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June 18, 2015

Daily Briefing primer: How a challenge to federal exchange subsidies got to the Supreme Court—and why it matters

Daily Briefing

The Supreme Court is considering a case challenging the Affordable Care Act for the third time.

The case—King v. Burwell—questions whether the law's authors intended to allow tax credits for consumers who use the federal insurance exchange.

The Court heard oral arguments in the case in March and is expected to issue a ruling in late June.

How the new Supreme Court case could affect hospitals

What's being debated?

Currently, subsidies are available to U.S. residents between 100% and 400% of the federal poverty level to help them purchase health plans sold on both federal and state exchanges. But the plaintiffs in King v. Burwell—originally King v. Sebelius—note that language in the ACA says subsidies would be available from state-managed exchanges and argue that the clause excludes state-run marketplaces.

This legal challenge centers on a key question: Did the ACA's authors intend to allow tax credits for consumers who use the federal insurance exchanges? According to the Obama administration, the answer is yes. The defendants have stressed that the subsidies were intended to be available through every exchange in order to help Americans sign up for affordable coverage.

But the challengers argue that the text of the law is clear: The answer is no. According to the plaintiffs, the language of the ACA suggests that subsidies should only be available in states that set up their own insurance exchanges. However, just 13 states and Washington, D.C., currently run their own exchanges.

Given the potential impact on their operations, several other states have received conditional approval to run their own exchanges as well.

How did King v. Burwell reach SCOTUS?

Here's a timeline of how King v. Burwell made it to the Supreme Court:

  • Sept. 16, 2013: Four Virginia residents file the King v. Sebelius complaint challenging ACA subsidies in the federal exchanges. Without the subsidies, the plaintiffs say they would qualify for a hardship exemption under the ACA, which would allow them to avoid the ACA's individual mandate and the accompanying penalty.
  • Feb. 18, 2014: U.S. District Court, Eastern District of Virginia, Richmond Division dismisses the lawsuit. U.S. District Court Judge James Spencer ruled the IRS holds authority to give out the federal tax subsidies for plans purchased on either the state or federal exchanges. Spencer wrote the four plaintiffs' argument had a "certain common sense appeal" but no statutory context.
  • March 3, 2014: Appellants file their opening brief with a three-judge Fourth Circuit Court of Appeals.
  • April 10, 2014: Kathleen Sebelius announces plans to step down from her position as HHS Secretary.
  • June 5, 2014: Sylvia Mathews Burwell is confirmed as Sebelius's replacement, and the lawsuit name thus changes.
  • July 22, 2014: A three-judge panel at the Fourth Circuit Court of Appeals upholds the District Court's decision, ruling the ACA wording ambiguous and the IRS's interpretation reasonable.  But on the same day, the D.C. District Court ruled in favor of plaintiffs in a similar case, Halbig v. Burwell, putting the courts at odds with each other.
  • September 4, 2014: The full D.C. Circuit Court agrees to rehear Halbig, vacating the split between the circuit courts.
  • Nov. 7, 2014: U.S. Supreme Court grants King v. Burwell certiorari. SCOTUS's ruling on King will supersede any circuit court decision.
  • March 4, 2015: The Supreme Court hears oral arguments in King v. Burwell.

Why did SCOTUS choose to hear King v. Burwell?

Many experts say the choice to hear the case is politically motivated, because currently there is no split among the circuit courts.

Washington and Lee University School of Law professor Timothy Jost, who supports the ACA subsidies, says the grant of certiorari is "highly unusual" in such a case. "The Supreme Court doesn't usually just take away cases from circuit courts where there's no circuit split," he says, "which I think sends a signal that politics might be driving this—not legal analysis."

Though the other possibility, he says, is that SCOTUS wants to decide the case rather than leaving it open for another year, "then it's possible that certainly five and maybe more of the judges could vote to uphold the law."

However, those supporting the plaintiffs see the certiorari as a positive sign. SCOTUS does not generally accept cases to affirm rulings—especially when lower courts are not in conflict.

Other reasons they may grant certiorari include:

  • A lower court "has decided an important question of federal law that has not been, but should be, settled by [the Supreme Court];"
  • Though the Halbig rehearing vacated the split circuit court decision, its occurrence suggests the justices know they will eventually have to handle the case at some point; and
  • The cases are time-sensitive because affected parties—such as insurance companies and those eligible for subsidies—must have time to respond should the subsidies be struck down.

What implications does the case have for ACA?

New language in the contracts between the federal government and insurers seems to allow insurance companies to stop offering health plans if the government pulls the plug on federal subsidies.

The contract states, "CMS acknowledges that (the insurer) has developed its products for the (federal exchange) based on the assumption that (advance payments of the premium tax credit) and (cost-sharing reductions) will be available to qualifying enrollees." It adds, "In the event that this assumption ceases to be valid during the term of this agreement, CMS acknowledges that issuer could have cause to terminate this agreement subject to applicable state and federal law."

What would happen without subsidies?

According to Robert Laszewski, president of the Health Policy and Strategy Association, it is possible that healthy people will drop their insurance if the federal government stops offering subsidies, leaving mostly people who are very sick and need care on the plans. He says, "If you're an insurance company and you lose 87% of your block and only keep the sick people, that's pretty devastating," adding, "this would be chaos and devastation in these 36 markets."

Premiums could rise as much as 774% if subsidies are deemed illegal

However, he says that it is not yet clear whether insurers would be allowed to leave the exchanges or if they would want to do so if federal subsidies are eliminated. In the event that the government stops offering subsidies, insurers would still be required to cover consumers for at least three months—but individual state laws could alter some of those requirements.

Additionally, should the justices decide the federal subsidies are indeed invalid, that may push states to create their own exchanges to ensure residents can still afford insurance.

Sources: Viebeck, The Hill, 2/19; Eilperin/Godstein, Washington Post, 4/11; Competitive Enterprise Institute, accessed 12/12; McIntyre, Vox, 11/7; American Health Line, 5/15; Daily Briefing, 11/7; Surowiecki, New Yorker, 11/18; Schencker, Modern Healthcare, 10/27 [subscription required]; Friedman/Lithwick, Slate, 11/10; Adler, "The Volokh Conspiracy," Washington Post, 9/4; Logiurato, Business Insider, 11/7

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