Five Little Words, Hundreds of Billions of Dollars at Stake: The Case of King v. Burwell

Photo: Wikipedia

JACK NOLAND, ECONOMIC DEVELOPMENT DIRECTOR

As another session begins, there’s a monumental case before the Supreme Court concerning the Affordable Care Act (ACA), better known as Obamacare. Hold on. Didn’t we settle this a few years ago? Weren’t the streets filled with gleeful liberals and fist-shaking conservatives as the Court upheld the President’s signature piece of legislation? As seems to be the answer to any political question, yes and no.

National Federation of Independent Business v. Sebelius, the case decided in 2012, centered on the law’s individual mandate – the provision that eligible people need to buy health insurance or face a penalty so that there are enough healthy people in the insurance pool to keep everyone’s rates low. Since insurers cannot discriminate based on existing conditions, without the individual mandate, someone could wait until they got sick to purchase insurance, and it would be illegal for insurers to deny the coverage to them. Everyone would pay more, since the insurance pool would be primarily full of people who only purchased a policy once they had fallen ill.

In the end, Chief Justice Roberts joined the more liberal justices of the Court in holding that the individual mandate was indeed constitutional, which cleared the way for the law to be implemented. After a much-maligned rollout, the ACA remains in place. What’s the issue at hand now?

Essentially, King v. Burwell, the most recent case to dispute a component of Obamacare, will be decided over five words in an act running longer than nine hundred pages:

“an Exchange established by the State.”

A little more background: since the ACA mandates insurance coverage, there are potential issues for lower to middle class people who may not be able to afford the policies they are required to have. In thinking about this burden, the law establishes subsidies for these individuals.

The kicker, however, is that these subsidies are only available to those who purchase their insurance policies through a government-run exchange. As of 2011, 59.5 percent of Americans received their health insurance through their employer. To ensure that the remaining citizens were able to get insurance, the federal government encouraged states to establish marketplaces where people could pick the policy that worked for them. However, since the federal government cannot force the states to set up these exchanges, the law also provides for federal marketplaces to be developed in the states that choose not to build their own.

As the plaintiffs in King contend, if an individual purchases their policy in a federal marketplace, they will not be able to receive a subsidy, since the exchange was not “established by the State.” Whether or not this language was designed to restrict subsidies to state-run marketplaces, or rather to refer to the government exchange in a state in general (as opposed to the private marketplace), is up in the air. Should the Supreme Court hold the plaintiff’s interpretation to be correct, there will be massive economic implications.

Last year, five million people purchased insurance on the federal exchanges, and thirty-four states have a federally-facilitated or state partnership marketplace. Without subsidies, many people in these states would be unable to afford health insurance, and the ACA would be effectively kneecapped.

As an Urban Institute report estimates, should the plaintiffs win, the federal government would withhold $340 billion in tax credits over the course of 10 years. This would lead to 8.2 million more uninsured people in the states with federal exchanges, or a seventy-five percent decrease in coverage. Put simply, if your state didn’t vote to implement its own exchange, there’s a good chance you would be unable to afford insurance.

Crucially, there would also be a spillover effect. For many people, the cost of insurance would be more than 8% of their income and they would therefore be exempt from the penalty; in this case, it would be more affordable to forgo insurance entirely. As discussed above, insurance pools maintain low premiums by covering a wide swath of people, both sick and healthy. This loss of buyers into the insurance pool would exert economic pressure on the price of insurance policies, to the tune of thirty-five percent higher premiums for the marketplace.

There are very real expenses for both individuals and institutions here. According to Paula Brussard of the Hospital and Healthsystem Association of Pennsylvania, the cost to hospitals in that state of treating people with insufficient or no insurance increased about 50 percent, to over $1 billion in 2012. Keeping people insured makes clear economic sense.

Such a rate hike would have a profound impact on health insurance in general. Obamacare’s trusted defense rests on the idea that, at least in the long run, it will provide a cheaper alternative to the status-quo market. If premiums shot up, the legislation would lose the credibility it has struggled so hard to attain, as people become increasingly priced out. The number of uninsured individuals would rise, and we would be back to where we started.

This two-tiered system would defeat the purpose of the law: comprehensive coverage for all. The states that opted not to run their own exchanges would essentially be stuck with a higher percentage of uninsured citizens until they decided to implement programs of their own. In truth, this might light a fire under the states to try to set up their own markets, but, as Dan Schuyler of Leavitt Partners notes, this would cost the average state around $40 billion. Additionally, attempts to craft creative solutions in these states would fall flat, for the ACA’s “state innovation waivers” only grant states funding relative to the “amount of tax credits they would otherwise receive.” This is precisely why several of the states with federal exchanges have signed onto an amicus brief arguing against the plaintiff’s interpretation, and that they had received no forewarning that states with this type of marketplace would be denied subsidies.

For those who would have received subsidies and decide to buy insurance anyway, there are very real losses to savings and investment at stake. Instead of forcing people to choose whether high-priced health insurance is worth it for them because their state decided not to set up its own exchange, this comprehensive national reform should be allowed to be just that: comprehensive and national. Creating a system where some states receive benefits and others do not is not only against the spirit of the legislation, it is simply the wrong thing to do.

When the Supreme Court hears arguments on March 4, ignoring questions of plaintiff standing, it is under no obligation to consider economic impact. Nor should it, really.

The argument really comes down to statutory interpretation. In the context of the rest of the law, it is clear that Congress did not intend to create a system of two halves, and the argument that this was a move to try to incentivize states to set up their own exchanges is not compelling to me. If this were the case, there would be more explicit references to such a reform, as it truly would be a monumental division. Either way, this is a ruling whose effects will ripple through the economy.

The Affordable Care Act is an imperfect law, to be sure, and it needs works to best achieve its objectives. A ruling against federal subsidies in King v. Burwell, however, will have massive and negative economic repercussions. Ruling for the plaintiffs here would create an unnecessary two-tiered system outside the scope of the law’s intentions, and prevent millions from getting the health care they need, just as they seem to have secured it.