On March 4, 2015, the U.S. Supreme Court heard arguments in the case of King vs. Burwell. The Supreme Court’s decision on this case will have significant implications for the capacity of the Affordable Care Act (ACA) to reduce the number of uninsured persons in the United States. In this brief we provide an overview of the potential impact of this case on the implementation of the ACA.
Background: The ACA’s Coverage Expansion Mechanisms
The ACA expanded access to health insurance coverage through two primary mechanisms. The first mechanism is an expansion of the Medicaid program through the extension of eligibility to individuals with modified adjusted gross income up to 138 percent of the Federal Poverty Level (FPL) (approximately $33,465 for a family of four). The primary beneficiaries of this expansion are low-income childless adults, as Medicaid eligibility for adults historically has been tied to parental status except at the lowest income levels. In 2012, the U.S. Supreme Court ruled that states could choose whether or not to expand Medicaid, and 30 states, including the District of Columbia, have done so to date.
The second coverage expansion mechanism of the ACA is the provision of premium tax credits to lower-income Americans to subsidize the purchase of private health insurance offered in newly-created Health Insurance Marketplaces (also known as Exchanges). Premium tax credits are available to individuals with incomes of between 100 and 400 percent FPL in states that have not expanded Medicaid and for those between 139 and400 percent FPL in states that have expanded their Medicaid programs. Persons eligible for tax credits offered through the Marketplace must lack access to other sources of coverage, including affordable employer-based insurance or Medicaid.
When the ACA was passed in 2010, states were given the option to establish and run their own insurance Marketplace (a State-Based Marketplace (SBM) or to use an Exchange run by the federal government (the Federally-Facilitated Marketplace (FFM)). Today, 34 states are served by the Federally-Facilitated Marketplace, while 13 states and the District of Columbia run a State-Based Marketplace. (Nevada, New Mexico, and Oregon are each building a State-Based Marketplace but are still using part of the federal Healthcare.gov platform and are considered State-Based Marketplaces for the purposes of King v. Burwell).
The Office of the Assistant Secretary for Planning and Evaluation (ASPE) at the U.S. Department of Health and Human Services (HHS) estimates that as of March 2015, there were 11.7 million persons with plan selections in the FFM and 2.8 million with plan selections in SBMs.
Who is David King and what is his claim?
David King is a 64-year old Virginian (one of four Virginians filling the lawsuit) who claims that the language of the ACA restricts the payment of premium tax credits to individuals obtaining coverage through a State-Based Marketplace and thereby excludes tax credits from being administered through a FFM. Without tax credits, coverage purchased in Virginia through the FFM would exceed eight percent of King’s income, as a result of which he should be immune from the ACA’s individual mandate to buy health insurance and from the tax penalty for failing to do so.
What is at issue in King vs. Burwell?
The main question in King vs. Burwell is an interpretation of statute. In the administrative rule-making process, the IRS allowed both the FFM and the SBMs to issue premium tax credits, thus making subsidies available to individuals across all 50 states and the District of Columbia. The challengers in the lawsuit contend that access to the premium tax credits is limited to only individuals enrolled in coverage through State-based Marketplaces since the ACA specifies that the premium tax credits are available to those individuals are enrolled in an exchange “established by the state.”
If the Supreme Court rules for the government, what does this mean for individuals who have already purchased health insurance coverage through the FFM in their state?
This outcome would re-affirm the ability of individuals in states using the FFM to qualify for premium tax credits, which reduce the out-of-pocket cost of health insurance for lower-income Americans.
Does this ruling have an impact on individuals in states that operate their own Exchanges, like MNsure in Minnesota?
The ruling on King vs. Burwell doesn’t directly affect access to premium tax credits among individuals with Exchange-based coverage in the 13 states and DC with their own Marketplaces. Minnesotans purchasing coverage through MNsure will not be affected by the outcome of King vs. Burwell, regardless of the ruling.
If the Supreme Court rules against the government, what does this mean for individuals who hold Marketplace coverage in FFM states?
There will likely be a significant increase in the percentage of adults who are uninsured in the United States. In 2015, an estimated 87 percent of all individuals who selected a plan in the FFM qualified for an advance premium tax credit, with an average credit of $268 per month. Given that most individuals obtaining Marketplace-based coverage have incomes of between 100 and 400 percent FPL (or $24,250 to $97,000 for a family of four in 2015), eliminating access to the tax credit will render coverage unaffordable for many, and they will most likely drop it. Analyses by the Kaiser Family Foundation report that in 2016, an estimated 13.4 million individuals stand to lose subsidies in FFM states.
The ACA has had a significant impact on reducing the number of uninsured in the United States. Current estimates from a Gallup-Healthways survey report a decline in the percentage of U.S. adults without insurance from 17.1 percent in the first quarter of 2014 to 11.9 percent in the first quarter of 2015; a negative ruling in King vs. Burwell could reverse this trend.
