Burwell: What Does It Mean?


Halbig v. Burwell, the legal case that’s now threatening to unravel ObamaCare, reaffirms this basic principle: that the federal government rarely usurps state authority by mere legal fiat; it does so, rather, by offering millions of federal dollars. Only then, after state policymakers have taken the money, does the coercion begin.

That principle is the basis of our contention that the only way for South Carolina to exempt itself from the Affordable Care Act is to turn down the federal dollars attached to it.

What Are Halbig and King?

A July 22, 2014 decision by the U.S. Court of Appeals for the D.C. Circuit dealt a significant blow to the Affordable Care Act (ACA) as it is currently being implemented. Despite this, the ruling is actually in support of enforcing the text of the ACA. In the case of Halbig v. Burwell, the court ruled 2-1 in favor of the plaintiffs, who argued that the way the ACA is currently being implemented is illegal. On the same day the Fourth Circuit Court of Appeals ruled against the plaintiffs in King v. Burwell, who make the same argument as the Halbig plaintiffs. These two decisions created a split in the circuit. Halbig and King, cases prompted after a 2013 article by Jonathan Adler and Cato scholar Michael Cannon, are the most significant challenge to the new health care bureaucracy created by the ACA since the infamous NFIB v. Sibelius case that found the individual mandate constitutional.

Legal scholars have described Halbig and King as cases that could unravel the ACA altogether.

What Do the Plaintiffs Argue?

The ACA requires each state to have either a state or federally run health care exchange where individuals can purchase health insurance plans that meet the minimum coverage requirements of the law. In order to make these plans more affordable, the IRS offers buyers who meet certain income qualifications subsidies that lower the monthly premium costs of plans purchased through the exchanges.

The plaintiffs argue these subsidies are perfectly legal in state-run exchanges but go against the plain text of the ACA in states with federally run exchanges. Section 1311 of the ACA authorizes the federal government to provide tax subsidies to eligible consumers who buy insurance from an exchange established by the state. But there is no mention of subsidies for insurance bought from a federal exchange.

The IRS, in the plaintiffs’ argument, is violating the law by offering subsidies in the 36 states (including South Carolina) that do not have state-run exchanges, since it’s not authorized to do by the ACA.

Why is This Important?

Put simply, IRS subsidies are the glue that holds the ACA together. Without subsidies, many people who currently own a plan purchased under a health care exchange would be unable to afford the monthly premium. The most recent estimates show 86 percent of individuals participating in a federal exchange receive subsidies, and on average these subsidies cover 76 percent of premium costs. If these subsidies are withdrawn, healthy people who can no longer afford their plans may drop their coverage, leaving only the sickest remaining on the exchange.

Currently, insurance companies rely on healthy members of the exchange to balance out the costs of sicker members who use more benefits and who can’t legally be denied coverage. If there is a mass exodus of healthy members from the exchanges, insurance companies partnered with the exchanges will have to increase rates on sick members to nearly unpayable prices. If less healthy exchange participants are unable to pay the increased premiums, or if companies are legally prohibited from raising rates, insurance firms will not long be able to shoulder the costs of these individuals. Once insurance firms can no longer support the cost of the benefits they must pay out, the exchange or the insurance companies themselves will cease to exist.

This process is known as a death spiral.

The subsidies are also important for their function as triggers of both the individual and employer mandate portions of the ACA. The ACA imposes a $2,000 per employee penalty for companies with more than 50 employees who do not offer “adequate health insurance” to their workers. This penalty is triggered when an employee accepts an IRS subsidy on a plan purchased through an exchange. If individuals in the 36 states without a state-run exchange are ineligible for subsidies, there will be no trigger to set off the employer mandate.

An absence of subsidies would also allow many people to avoid the ACA’s individual mandate, which requires citizens to maintain health insurance covering certain minimum benefits or pay a fine. This is because the ACA exempts citizens from the individual mandate whose out-of-pocket costs for health insurance exceed 8 percent of their household income. If IRS subsidies are removed, insurance plans offered on exchanges would exceed this cost threshold for many people – thereby providing them an exemption from the mandate.

What does this mean for South Carolina?   

South Carolina is one of the 36 states that has not established a state based healthcare exchange, and with good reason. If the decision just rendered in the Halbig case is affirmed upon appeal, many South Carolina citizens will be free from the ACA’s employer and individual mandates. Michael Cannon has estimated that a Supreme Court victory for the plaintiffs in Halbig or King will free over 220,000 South Carolinians from the individual mandate and would further free 5,940 South Carolina businesses from the employer mandate. In other words: hundreds of thousands of South Carolinians would be more easily able to spend their money in the way they, and not the government, deem best.

What’s the Next Step?

The federal government has indicated that it will appeal the Court’s decision by asking the entire D.C. Circuit (eleven judges) to review the decision en banc (as a whole). Whatever the Circuit Court does, Halbig or King will be appealed to the U.S. Supreme Court. The IRS has stated it will continue to offer insurance subsidies through federal exchanges pending the appeal.

The Limits of Federal Control

The ACA as written demonstrates the limits of federal control over the states. The federal government cannot usurp state sovereignty outright: states must be convinced, i.e. bribed, to trade their sovereignty away. In the case of the ACA, the federal government is offering insurance subsidies in exchange for states establishing exchanges and being able to impose the employer and individual mandates on state citizens. With the majority of states rejecting this offer, the Obama administration is attempting to impose these subsidies and mandates illegally. On July 22 the courts properly denounced that attempt.

If the Appeals Court decision in Halbig is affirmed (as it should be) South Carolina will need to do only one thing to maintain its sovereignty: turn down the federal ObamaCare money.

*Update: The Supreme Court has agreed to hear King v. Burwell. Oral arguments are on March 4 with a decision expected in June.

Like this analysis? Get our material delivered
to your in-box every week by clicking here.

Print Friendly, PDF & Email