Everybody seems to be missing the real issue at stake in the recent decision by at least four Supreme Court Justices to hear an appeal of a Fourth Circuit Court of Appeals decision affirming the applicability of Federal insurance subsidies for qualified individuals who purchase “Obamacare” insurance policies on federal exchanges set up for states whose governments chose not to establish one for their state.
This case, King v. Burwell, involves not a Constitutional question per se but rather a challenge to an IRS interpretation that allows subsidies for insurance purchased on federal exchanges despite statutory language that could be read to limit their availability only to those who purchase insurance only on an exchange which a state has chosen under the law to “establish” itself directly rather than leaving it to the federal government to set one up for it. The plaintiffs in the case (King et al) are Virginia residents who argued that the IRS decision allowing subsidies provided via the federal exchange set up when Virginia’s government refused to establish an Obamacare exchange on its own deprived them of an exemption from the Affordable Care Act’s “individual mandate” to purchase health insurance. They claim that absent such subsidies all policies available to them on the federal exchange would cost more than the 8 percent of their income that serves as a trigger for such exemptions.
While the legitimacy of the IRS determination to allow such subsidies would seem to simply involve a federal statutory question concerning the scope of administrative flexibility in interpreting the ACA’s grant of subsidies, the plaintiff’s argument in King v. Burwell opens the door to a much broader impact on Obamacare than just the matter of subsidies. It would be huge if the Supreme Court determines the court was wrong in affirming the IRS interpretation. Estimates indicate that, for the poor and lower middle class, upwards of seven million would lose over $ 36 billion in subsidies. These losses would affect residents of Texas and Florida (the biggest losers) and 32 other states subject to the King v. Burwell Supreme Court decision. These states are mostly in the hands of Republican governors and legislatures that oppose Obamacare in principle and the potential “work-around” would depend on those governors and legislators agreeing to “establish” state exchanges possibly “outsourcing” their operations to the existing federal exchange, using their states’ own money instead of the federal funds provided under the ACA because eligibility for those funds just happens to have run out on November 14, 2015! No word as yet on whether the Centers for Medicare and Medicaid would consider extending that deadline in view of the pending Supreme Court decision.
With no “work around,” moreover, the dominoes at the heart of the ACA would, as noted above, begin to fall. If no subsidies are available in a particular state (or in the 34 states subject to a King v. Burwell reversal), then the premiums on the policies now on offer in the federal exchanges serving those states would exceed 8 percnet of their income and therefore they would automatically become exempt from the individual mandate to purchase any health insurance at all. This result would not just affect the poorest families. Young, healthy college graduates — many burdened by tens of thousands of dollars in student loan debt — would be free to opt out of buying any insurance on a federal exchange or otherwise, and the economics of the federal exchange would be severely adversely affected without a balance of relatively healthy individuals to weigh against the insurance claims of more mature families and sub-Medicare elderly. Premiums would go up, enrollments would go down with a ruptured individual mandate.
But that’s not the end of the effects of a Supreme Court decision to invalidate federal subsidies obtained through the federal exchange in two-thirds of our states. The employer mandate under the ACA requires employers of more than 50 full-time workers (currently defined as all those working at least 30 hours per week) to either provide a federally-approved health insurance package or pay an increasingly onerous per-worker tax penalty. For a variety of reasons, some clearly operational, some probably political, the Obama administration gave employers extra time to comply, but the mandate will now begin in 2015 for employers with over 100 full-time workers, and for those with between 50 and 100 in 2016. But if the Supreme Court reverses King v. Burwell by overturning the IRS rule with respect to federal subsidies, which are in fact delivered by means of tax credits which is why an IRS rule is at issue, the employer mandate is just as fatally wounded as the individual mandate, and the biggest Obamacare domino of all falls.
The ruling by a federal court panel majority in another case brought against the IRS rule on Obamacare tax credit subsidies, Halbig v. Burwell, points directly to this conclusion. The majority ruled against the IRS subsidy interpretation (the decision has since been appealed to the entire D.C. circuit Court of Appeals), and along the way to this conclusion, laid out its objections to the IRS interpretation precisely focusing on the effect on both the individual and the employer mandate:
“[B]y making tax credits available in the…states with Federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.”
The IRS Rule affects (sic) the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers — defined as those with at least 50 employees, see 26 U>S>C> section 4980H9c) (2) (A) – to provide their full-time employees with health insurance. Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees “enroll…in a qualified health plan with respect to which an applicable tax credit… is allowed or paid with respect to the employee.’ Id. Section 4980(a)(2); see also id. Section 4980h (b) (linking another penalty on employers to employees’ receipt of tax credits).”
Lest there be any mistaking the view of this judicial panel majority as to the impact of their ultimate decision precluding tax credit subsidies to purchasers on the federal exchange, the judges went on to rub it in quite precisely:
“Thus, even more than with the individual mandate, the employer mandate penalties hinge on the availability of tax credits. If credits were unavailable in states with Federal Exchanges, employers there would face no penalties for failing to offer coverage.”
If a majority of the Unites States Supreme Court were to agree with the Halbig v. Burwell majority, the last Obamacare domino would seem to fall, more or less automatically.
And yet the media and even the most ardent supporters of Obamacare seem to ignore this potential effect. Assuredly, the “large employers” and their lobbyists who are funding the Halbig and King cases have not. Not to mix too many metaphors, but it is most important to understand that both the King and the Halbig cases are twin Trojan Horses: ostensibly about killing ObamaCare subsidies, but really all about indirectly but effectively destroying the individual and employer mandate. In the concluding words of the majority in the Halbig case, its ruling against Federal Exchange subsidies “will likely have significant consequences both for the millions of individuals receiving tax credits through federal r exchanges and for health insurance markets more broadly.” (Halbig v. Burwell at p 41.)
All the more so if the Supreme Court agrees.
By Terry Connelly, Dean Emeritus, Ageno School of Business, Golden Gate University
Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education