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.
