King v. Burwell: Reality Check for States

● U.S. Supreme Court defines federal agency as “state”
● Millions will continue to be subject to individual, employer mandates
● Only one way remains to circumvent ObamaCare

Last week the Supreme Court issued its second major ruling on the Affordable Care Act (ACA), which once again sided with the Obama administration. The new ACA decision came in the case of King v. Burwell (previously covered by the Policy Council).

Background of King v. Burwell

The ACA requires each state to have either a state or federally run health care exchange in which 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 subsidies to buyers that meet certain income qualifications, thus lowering the buyer’s monthly premium costs for plans purchased through the exchanges.

The plaintiffs argued that these subsidies are legal in state-run exchanges but go against the plain text of the ACA in states with federally run exchanges. 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. Specifically, the ACA says that premium assistance credits are only available for health plans “which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act.” To clarify further, the Act defines a state as “one of the 50 States or the District of Columbia.”

According to the plaintiff, the IRS 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 explicitly authorized to do so by the ACA.

The argument over subsidies is even more important than it would initially appear because the subsidies 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 exceeds 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.

The majority opinion

The six justices who ruled in favor of the administration, led by Chief Justice Roberts, seem to have been heavily influenced by the doctrine of judicial deference to the legislature. But rather than deferring to the plain text of what Congress produced, they deferred to what they believed was the intent of Congress in creating and passing the ACA.

The majority argues that withdrawing the IRS-provided subsidies from federally run exchanges could have catastrophic effects on both the health care market and the ability of the ACA to function as Congress intended. In light of the potentially devastating effects of making subsidies only available in state-run exchanges, the majority divines that this limitation on premium subsidies could not have been Congress’ intent.

In support of their argument on Congressional intent, the majority opines that the phrase “exchange established by a state” is ambiguous. When a state fails to establish an exchange, the ACA orders the Secretary of Health and Human Services (HHS) to establish “such exchange” in the state. The majority contends that use of the phrase “such exchange” indicates the secretary is to establish and operate the very same exchange the state had previously been directed to establish.

The majority furthermore notes that when the ACA references an exchange, it tends to use the definition of an exchange given in Section 18031 of the Affordable Care Act – namely that of an exchange established by the state. Therefore, if “exchange established by the state” excludes exchanges created by the HHS Secretary, virtually none of the ACA provisions regulating exchanges (not just those on the availability of subsidies) would apply to federally created exchanges. The majority further cites several provisions that assume premium subsidies will be available in both types of exchanges, including the requirement that all exchanges create outreach programs to distribute information concerning the availability of subsidies, the requirement that all exchanges establish an electronic calculator to allow individuals to determine the cost of their coverage after subsidy, and the requirement that all exchanges report to the Treasury Secretary information concerning subsidies paid out.

Roberts and the rest of the majority also reject the argument that Congress believed it was making states a deal they couldn’t refuse by only making subsidies available in state-created exchanges. The very fact that the law provides for federally run exchanges shows this argument to be false, according to the majority.

Ultimately, the majority concluded that the phrase “exchange established by a state” is a “vague” and “ancillary provision,” and restricting subsidies based on a literal reading of this provision would violate the Congressional intent behind the ACA. As a result, the court must give a non-literal reading to the disputed phrase in order to both honor Congressional intent and avoid destroying healthcare markets.

The dissent

Justice Scalia authored the dissent and was joined by Justices Thomas and Alito. Scalia takes a literal reading of the phrase “exchange established by the state,” contending that its meaning is obvious. He quips: “Words no longer have meaning if an Exchange that is not established by a State is ‘established by the State.’”

It’s hard to come up with any rationale for including the words “by the state,” Scalia argues, other than for the purpose of limiting credits to state exchanges; the very fact that the HHS Secretary is only authorized to create a federal exchange after a state government chooses not to create one destroys any pretense that the two kinds of exchanges are equivalent. He adds that to treat the two types of exchanges as identical renders the phrase “established by the state,” which appears no fewer than seven times in the ACA, as having no operative effect at all. According to case law an interpreter is supposed to give meaning to every clause and word of a statute.

