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.