Saving the Affordable Care Act if the King v. Burwell Challenge Succeeds

In this essay, I will assume that it is the day after the Supreme Court’s decision in the upcoming case of King v. Burwell, the latest challenge to the Affordable Care Act, and will further assume that the Supreme Court has found for the plaintiffs in a decision roughly along the lines of that handed down by the DC Circuit panel in Halbig v. Burwell. I will propose and discuss a method that the Obama Administration could use to ensure that the ACA continues to function as intended even after such a ruling, or that the Obama Administration could implement in advance of such a ruling as a means of rendering the King challenge substantively moot. Those familiar with King may wish to skip the “Background” section of this essay, and move directly to the section entitled “Goals and Constraints”.

Saving the Affordable Care Act if the King v. Burwell Challenge Succeeds

Freilich Jones[*]

 

Abstract

In this essay, I will assume that it is the day after the Supreme Court’s decision in the upcoming case of King v. Burwell, the latest challenge to the Affordable Care Act, and will further assume that the Supreme Court has found for the plaintiffs in a decision roughly along the lines of that handed down by the D.C. Circuit panel in Halbig v. Burwell. I will propose and discuss a method that the Obama Administration could use to ensure that the ACA continues to function as intended even after such a ruling, or that the Obama Administration could implement in advance of such a ruling as a means of rendering the King challenge substantively moot. Those familiar with King may wish to skip the “Background” section of this essay, and move directly to the section entitled “Goals and Constraints”.

 

Background

Sometime this coming summer, the Supreme Court will decide the case of King v. Burwell,[2] the latest challenge to the Patient Protection and Affordable Care Act (hereafter the “ACA”).[3] Unlike the previous challenge to the ACA to reach the Supreme Court (NFIB v. Sebelius),[4] King does not attack the constitutionality of the law. It is a much narrower case, focusing on the way a single critical provision of the ACA has been implemented by the IRS. Section 36B of the ACA governs the manner in which the tax credits that allow low-income individuals to purchase health care are calculated and distributed. Under this section, a taxpayer is only eligible to receive tax credits based on the plans offered on and enrolled in through, “an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act,” with §1311 of the ACA authorizing states to establish health exchanges. While the drafters of the ACA expected each state to establish their own exchange, more than 30 states declined to do so. The federal government then stepped in pursuant to authority granted to it under the ACA’s § 1321, which empowered the federal government to “establish and operate [an] Exchange” within any state that was unwilling or unable to set one up by a specified date. The plaintiffs in King claim that the IRS may not give tax credits to individuals and families signing up in exchanges facilitated by the federal government since those exchanges were set up by the federal government pursuant to §1321, not by the “State under §1311.” The Administration claims that a less myopic reading of the ACA allows the IRS to grant tax credits to taxpayers in states that use either type of exchange.

If the King challenge succeeds, the results would be devastating to the system established by the ACA. As Timothy Stolzfus Jost has written in the New England Journal of Medicine, such a ruling would quickly cause a catastrophic chain reaction throughout the American health insurance system:

First, nearly 5 million Americans who chose an insurance plan through the federal exchange using a premium tax credit would lose that credit—and probably their health insurance. Since the enforceability of the ACA mandates that large employers provide and individuals obtain health insurance depends on the availability of tax credits, those mandates could also disappear or be seriously undermined in two thirds of the states. Insurers, however, would still be required to offer coverage regardless of applicants’ preexisting conditions. Absent the premium tax credits and the mandates, the risk pool for insurers in states with federally facilitated exchanges would deteriorate rapidly, causing premiums to rise precipitously. The individual insurance market could indeed collapse entirely in these states, leaving millions of Americans uninsured.[5]

This essay will not address the merits of either side of King, or the precise extent of the damage a ruling for the plaintiffs in King would cause the ACA system. Both issues have been ably explored elsewhere. Instead, we will assume that it is the day after the Supreme Court’s decision in King, and that the Supreme Court has found for the plaintiffs, holding that tax credits may only flow to those who have signed up for health care plans through state-established exchanges created pursuant to the ACA’s § 1311, and may not flow to those who have acquired their plans through the exchanges established by the federal government in more than 30 states under the ACA’s § 1321. I will propose and examine a method that the Obama Administration could use to ensure that the ACA continues to function as intended even after such a ruling. Alternatively, the approach I propose could be implemented in advance of such a ruling, rendering the King challenge moot.

 

Goals and Constraints

Any King workaround must meet at least the following requirements if it is to be taken seriously:

  • Keep the ACA system afloat by ensuring the continued flow of tax credits to the residents of all states.
  • Use only the policy tools actually available to the Obama Administration. This means that any workaround dependent on passing legislation through Congress, now unified under Republican control, is unlikely to succeed. Similarly, no workaround can reasonably depend on the active cooperation of the states that originally refused to set up exchanges, or that have been since fallen under the control of those opposing the success of the ACA’s exchange program. Effectively, this means that any workaround cannot depend on any State that is not under Democratic Party control, as opposition to the ACA has become too important politically to the Republican Party for the Administration to rely on Republicans for support.
  • Avoid the precedential landmines that will likely be created by a ruling for the plaintiffs in King. Any ruling in King that goes against the Obama Administration will likely be based on a close textualist critique of the statutory text governing the provisioning of tax credits. Any workaround must be designed to survive a textualist judicial review and cannot rely for its defense in court on purposivist legal doctrines, as the Supreme Court will likely have dismissed such arguments insofar as they apply to the provisioning of 36B tax credits.

