are receiving taxpayer subsidies for their coverage, that means up to 7.9 million people could be impacted by the decision.
Many court watchers believe the King v Burwell decision could hinge on whether or not Congress has a viable plan to provide for alternative, if not continued, coverage for them.
Many leaders in Congress recognize the court needs to be reassured that legislators have a plan to address this issue. As a result, efforts are underway for Congress to develop legislation that would create a transition path to other types of subsidized coverage, particularly a safety net for lower-income individuals currently covered by policies in federal-exchange states. The legislation should not only take care of people who are at risk of losing their current coverage, but also use this as an opportunity to begin to move our system toward a more competitive market, centered around individual choice.
The congressional proposals for a short-term safety net and a longer term transition to better choices exist primarily in draft form so far. Most would aim to hold people in federal exchanges harmless going forward and provide an extension of their current coverage through the end of the current plan year. Returning power to the states to regulate their health insurance markets also is important so that people could choose health insurance plans approved by the states, rather than the highly-mandated and regulated policies available on and off the exchanges. Proposals also would remove mandates for individuals to purchase and employers to offer policies.
There is general agreement among most critics of the Affordable Care Act that its federal-exchange-based subsidies would have to be replaced to various degrees, but there are two primary schools of thought about how to deliver the subsidies in a different manner: Either through new and much-less-restrictive federal tax credits to individuals for purchasing insurance; or through allocations to the states to distribute through existing mechanisms, such as the Children’s Health Insurance Program.
The public relations wars over the pending Supreme Court decision already have begun: Families USA is leading the effort on the left and will try to show how many people would be harmed if the subsidies are struck down. Supporters of free-markets and limited government also are mounting a serious media outreach effort to show the harm that this law is doing, including the soaring cost of health insurance, the threat of mandate penalties, labor market disincentives, the disruptions in previous coverage, and patients’ reduced access to their preferred medical providers. Critics of the IRS rule and its federal exchange subsidies need to explain very clearly that Congress is ready and willing to act to help people who would lose their coverage if the Supreme Court decides not to allow subsidies in the federal exchanges.
The Consequences of Doing Nothing
Absent any further actions by Congress, here is an overview of the immediate effects of a decision in favor of the petitioners:
•People will lose federal premium assistance tax subsidies in exchanges not established by a state.
•The employer mandate cannot be enforced in federal exchange states, and
•Fewer Americans will be subject to the individual mandate.
Secondary, ripple effects involve:
•The effective reach of ACA’s federally-required insurance regulation is reduced.
•The level of continuing and subsequent insurer and enrollee participation in ACA exchanges declines.
•Future coverage in unsubsidized or less-subsidized federal exchanges will be repriced.
•The fiscal limits of the ACA’s risk corridor and reinsurance provisions will be reached sooner.
•States will face renewed pressure to expand Medicaid coverage more aggressively.
•Pro-ACA policymakers will explore new efforts to redefine and revise the parameters of “state-established” exchanges.
Subsidies: If the Supreme Court rules that the IRS acted illegally, the government’s authority to distribute tax subsidies through federal exchanges will end within a month, assuming no new action by Congress. States that created their own exchanges will be able to continue to operate and distribute subsidies, and other states may consider qualifying as a state exchange after a King ruling.
The federal exchanges, also called federally-facilitated marketplaces (FFMs), could continue to operate, but the expensive insurance sold there would be much less attractive to customers who are no longer receiving federal tax subsidies. Barring further congressional action shortly after a Court decision against the IRS rule, insurers would no longer benefit from those unauthorized tax subsidies for the rest of 2015 and beyond.
Employer mandate: In states that have not established their own state exchanges as specified under Section 1311 of the law, the federal government will effectively be unable to impose any employer-mandate penalties on employers in that state. That is because the penalties are only triggered in the event that an employer fails to comply with the mandate to provide qualified and affordable coverage and also has at least one of its employees lacking such coverage who subsequently receives federally-subsidized coverage through the exchange in that state. (Employers may violate the mandate either by not offering ANY qualified coverage to their workers, or by offering unaffordable policies to one or more of their employees. Qualified coverage involves the employer offering an insurance plan that provides at least minimum essential benefits and the employer also paying for at least 60 percent of the benefits covered by that plan. Unaffordable coverage involves policies in which premium expenses cost an employee more than 9.5 percent of his or her W-2 wage income.)
Individual mandate: Individuals in states without a section 1311 exchange also will face higher income thresholds before the individual mandate could apply to them. The individual mandate does not apply if available coverage costs more than 8 percent of one’s household income. The lack of subsidies will drive up the net cost of coverage. As a result, individuals in states that don’t establish exchanges will face higher income thresholds before the mandate can apply to them. If these subsidies are no longer available in a state after the King decision, the out-of-pocket premium costs for coverage become more expensive and less affordable for unsubsidized individuals. Therefore, they are less likely to bring those individuals within reach of the individual mandate penalties. So, a favorable ruling in King won’t totally eliminate the individual mandate, but it will exempt more lower-income Americans from its penalties.
There will be numerous indirect effects as well.
