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King v. Burwell: Subsidies at Risk?

Thursday, January 15, 2015   (0 Comments)
Posted by: Alyssa Panning
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Adele Allison, Director of Provider Innovations, DST Health Solutions


King v. Burwell:  Subsidies at Risk?


Question:  I have heard there is another big Affordable Care Act case going before the Supreme Court.  Can you tell me whether federal insurance subsidies are truly at risk?


You are correct.  Another legal battle – King v. Burwell – is pending before the Supreme Court of the United States (SCOTUS).  The issue before the court is whether the IRS may legally create regulations that result in tax-credit subsidies for healthcare coverage purchased through an insurance marketplace established by the federal government under § 1311 of the Affordable Care Act (ACA).  Oral argument is set for Mar. 4, 2015, after which SCOTUS will take matters under advisement and later issue its opinion.  The court’s final opinion stands to impact federal subsidies to Americans purchasing coverage through a federally-run marketplace. 

Since being enacted in Mar. 2010, ACA has come under numerous legal challenges. The most recognized ACA legal battle – National Federation of Independent Business, et al. v. Sebelius – addressed the constitutional issues of the federal government requiring individuals to purchase insurance under the threat of penalty (individual mandate) and requiring states to expand Medicaid eligibility by threatening to remove all federal funding if they did not.  SCOTUS upheld the individual mandate by deeming the penalty a tax.  However, the court did make a change to the Medicaid provision by only allowing the federal government to remove new funding for the expansion if the state opted out, thereby, allowing states a true expansion option.  

While both of the above issues dealt with the ACA law directly, King v. Burwell takes issue with an IRS final rule – a regulation.  ACA seeks to make insurance coverage affordable by providing federal premium subsidies to low- and moderate-income people.  These subsidies include advance payment of tax credits for Americans with household incomes between 100-400 percent of the federal poverty level.  The IRS policy issued in May 2012 allows any eligible American to receive tax credits for purchasing health insurance in a state-based marketplace (SBM) or federally-facilitated marketplace (FFM).  However, ACA language specifically limits subsidies to exchanges “established by the state,” not by the federal government.  Although it is the belief of many that Congress intended ACA to provide states with access to federal subsidies regardless, petitioners hold that the language of the law is “extraordinarily straightforward.”

ACA allows each state to determine how it will administer its insurance marketplace to residents given the following options:  State-based (13 states and D.C.), Federally-supported (3 states), State-Federal partnership (7 states), or Federal-based (27 states).  In other words, 16 states and D.C. have state-run marketplaces; and, 34 states have opted to allow the federal government to setup insurance exchanges.  These 34 states with federal marketplaces could lose access to premium subsidies if deemed appropriate by SCOTUS under the law.

There have been numerous legal battles in lower federal courts on this point, resulting some in favor and some against providing subsidies.  There have also been two federal appellate decisions with opposing rulings – one in the D.C. Circuit, Halbig v. Burwell; and, one in the 4th Circuit, King v. Burwell.  In King v. Burwell, the court found in favor of the IRS interpretation to allow subsidies in FFM states.  King v. Burwell is now moving to the SCOTUS under certiorari (judicial review) for a Mar. 4th court date. 

What would be the impact if 34 states lose federal subsidies?  RAND Corporation recently supplied a study predicting the effect on enrollment and premiums in FFM states and found – not surprisingly – elimination of federal subsidies would have a significant influence on both.  Specifically, FFM states would experience a 70 percent reduction in enrollment (from 13.7 million to 4.1 million) and a 47 percent increase in premiums (from $3,450 to $5,060).

RAND explains that FFM states would be more significantly impacted than SBM states by subsidy elimination for three reasons:

1.     A high number of FFM states did not expand Medicaid eligibility, making these low-income people very reliant on subsidies for coverage.

2.     FFM states have a higher number of low-income Americans as a whole, making insurance purchase price a more sensitive issue.

3.     FFM states boasted a higher number of uninsured people pre-ACA.

Experts are predicting SCOTUS will render its opinion on the case by the end of June.  And, if found illegal in FFM states, millions will likely drop their coverage – particularly healthy Americans who deem they can live without insurance.  If so, the stop-gap would move to our 114th Congress.  Lawmakers could either shore-up the language to extend subsidies to FFM states or allow the ruling to stand.

Alternatively, individual states could seek remediation by moving into compliance with the letter of the law – create a truly state-run marketplace.  The White House and HHS, namely CMS, have been working on contingencies should a negative outcome ensue.  According to a Leavitt Partners report, the following options may become available to states:

·         Hybrid State-based Marketplace.  Under this option, states would use the Healthcare.gov platform, but assume all ownership of the marketplace requirements such as plan managements, consumer assistance, eligibility determination, financial management, etc.

·         Regional Partnerships – A Shared-Marketplace.  States could throw-in with another state-run marketplace to create a regional, multi-state partnership for their marketplace.  This model has already been entertained by the governors of Iowa, Kansas, Nebraska and South Dakota.

·         Marketplace as a Service (MaaS).  Two or more states would share a marketplace technology platform, but unlike the partnership and a shared regional marketplace, each would maintain its marketplace individually.  This would produce economies of scale, similar to CHCs that belong to a Health Center Controlled Network (HCCN).

·         1332 Innovation Waiver.  ACA allows states to develop an alternative means of insurance distribution to the “marketplace” model through an innovation waiver.  However, the waiver will not available under the law until 2017, and any new model would have to be approved by CMS.

Leavitt goes so far in its report totake the 34 FFM states and predict which ones would move forward with steps toward a SBM and which ones would resist, as follows:

Existing Plans to Move to SBM

Will take Pro-active Steps Toward SBM

Will Research Steps to Create SBM

Will Resist and Seek Extractions






The impact of this decision on federal and state politics is undeniable given elections, vetoes and the potential media-frenzy that it could create.   The effect this case has on millions of Americans is very real.  King v. Burwell will be one to watch closely.


Do you have a question?  Let us know!  Contact membership@nwrpca.org to submit your questions to “Ask Adele.”

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