A Supreme Court Case That Could Upend Obamacare

Story Stream
recent articles

The Affordable Care Act's legal troubles are far from over. The Supreme Court's announcement that it will review King v. Burwell, the case challenging health insurance premium subsidies for those who buy their insurance on the 36 federal exchanges, increases the priority of reforming the most destructive aspects of the Act. This announcement comes just over a year after Judge James R. Spencer of the U.S. District Court for the Eastern District of Virginia agreed to rule in the case, then called King v. Sebelius.

Last year, few had heard of King v. Sebelius or its parallel case, Halbig v. Sebelius. With Friday's Supreme Court announcement, the case could upend the Affordable Care Act. Congress should focus on passing legislation before June, in case the Court rules in favor of the plaintiffs. Then, President Obama would have an incentive to sign the bill to stop his signature piece of legislation from falling apart.

The essence of King v. Burwell is whether those who buy health insurance on federally-run exchanges are eligible to receive premium subsidies. The IRS says yes. The letter of the law says no. The answer as to whether the implementation of the Affordable Care Act will move forward lies with the nine justices.

If the justices rule that subsidies are not permitted on the 36 federal exchanges, then insurance markets in these states would break down. Eighty-five percent of people who bought plans on the exchanges received subsidies in 2014, according to the Department of Health and Human Services. If Americans on the federally-run exchanges do not qualify for health insurance subsidies, far fewer will sign up because plans will be unaffordable for many. If fewer people sign up, rates will rise, leading to a vicious cycle and possible collapse of the plans offered.

If the ACA begins to fall apart, President Obama will have to sign remedial legislation to preserve it. The Act will be practically repealed-unless most or all of the remaining 36 states set up their own state exchanges. Without functioning exchanges, employers will not have to offer health insurance, since there will be no subsides available, and the employer mandate in those states would vanish.

According to the text of the Affordable Care Act, subsidies are available to those who get their health insurance "through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act." Or, in another section, those "enrolled in...an Exchange established by the State under section 1311."

Section 1321 of the Act allows the federal government to set up exchanges in states that have not set up their own web-based portals. But nowhere does the law state that people on federal exchanges can receive tax subsidies.

New York Times columnist Paul Krugman argued on November 10 that defining exchanges as "established by the State" was an "obvious typo." Krugman wrote, "not only is it clear from everything else in the act that there was no intention to set such limits, you can ask the people who drafted the law what they intended, and it wasn't what the plaintiffs claim."

However, MIT professor Jonathan Gruber, one of the architects of the ACA, said in January 2012 that subsidies were put in place to encourage states to set up exchanges: "What's important to remember politically about this is if you're a state and you don't set up an exchange, that means your citizens don't get their tax credits-but your citizens still pay the taxes that support this bill. So you're essentially saying [to] your citizens you're going to pay all the taxes to help all the other states in the country. I hope that that's a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these exchanges."

Regardless of the letter and the intent of the law, in a May 2012 ruling, the IRS extended the subsidies to those getting health insurance on any exchange by defining an exchange as a "State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange." The Department of Justice argues that the law is ambiguous, so the IRS had the right to extend subsidies to the federal exchanges.

A three-judge panel in the D.C. Circuit Court of Appeals decided on July 22, 2014, in Halbig v. Burwell, that individuals could not receive subsidized premiums. On the same day, the U.S. Court of Appeals for the Fourth Circuit ruled in King v. Burwell that they could. This appeared to be a circuit split, until the entire D.C. Circuit Court of Appeals decided to rehear Halbig v. Burwell in December, vacating the panel's ruling.

The potential of this case to upend the Affordable Care Act was one of the reasons that Senate Majority Leader Harry Reid triggered the "nuclear option" in November, 2013, and broke long-standing Senate rules requiring confirmations with 60 senators. Now only 51 senators are needed. Judges Patricia Ann Millett and Nina Pillard were confirmed to the D.C. Circuit in December 2013, and Judge Robert Wilkins was confirmed in January, 2014, giving Democratic appointees a majority on the Court.

The overtly-political use of the "nuclear option" is likely one reason that the Supreme Court decided to take the case.

If the Supreme Court rules in favor of the plaintiffs, the ball would be in Congress's court to offer a replacement, since it would have substantial leverage. The question is, what would such a bill contain? Here are five suggestions.

Reforms should solve the central problem before the Court by giving individuals at all income levels a tax-free subsidy to purchase health insurance. This would qualify everyone enrolled through the federal exchanges for subsidies and mitigate the current financial disincentives to work and marry.

Due to the steep subsidies that phase out gradually and then completely at $95,000 for a family of four, families have an incentive to keep their income under $95,000. As a result, some adults are working fewer hours, with others dropping out of the labor force entirely, all in order to keep their healthcare subsidies. Other couples have had to delay, or completely forego, marriage in order to keep their combined income low.

As I wrote in these columns last week, ACA reform should reduce disincentives to hiring. This means repealing the requirement that employers offer health insurance to full-time employees or pay a fine. Beginning in January 2015, employers with more than 100 full-time equivalent workers will face a substantial penalty for not offering the right kind of health insurance. In January 2016, the penalty will apply to employers with more than 49 full-time equivalent employees. This pressures firms to create fewer jobs, or staff their businesses with part-time employees to avoid paying penalties for those workers.

Congress should allow any state-approved plan to be offered on the exchanges in order to lower the cost of insurance. Currently, all plans offered have to contain free preventive care, drug abuse coverage, mental health coverage, free contraceptives, and even free pediatric dental care-even for those without children. People should have the option to buy basic plans, without all the bells and whistles, that better fit their needs..

Congress should repeal the medical device tax, which compels medical device manufacturers to expand their offshore production, or forgo developing innovative medical equipment. America needs all the jobs it can get, and new technologies are one critical component of better healthcare. Ending this job- and innovation-killing tax is an area of strong bipartisan agreement, and should be a commonsense first step for the 114th Congress.

Congress should get rid of the Independent Payment Advisory Board, which has the power to dictate which drugs and devices are cost-effective and therefore permitted to be covered. This reduces innovation by discouraging companies from developing many novel treatments will not receive coverage. An expensive drug or device that is expensive now can fall in price and become routine the following decade, as well as spawning other pharmaceutical and biomedical inventions.

No one knows how the Supreme Court will rule in June 2015. But regardless of the decision, the new Congress should be prepared to act swiftly to improve the most destructive aspects of the Affordable Care Act.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

Show commentsHide Comments

Related Articles