Four Little Words and a Potential “Death Spiral” - Supreme Court Hears Challenge to Affordable Care Act Subsidies in King v. Burwell


Four Little Words and a Potential “Death Spiral” - Supreme Court Hears Challenge to Affordable Care Act Subsidies in King v. Burwell


On Wednesday, the Supreme Court heard oral arguments in King v. Burwell, in which petitioners argue that the Affordable Care Act (ACA) allows subsidies only to individuals in those states that have established an exchange, or insurance marketplace, under the ACA. To date, only 14 states have established their own exchanges, while the balance rely on the HealthCare.gov federal exchange. The subsidies at issue are such a critical piece of the ACA’s architecture – the third leg of a stool also comprising guaranteed coverage and the individual mandate – that a ruling for the petitioners in this case would likely be the death knell for the ACA itself.

While the text of the ACA spans over 2,000 pages (and the regulations nearly 20,000 pages), the case hinges on four words: “established by the State.” If a majority of the Court finds that the plain meaning of those four words in the ACA trumps a contextual reading, subsidies would be barred for the estimated 8 million individuals (those who do not have coverage through their employers and do not qualify for Medicare or Medicaid) in the 36 states that rely on the federal exchange.

Many observers predict that a “death spiral” would ensue: a large group of individuals would no longer be able to afford insurance, but insurers would still be required to offer insurance universally. Insurance markets in those states would collapse as “young invincibles” (younger, healthier individuals) drop coverage and sicker individuals retain coverage. Insurance costs would rise overall as more and more people drop out of the insurance market. States would then essentially be coerced into establishing their own exchanges. Indeed, a recent study by nonpartisan advisory firm Avalere Health suggests that insurance premiums could increase nearly 800% if Court rules against the government in this case.

During oral arguments, Justices Sonia Sotomayor and Anthony Kennedy, a frequent swing vote, cited this coercive scenario – conditioning subsidies and protections against adverse selection in the insurance markets on state cooperation with federal policy – as raising serious federalism and Constitutionality concerns.

Even the markets took notice of Justice Kennedy’s comments on Wednesday: hospital stocks increased more than any others on the S&P 500 Index after he appeared skeptical of petitioner’s claims. One of those rising stocks was HCA, the nation’s largest healthcare provider, which supported ACA subsidies in its amicus brief recently filed with the Court, arguing that the ACA “is functioning as intended,” and that a decision for petitioners would produce consequences “so absurd that Congress could not possibly have intended them.” As hospitals and health insurers are the corporate entities seen as having the most at stake in the outcome of King v. Burwell, insurance lobbying group America's Health Insurance Plans (AHIP) filed its own amicus brief warning that a ruling for petitioners “would leave consumers in those states with a more unstable market and far higher costs than if the Affordable Care Act had not been enacted.”

Even if Justice Kennedy does not swing his vote toward the government, Chief Justice John Roberts may; he was the deciding vote in the 2012 case upholding the ACA’s individual mandate, National Federation of Independent Business v. Sebelius.  Notably, Chief Justice Roberts remained largely silent during the 85-minute oral arguments on Wednesday. It appears that petitioners would need both Justice Kennedy and Chief Justice Roberts to prevail while the government can likely win the case with either Kennedy or Roberts on its side. Another possible result may be for the Court to declare the ACA ambiguous with respect to subsidies and defer to Internal Revenue Service regulations making tax credits available nationwide.

A decision in King v. Burwell is expected in June. 

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