Could King v. Burwell Spell the End of Obamacare as We Know It?

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The U.S. Supreme Court will rule in June on King v. Burwell: a case that could spell the end of the Affordable Care Act (aka the ACA or Obamacare) as we know it if the Court disallows the ACA’s federal health insurance subsidies in 34 states (68% of the country) and thus prevents the law’s individual and employer mandates from taking effect in those states.

The ACA called for the creation of health insurance marketplaces (aka health exchanges), or online portals allowing individuals lacking insurance coverage through their employers to purchase ACA-approved coverage with the help of federal subsidies. To date, 34 states declined to assume the administrative and financial burdens of building and running their own exchanges: burdens that—as the Washington Post reported on May 1, 2015—continue to mount. They opted instead for the federal government to run exchanges for their states.

To date, only 16 states and Washington, D.C. have established and are running their own, purely state-based exchanges without federal managerial support. The distinction between state and federal management of exchanges is important given the ACA’s explicit text dealing with distribution of federal subsidies to consumers purchasing health insurance coverage on exchanges. Specifically, the ACA notes the availability of federal subsidies in “Exchange[s] established by the State.” Thus, if one reads and interprets the legislation verbatim, individuals operating in the 34 federally managed exchanges NOT “established by the State” would be ineligible to receive federal subsidies when purchasing their coverage. The federal subsidies are designed to offset the higher costs associated with the highly-standardized, ACA-approved plans, but they are also the key triggers to the ACA’s individual and employer mandates to purchase coverage. So, if these subsidies are non-existent in any state, the mandates cease to take effect in that state. This is the core issue at the heart of King v. Burwell. If the Court rules in favor of the plaintiffs in the case, Obamacare—for all intents and practical purposes—will be inoperable in the 34 states with federal exchanges while continuing to operate in 16 states (and Washington, D.C.) with state-run exchanges.

The federal government—arguing for full preservation of the ACA—has tried to downplay the “Exchange established by the State” phrasing as simply a “term of art” applying to all exchanges—both state-run and federally-run. It argues that this interpretation has to be correct and that the phrasing cannot possibly be interpreted literally given the legislative intent of the act to provide everyone in every state with affordable health insurance. But there are problems.

Cato Institute scholar Michael Cannon, speaking at an event sponsored by the Show-Me Institute in Kansas City in March, identified several holes in and outright evidence contrary to the government’s line of reasoning and broader case.  To begin, Cannon noted that the U.S. Congress chose the ACA and its omission of reference to subsidy availability (read: unavailability) on federal exchanges over other bills that explicitly provided subsidies on federal exchanges. Furthermore, rather than being highlighted as an unfortunate feature of the ACA and corrected, the omission survived several rounds of revisions to the ACA’s text and reference sections.

A second curious omission that—as Cannon contended—signals true legislative intent occurs in the way the ACA defines a “State” as the 50 recognized states of the United States plus Washington, D.C. The inclusion of Washington, D.C. — which is not a U.S. state —as a “State” for the ACA’s purposes suggests that Congress could have defined the federal government as a “State” for the ACA’s purposes as well if it intended for federally-run exchanges to be eligible for subsidy distribution as “Exchange[s] established by the State.” So, the fact that it did not define the federal government as such is telling.

Outside of the ACA’s pure textual construction, MIT economist Johnathan Gruber, who was a key architect of both Obamacare and similar state legislation predating it in Massachusetts (aka Romneycare), verified exactly what the plaintiffs are arguing about the ACA. Gruber said in a 2012 video, speaking to an audience at the Nobilis Innovation and Collaboration Center, “I think 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.”

Additional evidence from both Department of Health and Human Services (HHS) and the Internal Revenue Services (IRS) efforts to implement the ACA also point to a broader administrative understanding that subsidies were to be distributed only to state-run exchanges. See Scot K. Vorse’s work on ACA-related administrative action timelines and correspondence for further reading on this topic.

Looking beyond the evidence undergirding the plaintiffs’ argument and looking specifically at the dynamics of the case before the Court, Cannon characterized the case as an uphill battle for the plaintiffs given that they are challenging a federal agency. However, in light of the fact that the U.S. judicial system has been largely deferential to federal agencies and their decision-making prerogatives over time, King v. Burwell’s ascension to the U.S. Supreme Court could speak to the strength of the plaintiffs’ challenge.

In their own readings of the proverbial tea leafs, supporters of the government’s “legislative intent” argument zeroed in on a particular statement from Justice Anthony Kennedy as a sign that the Court couldn’t possibly interpret the ACA as written due to the dire consequences such an interpretation would bring. In a statement addressing the attorney for the plaintiffs Kennedy opined:

“From the standpoint of the dynamics of Federalism … there is something very powerful to the point that if your argument is accepted, the States are being told either create your own Exchange, or we’ll send your insurance market into a death spiral.”

Yet, Cannon offered a different take. Perhaps Justice Kennedy’s comment provides a window into a line of thinking that the ACA’s explicit “Exchange established by the State” language regarding subsidy distribution was designed deliberately to coerce states into setting up their own health exchanges. If Kennedy and four other justices needed for a majority do indeed settle on a ruling that classifies the ACA’s subsidy provisions as coercive, the ruling could have implications beyond the ACA as precedent from which other federal-state agency relationships and mandates deemed coercive could be challenged.

In any case, Kennedy’s vote and influences on the Court’s decision overall are sure to be followed particularly closely given his role as the proverbial “swing vote” on a Court that has the potential to otherwise split evenly across liberal and conservative ideological fault lines.

Check back in June for a post-decision update and analysis.

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