SummaryToday, the U.S. Supreme Court will consider whether it is legal for consumers in states with a federal exchange to receive tax credits to subsidize monthly premiums for plans purchased through the exchange.
In advance of the oral arguments in King v. Burwell, Avalere offers the following observations:
Impact on Premiums
“Without action from Congress or the Administration, a ruling in favor of the plaintiffs would make premiums unaffordable for millions of Americans,” said Elizabeth Carpenter, director at Avalere. “Exchange consumers are very sensitive to prices, and large premium contribution increases would likely lead many to drop coverage.”
- More than 7.5 million consumers in 34 states could be impacted. According to an analysis released by Avalere, at least 7.5 million consumers are currently subsidized through the federal exchange. A ruling in favor of King will likely have the greatest impact in Texas, Florida, Georgia, and North Carolina, where more than 400,000 consumers would be affected in each state.
Without tax credits, many exchange consumers would find premiums unaffordable. Eighty-seven percent of federal exchange consumers are subsidized, with their tax credits paying for 72 percent of their premium on average. Data released last week find that average required premium contributions would rise 255 percent in federal exchange states, if tax credits are struck down.
Potential for a Regulatory or Legislative Fix
“If the Court rules in favor of King, Congress, the Administration and the states will likely pursue solutions,” said Dan Mendelson, CEO and founder of Avalere. “However, any potential approach will come with both operational and political challenges.”
Congress can maintain stability in the market, but politics will be challenging. Leading Republicans in the House and Senate indicate that Congress will act to avoid tax credit loss in the case of a ruling against the government. In particular, Republicans increasingly discuss a short-term “patch” that maintains tax credits, while Congress works on an alternative to the ACA. Nevertheless, Congressional politics remain challenging and garnering the necessary votes from either party may prove difficult.
Regulatory solutions will likely require a state to act. If the Court rules in favor of King, the Administration may issue regulatory guidance easing the path to state-based exchange status. However, even with such guidance, states will likely need to move proactively to take advantage of new opportunities to transition to a state-run exchange. Twenty-one of the 34 states that will potentially be impacted are controlled by Republican governors and Republican legislatures. At least six states, including three under split political control (NH, MO, MT), prohibit the governor from acting on ACA implementation without legislative approval.1
Independent state solutions are labor intensive. Separate from an Administration-led workaround, some states may pursue other options for becoming a state-based exchange. The ACA grants states flexibility to merge together into multi-state or regional exchanges that would leverage one exchange’s operating model and technology platform across two or more participating states. Alternatively, some state-based exchanges could sell their complete exchange solutions (“exchange in a box”) to other states interested in quickly converting to being state-run. However, each of these solutions would require significant investments of time and money, which may be an obstacle.
Timing is a serious issue. Generally, Supreme Court rulings go into effect 25 days after they are issued, unless the Court specifies otherwise. As a result, action by Congress, the Administration, and states would likely need to happen quickly to avoid gaps in coverage. This would potentially require quick consensus on Capitol Hill, expedited rulemaking, and /or special state legislative sessions.
Impact on the Individual and Employer Mandates
“Increases in required premium contributions will make many consumers exempt from the individual mandate,” said Caroline Pearson, senior vice president at Avalere. “Moreover, in states where subsidies are no longer available, employers will not be subject to employer mandate penalties.”
Many consumers will be exempt from the individual mandate without tax credits. Under the Affordable Care Act (ACA), in 2015 consumers are eligible for a hardship exemption from the individual mandate if the premium of the lowest cost bronze plan available to them in their region exceeds 8.05 percent of their income.2 The premium increases resulting from a ruling in favor of King would likely qualify many Americans for this exemption and undermine the individual mandate.
Individual mandate exemptions will depend on age. Premiums in federal exchange states are rated based on age, with younger enrollees paying less than older enrollees.. As a result, older enrollees will be exempt from the mandate at higher income levels (because their premiums are higher). While younger enrollees may be more likely to also have lower incomes overall, the impact of the ruling will likely have a different impact depending on a consumer’s age.
If tax credits are struck down, so is the employer mandate. Employers are only subject to the employer mandate penalty if an employee claims a tax credit on the exchange. If tax credits are not available to consumers, employers cannot be penalized.
2. Assumes enrollees do not have an affordable offer of coverage from their employer and are not eligible for other government programs.