Late last month, the Supreme Court ruled in King v. Burwell that the health insurance subsidies for low- and middle-income taxpayers, made possible by the Affordable Care Act (ACA) and implementing regulations, are legal in all 50 states, even in those states that have not established a state-operated exchange.
The Court, through Chief Justice Roberts, held for the government. The Court’s majority analyzed the text, purpose, and structure of the ACA and gave it a “fair reading.” By finding the validity of subsidies to be a question of deep political and economic significance, the Court was able to enshrine its view on the subsidy issue based on its own interpretation of congressional intent.1 The Court's view of congressional intent was that Congress meant for subsidies to apply in every state because it is “implausible” that Congress could have intended otherwise. That view is now invulnerable to a change in administrations and can only be modified by an act of Congress.
We recommend that health plans, providers, and employers keep calm and carry on with ACA implementation, while being mindful that the ACA continues to face legal challenges and that health care remains far from affordable.
Effect on Employers
If the Supreme Court had invalidated the provision of subsidies for coverage purchased on the federal exchange and on partnership exchanges, employers could have been significantly affected. For example, such a ruling could have reduced an employer’s risk under the “employer shared responsibility” (i.e., “Pay or Play”) rule. That rule generally requires employers to offer sufficient health plan coverage or risk a penalty.
Since the Supreme Court found subsidies legal in all 50 states, the status quo remains in place for employers. Employers therefore need to continue to focus on complying with the various ACA requirements, including:
- Generally, amending the eligibility terms of health plans to adopt the “measurement period,” “administrative period,” and “stability period” selected by the employer;
- Preparing for the new IRS reporting rules contained in Forms 1094 and 1095, which will first be completed in January 2016; and
- Planning for the “high cost” health plan tax (the “Cadillac tax”) which applies in 2018.2
Effect on Health Plans
The Supreme Court’s decision has spared health plans operating on and off the exchanges from the devastating consequences of invalidating subsidies. Millions of enrollees will not be calling about the status of their coverage; millions of policies will not have to be terminated; relations with providers will not be strained over pended or unpaid claims; and there will be no death spirals.
While less significant challenges to the ACA may still arise, as discussed below, health plans may now focus on ACA compliance with little concern that all those efforts will be for naught. Health plans can continue to plan for the third year of the exchanges and the changes to small group coverage in 2016, as well as accommodating their employer groups for the upcoming changes described above.
Publicly traded health insurance stocks rose on news of the ruling in King v. Burwell. The removal of this major uncertainty may cause some major insurers to leave the sidelines and begin to offer qualified health plans on the exchanges and others to become more involved. It also is expected to spur more consolidation among major players in the health insurance industry.
Despite the happy news, insurers need to be mindful that consumer groups and regulators may now have more time to watch and push back on premium increases.
Impact on Providers
Providers, including for-profit chains whose stocks were buoyed, heaved a sigh of relief when the decision was announced. Providers take comfort in knowing the decrease in bad debt and favorable increase in the level of commercial insureds in the patient mix will continue. Each hospital CEO and CFO knows by now the revenue impact of each increment of change in the patient mix from uninsured to insured. The decision favorably impacts at least 6.4 million individuals, many previously uninsured, in 34 states.
Hospitals, however, are likely more aware than most of some of the gaps, threats, and perhaps “unintended consequences” of the ACA in its present form.
First, the gaps. The 2012 Supreme Court decision in National Federation of Independent Business v. Sebelius has allowed states the option of not expanding their Medicaid programs. A 50-state patchwork has resulted and more than 20 states have chosen not to expand their Medicaid program. In such states, close to 4 million individuals earn too much to qualify for their state’s Medicaid program but do not earn enough to qualify for exchange based coverage. This new “donut hole” continues and means that, going forward, providers in those states will continue to lobby for Medicaid expansion.
Second, the threats. Real threats are posed to hospitals by provisions baked into the ACA. The various statutory funding mechanisms in the ACA include three that continue to threaten providers. The full brunt of these provisions, if not modified, will pose a significant threat to provider (especially hospital) financial viability. Of note are the restrictions on:
- The growth of the total Medicare spending;
- The growth of federal tax subsidies provided on health insurance exchanges; and
- The growth of Medicaid hospital spending.
Each of these key metrics is essentially limited to the rate of growth of real GDP per capita plus .5 percent. That rate is significantly less than the annual increase over the past 40 years in U.S. health care costs.
These restrictions limit government spending, but do not constrain health care cost increases. This means that health care costs will continue to burden Americans and, to the extent borne by employers, put a damper on wage increases.
Reducing Medicare spending will likely entail reduced reimbursement to providers, and Medicare reimbursement may even dip below Medicaid reimbursement. This, of course, will be deeply unpopular and we may see another annual deferment ritual akin to the “sustainable growth rate” ritual providers have endured for the past 13 years.
Third, some highlights from the “unintended consequences” department.
- Expanding Medicaid will increase use of the ER. Post-ACA experience affirms past studies on this point. Thus, while the ACA reduces government subsidies for uncompensated care at safety net providers, utilization at those facilities’ ERs will be increasing.
- Under the ACA, if a worker is eligible for insurance through an employer, and could obtain dependent coverage, the so-called “family glitch” may come into play. If the employer’s insurance is “affordable” (as defined in the ACA) to the worker, the dependents cannot receive subsidies. We may see legislative efforts to change this.
- Because of a nationwide, significant trend toward high-deductible plans, both in the employer context and on the exchange, many “insured” individuals may in fact be underinsured, with deductibles which are high relative to income. For providers, this is a worrisome trend. This may impact 31 million U.S. adults, a number which is expected to grow.
Lastly, employers, consumers, providers, and insurers should not lose sight of the fact that legal challenges to the ACA remain — not as big a threat as the challenge posed by King v. Burwell but nonetheless noteworthy. Among the more significant (dollar-wise) still pending challenges is the following:
- The House Republican lawsuit, House v. Burwell, pending in the District Court in Washington, D.C., which alleges that the administration is spending close to $200 billion never appropriated by Congress to support the ACA’s “cost-sharing reductions” (CSRs). CSRs allow lower-income, exchange insureds to achieve reduced deductibles, copays, out-of-pocket limits, and coinsurance. CSRs benefit more than half of marketplace enrollees, and the providers that serve them. If CSRs are invalidated, providers' risks for bad debt is increased.
The good news is that while all eyes were riveted on King v. Burwell, other important questions were “put to bed” when the Supreme Court declined to review various challenges to the ACA. These cases include Mayhew v. Burwell, which challenged the ACA requirement for “maintenance of effort” by states on children’s Medicaid eligibility; and Coons v. Lew, a constitutional challenge to the ACA-created Independent Payment Advisory Board (which by the way has yet to be constituted).