The dissent also disputes the majority’s assertion that where the ACA reads “exchange” it automatically defaults to the definition of a state exchange, pointing to numerous instances in which it does not.

The minority opinion goes on to say the dissenting justices see no objection to the provisions cited by the majority that require all exchanges to report on or make available information related to subsidies. Federal exchanges, the dissent contends, could simply report the unavailability of subsidies and their payout of subsidies as zero. The dissent further adds that there are numerous provisions in the ACA that conflict with the interpretation that the two types of exchanges are equivalent. If such were the case state governments would be permitted to control the type of electronic interface used by a federal exchange, control the contracting decisions of a federal exchange, and receive funding in connection with the establishment of a federal exchange. The majority avoids these issues by concluding federal exchanges count as state exchanges exclusively for the purpose of premium subsidies.

Scalia and the other dissenting justices conclude that by making subsidies available in all exchanges, the court may be subverting the true will of Congress by removing an incentive for states to create their own exchanges. If the majority’s prediction of catastrophic consequences absent subsidies is accurate, it only provides further incentive for state governments to create and operate their own exchanges.

The dissent rests on the unassailable premise that it’s not the court’s place to rewrite a statute in order to make it compatible with what the court guesses was the legislature’s intent when passing the law.

The fallout

A ruling in favor of the plaintiffs could have potentially freed millions of Americans from the individual and employer mandates imposed by the ACA. The ruling in favor of the administration ensures these millions will remain subject to the mandates and their attached penalties.

Michael Cannon, Director of Health Policy Studies at the Cato Institute, draws from sources such as the Census Bureau and the Center for Medicare and Medicaid services, to prodruce the exact numbers of individuals in each state who would have been freed from the mandates had the court ruled for the plaintiffs. In South Carolina, a ruling for the plaintiffs would have freed 282,808 people from the individual mandate, and 6,036 businesses from the employer mandate.

Cannon also provides some of the other nationwide benefits that would have accompanied a ruling for the plaintiffs, as estimated by former director of the Congressional Budget Office Douglas Holtz-Eakin. These include:

  • More than 67 million Americans freed from illegal taxes in the form of the ACA’s employer mandate.
  • More than 11 million Americans freed from an illegal tax averaging $1,200 (e., ACA’s individual mandate).
  • A pay raise of around $900 per affected worker.
  • An estimated 237,000 new jobs.
  • An estimated 1.3 million workers added to the labor force.
  • More hours and higher incomes for 3.3 million part-time workers.

These potential benefits evaporated with the ruling for the administration.

The solution

The Supreme Court sent a clear message to the states: help is not on the way. With federal repeal of the law seeming increasingly unlikely, and the Supreme Court indicating that it won’t rein in implementation of the Act, states wishing to minimize the damage done by the law and implement free market reforms to health care will have to do so themselves – as they should have done from the beginning.

The Policy Council has laid out just how these state reforms can be accomplished. The one leverage point the federal government constantly uses to dictate state policy is federal funding. Federal funds for any program are inevitably tied to state implementation of federally desired policies. If South Carolina and other states wish to free themselves from federal mandates, they simply have no choice but to reject federal dollars. The best way to achieve this goal is to create a clear and transparent process that details exactly what policies (and their related impacts) the state is agreeing to when it takes federal dollars. In 2011, based on research by the Policy Council, the General Assembly passed a bill, sponsored by Sen. Tom Davis (R-Beaufort), that requires state agencies to annually disclose all federal funds along with the mandates and matching state funds required – an excellent first step.

After rejecting federal funding, however, South Carolina should review and eliminate state mandates that drive up the cost of insurance and diminish cost communication between medical providers and patients.

The Supreme Court’s ruling in King v. Burwell doesn’t preclude the possibility of free market reform to our health care system, but it reinforces the unfortunate reality that states will have to do their part to achieve that reform. South Carolinians can have a low cost and efficient market-oriented health care system, but our state must first wean itself from a deadening dependence on the federal government.

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