Access to plan choice may diminish. Insurers may also be able to stop offering plans in the FFMs, given the terms of the agreement they enter with the Federal government in order to be a Qualified Health Plan (QHP). A secondary effect of market exit by insurers is a rise in premiums, which will exacerbate dropping of coverage by lower-income Americans (who are more price-sensitive than other population segments).
Premiums may increase. Due to the elimination of premium tax credits and cost-sharing reductions, the ability of many individuals to afford health insurance would decrease and many, like Mr. King, would be exempt from the individual mandate because the price of health insurance premiums would exceed 8 percent of their income. Many would likely drop coverage and the number of people purchasing coverage in the individual market – both in and out of the Marketplace – would decline. Older and sicker individuals would be the least likely to drop coverage with the young and healthy more likely to drop coverage, a scenario that would raise the average risk profile of the individual market and lead to increased premiums over time.
If the Supreme Court rules against the government, are there other “winners” and “losers”?
The short answer is yes.
Clearly, those who have been opposed to the ACA will take a ruling against the government as a large win. While this ruling most directly affects individuals in states supported by the FFM, there are other parties that will be affected.
Larger employers (i.e., those with 50 or more FTE employees) that do not offer coverage in the FFM states will “win.” Essentially, these firms would become exempt from the employer shared responsibility requirement that is going into effect this year (after a delay). The language of the employer shared responsibility requirement, which requires employers to pay a fine for failing to offer affordable health insurance with a minimum level of coverage to full-time employees, is contingent on at least one full-time worker from a firm obtaining a premium tax credit toward Exchange-based coverage. If no premium tax credits are available in 34 states, then penalties for not offering coverage to full-time workers and dependents are not possible.
Insurers will lose because the expanded market for private insurance created as a result of the premium tax credits will disappear in 34 states. There will be considerable volatility in insurer performance as individuals drop coverage (or insurers drop enrollees for not paying premiums): A smaller number of insured individuals means a smaller pool for sharing risk, and a smaller risk pool is more vulnerable to the care costs of sicker individuals.
ACA supporters will lose because the rate of uninsured will rise in those 34 states served by the FFM, thus dramatically reducing the policy impact of the ACA.
What potential actions exist if the Supreme Court rules for the plaintiffs?
If a ruling against the government occurs, states in the FFM could initiate their own Marketplace, although this is costly and time-consuming. It is likely that many of these states will not develop their own Marketplace given their political leaning, vocal opposition to the ACA, and the additional political pressures associated with the upcoming presidential election.
If the Supreme Court rules for the plaintiffs, it is not clear whether the Court would institute a delay in enacting the ruling. If there is a delay in enactment, Congress would face pressure to make the next move. Congress could pass a “fix” to the language to expand premium tax credits to the FFM states, but this is unlikely given Republican control of both the House and Senate. Congress could also introduce legislation to “repeal and replace” the ACA (or the coverage expansion sections of it) with an alternative policy.
There is also discussion of an administrative fix that would not require legislation but instead would create some type of a state-based regional exchange where residents across several states could buy coverage through an existing SBM or through a newly developed regional SBM. For example, one might imagine the Kentucky SBM serving the Southeastern states or the California SBM serving the Southwest.
What does this mean for individuals who have Medicaid?
Future pressures on state Medicaid spending: A key function of health insurance is to protect an individual’s assets in case of a catastrophic health event. When faced with a catastrophic health event or the continued expense of chronic conditions, many uninsured individuals living in FFM states without a Medicaid expansion will “spend down” their assets until they become eligible for Medicaid.
Additional pressure on the safety net for states with FFMs: With no tax credits offered through the FFM, many people will drop coverage because it’s too expensive and because many will no longer face a tax penalty. This will increase the number of uninsured and the number of those that rely on emergency departments; free or reduced-fee clinics including Federally Qualified Health Centers (FQHCs); and public hospitals for needed care.
Fewer options for low-income adults: A majority of the FFM states also chose not to expand their Medicaid programs to 138 percent FPL as allowed under the ACA. Given this situation, low-income adults, especially those without children in the FFM states without a Medicaid expansion, will have very limited options for health insurance coverage.
Potential decline in coverage for children: This decision could also impact children’s health insurance coverage on Medicaid or CHIP. With the elimination of tax credits on the FFM, fewer parents would be looking for coverage, which could result in fewer children being screened and determined eligible for the more comprehensive Medicaid coverage often provided to children across the states.
What about Minnesota?
Minnesota runs its own SBM, MNsure, and expanded its Medicaid program to 138 percent FPL. In addition, Minnesota extended its long-standing MinnesotaCare program, which provides coverage for those with incomes between 138 and 200 percent FPL. The ruling in this case should have no immediate effects on Minnesota’s ACA expansion efforts.
What about other SBM states?
While Minnesota would remain relatively untouched by a ruling in favor of King, such a ruling could preclude even any discussion of a state partnership with the federal Healthcare.gov platform used by Oregon and being considered in Vermont.