Participation by individuals, employers, and insurance companies:
Absent an enforceable employer mandate, along with a more limited individual mandate and less of a “captive” population in federal, unsubsidized exchanges, the ACA’s other insurance rules will be weakened as well. In states that don’t run exchanges, employers couldn’t be penalized any longer for offering non-qualified coverage. Fewer individuals have to, or will want to, buy ACA-prescribed coverage.
Without the federal exchange subsidies, more insurers will decide to drop out of participating in states with federal exchanges, and the insurers will face less attractive operating cost margins: They will have fewer enrollees, arguably skewed toward higher-risk patients who lack other coverage alternatives.
Risk payments: The business assumptions behind participating in federally-facilitated exchanges would change so much for insurance companies post-King that insurers’ losses in those states in subsequent months and years would increase and add to the claims against ACA’s risk corridor funds. This would accelerate pressure to resolve the issue of whether those risk corridor payments are meant to be budget neutral, that is, payments for losses can be no greater than payments collected from more profitable exchange insurers going forward.
Countermoves in this environment by state and federal officials wanting to keep the ACA coverage afloat are likely to include broader definitions of Medicaid coverage (with states agreeing to the ACA’s Medicaid expansion and possibly submitting waivers to cover people above the current 138 percent FPL ceilings authorized by the ACA). Officials also may get clever with the definition of a state-established exchange, for example by renting the federal exchange website mechanisms, contracting out to piggyback on other state exchanges, revising current regulations for what constitutes a section 1311 exchange, etc.
In summary, there will be costs and benefits that differ among various parties in the event of a Supreme Court decision against the IRS rule and current federal exchange tax subsidies. Members of Congress and state officials must not simply default into restoring the current law’s many costs and regulatory burdens. Instead, they need to prepare now to take advantage of the opportunities that will be available to them to improve our health sector and the choices of coverage available to consumers if the Supreme Court rules against subsidies on federal exchanges.
Miller is a resident fellow at the American Enterprise Institute. Turner is president of the Galen Institute.
By Tom Miller & Grace-Marie Turner
Tax subsidies are one of the mechanisms through which the Affordable Care Act expands access to health insurance. These subsidies are available only to those who purchase highly regulated policies through government-run exchanges, and are allocated on a monthly basis to insurance companies to offset the costs of premiums and sometimes out-of-pocket costs.
The law’s formula for determining the amount of these premium subsidies specifies that people are eligible for them if they are enrolled in qualified plans offered in “an Exchange established by the State under [section] 1311 of the Patient Protection and Affordable Care Act.” Only 13 states are operating such exchanges this year. The rest are relying on exchanges created by the federal government. But in 2012, the IRS wrote a rule that allows the subsidies to flow through the federal exchanges as well. About 6 million people were enrolled on the federally run exchanges after open enrollment closed for the 2014 plan year, about 85 percent of whom received the subsidies.
The Supreme Court has agreed to hear a case, King v. Burwell, challenging the IRS rule. Plaintiffs argue that the law clearly restricts the subsidies to state exchanges, that this gives states an incentive to create their own exchanges, and that administrative agencies like the IRS cannot alter legislation or spend taxpayer dollars without statutory authorization by Congress. Defendants say that “established by the State” is at worst a drafting error, not a reflection of legislators’ intent, and that Congress wanted subsidies to be available in all of the states.
Will Congress Act?
The Supreme Court justices will hear oral arguments in the case on March 4. If the justices decide that the IRS acted illegally, residents of as many as 37 states soon will become ineligible for the subsidies. As a result, most will begin to face the full cost of the unsubsidized premiums on their policies and will be more likely to drop their coverage.
Many court watchers believe the decision could hinge on whether Congress has a viable plan to provide for alternative, if not continued, coverage for these millions of people. As a result, efforts are underway to develop legislation to transition those on the federal exchanges — especially lower-income individuals — to other types of subsidized coverage. The legislation should not only take care of people who are at risk of losing their current coverage, but also take the opportunity to move our system toward a more competitive market, centered around individual choice.
The congressional proposals exist primarily in draft form so far. Most aim to hold people in federal exchanges harmless going forward, providing an extension of their current coverage through the end of the current plan year. Most also would give people a much greater range of health-insurance options, while removing federal regulations and mandates for individuals to purchase or for employers to offer policies.
There is general agreement that Congress will need to act to provide assistance to the roughly 5 million people who would lose their subsidies as a result of the court decision. There are two schools of thought about how to do this: either through new, less restrictive federal tax credits to individuals; or through allocations to the states to distribute through other mechanisms, such as those used for the Children’s Health Insurance Program.
The public-relations wars over the pending Supreme Court decision already have begun: Families USA is leading the effort on the left and will try to show how many people will be harmed if the subsidies are struck down. Supporters of free markets and limited government are mounting their own serious media-outreach effort to show the harm that this law is doing, emphasizing the soaring cost of health insurance, the threat of mandate penalties, the labor-market disincentives, the disruptions in previous coverage, and patients’ reduced access to their preferred medical providers. Critics of the IRS rule need to explain very clearly that Congress is ready and willing to act to take care of the people who will lose their coverage if the Supreme Court decides not to allow subsidies on the federal exchanges.
The Consequences of Doing Nothing
If the Supreme Court rules that the IRS acted illegally, the government’s authority to distribute tax subsidies through federal exchanges will end within a month, assuming no new action by Congress. These exchanges can continue to operate, but the expensive insurance sold there will be much less attractive to customers without tax subsidies. States that created their own exchanges will be able to continue to operate and distribute subsidies, and other states may consider qualifying as a state exchange after a King ruling.
In states that have not established their own exchanges, the federal government will effectively be unable to impose any employer-mandate penalties. That is because the penalties are triggered when someone without access to employer-based coverage receives subsidized coverage on an exchange.
The individual mandate will take a blow as well. The mandate does not apply if the lowest-priced coverage available costs more than 8 percent of one’s household income, and the lack of subsidies will drive up the net cost of coverage. So, individuals in states that don’t establish exchanges will face higher income thresholds before the mandate can apply to them.
There will be numerous indirect effects as well. With both the employer and individual mandates weakened, the ACA’s other insurance rules will be weakened too. In states that don’t run exchanges, employers won’t be penalized for offering non-qualified coverage, and fewer individuals will have to, or will want to, buy ACA-prescribed coverage.
Insurers on the federal exchanges, meanwhile, will have fewer enrollees, likely skewed toward higher-risk patients who lack other coverage options. Many insurers could drop out, and losses for those that remain will add to the claims against ACA’s “risk corridor” funds. This would accelerate pressure to resolve the issue of whether these payments are meant to be budget-neutral — that is, payments for losses can be no greater than payments collected from more profitable exchange insurers going forward..
Countermoves by state and federal officials wanting to keep ACA coverage afloat are likely to include changes to Medicaid coverage, with more states agreeing to the law’s Medicaid expansion and possibly seeking federal waivers to cover people above the current income ceiling (138 percent of the federal poverty level). Officials also may get clever with the definition of a state-established exchange, for example by renting the federal exchange website mechanisms, contracting out to piggyback on other state exchanges, revising federal regulations for what constitutes a section 1311 exchange, etc.
Members of Congress and state officials must not simply restore the current law’s many costs and regulatory burdens. Instead, they need to prepare now to take advantage of the opportunities that will be available to them to improve our health sector and the choices of coverage available to consumers if the Supreme Court rules against subsidies on federal exchanges.
Tom Miller is a resident fellow at the American Enterprise Institute. Grace-Marie Turner is president of the Galen Institute.
WHEN Karen Pineman of Manhattan received notice that her longtime health insurance policy didn’t comply with the Affordable Care Act’s requirements, she gamely set about shopping for a new policy through the public marketplace. After all, she’d supported President Obama and the act as a matter of principle.
Ms. Pineman, who is self-employed, accepted that she’d have to pay higher premiums for a plan with a narrower provider network and no out-of-network coverage. She accepted that she’d have to pay out of pocket to see her primary care physician, who didn’t participate. She even accepted having co-pays of nearly $1,800 to have a cast put on her ankle in an emergency room after she broke it while playing tennis.
•Avik Roy’s Transcending Obamacare reform proposal retains a number of core features of the Affordable Care Act, even while promising to modify them at the margins.
•Despite the plan’s initial aversion to political risk, Roy places several longshot bets on proposed policy reform results.
•The plan strives too narrowly to ensure that high-deductible health insurance will be the dominant (or, perhaps, exclusive) form of exchange-based coverage and neglects or avoids a number of other reform opportunities. It is also prone to overly optimistic fiscal projections, insufficient details, and ad hoc revisions that fail to hold together.
If the U.S. Supreme Court rules in June that health insurance subsidies for millions of Americans are illegal, Republicans better not be caught flat-footed, because President Obama will be ready to pounce, Sen. John Barrasso, R-Wyo., told the Washington Examiner in an interview.
“As the president said to me in the White House [earlier this month], he said, ‘There are five million people [who receive subsidies through the federal exchange] — and I know who they are.’ He spoke like a community organizer who was going to try to use those people that he has actually caused significant damage to by not applying the law,” Barrasso said from his senate office.
By Avik Roy On March 4, the Supreme Court will hear oral arguments in King v. Burwell, the case that many pundits claim will “blow up Obamacare.” That’s an exaggeration; whatever the High Court decides, Obamacare will remain entrenched in federal law. But if the Supremes do end up ruling against the Obama administration—a distinct possibility—they will be giving Congress a uniquely important opportunity to reshape the Affordable Care Act in far-reaching ways. Here’s how that could work.
Mere days into a Republican Congress, Democrats are making charges of ideological bias when it comes to the majority’s handling of the Congressional Budget Office. A group of leading Senate Democrats wrote a letter to House Speaker John Boehner specifically noting that “a CBO director should not be required to revise the score of the Affordable Care Act in order to please partisan interests.” It’s an ironic charge, given that it’s far from partisan to question why the CBO failed to perform analyses that could have predicted the collapse of an $86 billion Obamacare program — exactly what happened under its current director, Doug Elmendorf.