Our task is seemingly impossible. How can the Obama Administration get around a Supreme Court decision in King using only federal rulemaking, and the cooperation with those state governments in which the Democrats control both houses of the state assembly as well as the governor’s mansions? A close examination of the text of the ACA shows, however, that such a workaround may in fact be feasible.

 

The Workaround

The workaround depends on the interaction of two seemingly unrelated provisions in the ACA:

  • If a state is unwilling or unable to establish and operate a qualifying exchange by January 1, 2014, “the Secretary shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.” (42 USC § 18041(c)(1)) (emphasis added).
  • The ACA defines an exchange as “a governmental agency or nonprofit entity that is established by a State” for the purposes of Section 1311. (42 USC 18031(d)(1)) (emphasis added).

In combination, these two provisions allow the Administration to conclude an agreement with a nonprofit health exchange established by one state under the ACA’s § 1311, under which that nonprofit health exchange would operate health exchanges in other states that were unable or unwilling to establish exchanges of their own. While such exchanges would be run pursuant to the federal government’s ACA § 1321 authority to operate exchanges in states that cannot or will not do so themselves, they would still have been “established” by a “state under 1311” of the ACA. Individuals and families signing up for health care plans through exchanges operated under such an arrangement would be signing up through exchanges “established by the State under 1311,” and would therefore be eligible for tax credits. In effect, the federal government would be incorporating its entire exchange operation into the nonprofit entity created by one of the states. Furthermore, the workaround meets our three requirements for any workaround to King to be taken seriously. First, it requires only federal rulemaking, and the cooperation of a single state government, to succeed. Second, it depends on a very literal reading of the text of the ACA, precisely the sort of reading that the Supreme Court is almost certain to endorse if it finds for the plaintiffs in King. This reliance on the Supreme Court’s reasoning in King would make the workaround more likely to survive lower court review. Third and finally, this workaround will ensure that individuals in every single state of the Union can continue to receive the tax credits that enable them to afford health insurance.

 

Potential Problems

At this point, it is fair to ask whether any other provisions of the ACA might make difficult to implement this approach. There are two potential concerns, although both can be overcome. We will address each in turn.

The first critical issue that the Administration would need to avoid in adopting this approach would be running afoul of section 1311(f)(1) of the ACA,[6] which states that an exchange may only operate in more than one state if “each State in which such an Exchange operates permits such operation; and the Secretary approves such regional or interstate exchange”. The Obama Administration has at least three ways to circumvent this restriction. First, the Administration could convince a state to establish some 50 nonprofit exchanges. The Federal government would then contract with each nonprofit exchange to operate only in a single state. Second, the Administration could try to issue a rule making it very difficult for any state to fail to permit the operation of an interstate exchange. As a third option, the Administration could take advantage of the ACA’s §1311(f)(2), which allows states to “establish one or more subsidiary exchanges if (A) each such Exchange serves a geographically distinct area; and (B) the area served by each such Exchange is at least as large as a rating area described in section 2701(a) of the Public Health Service Act”. Under this structure, the main “umbrella” exchange would not operate anywhere; it would serve exclusively as a sort of holding company. Each subsidiary exchange would operate in exactly one state, avoiding the need to request state permission to operate interstate exchanges. Since states are distinct geographic areas, and all states are at least as large as the rating areas described in section 2701(a) of the Public Health Service Act, the requirements necessary to establish and operate a subsidiary exchange would be met. Of these three options, the first and third seem the most likely to survive subsequent judicial review. It is difficult to imagine how the second option might be accomplished, since the plain text of the ACA clearly gives states effective veto power over interstate exchanges. Between the first and the third options, the third seems preferable, as it is likely easier to manage a nested group of exchanges than it is to manage 50 completely independent exchanges.

In addition to 1311(f)(1), there is one argument that, at first glance, might appear to cause problems for our proposed workaround, but at second glance would not. 26 USC 36B(b)(2)(A), the very provision that lies at the heart of the King suit, refers to “the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act…”. The phrase “the State under 1311”, by including a definite article rather than an indefinite article, clearly points back to some specific state. While at first glance there is a possibility that this definite article could refer back to the state of the enrollee’s residence, a closer look makes clear that this is not so. “The State”, in this case, refers back to the “state” mentioned in the phrase “qualified health plans offered in the individual market within a State which cover the taxpayer” earlier in 36B(b)(2)(A). As long as the qualified health plans covering the enrollee are offered on an individual market “within state”, not specifically the state of the enrollee’s residence, the law clearly contemplates that it may cover that taxpayer. Since the phrase “the state under 1311” refers back to this previous phrase, which discusses only the plans covering the taxpayer that are on an exchange established by (read “any”) state, it actually reinforces the idea that an exchange in one state may cover a taxpayer in another.

A word of caution: while my review of the language of the ACA suggests that these are the only two real issues that must be addressed for the workaround to be implemented, it is possible that there are more. This possibility would need to be more fully explored before this workaround could be rolled out.

 

The Workaround in Practice

Seven states will have both houses of their legislatures, and their governors’ mansions, controlled by the Democratic Party after the 2014 election and inauguration process has been completed: California, Connecticut, Delaware, Hawaii, Oregon, Rhode Island, and Vermont. One of these, President Obama’s birth state of Hawaii, is at the time of writing also the only state to have established a nonprofit health exchange system. These seven are the states that would likely be most willing and able to work with the Administration to authorize and establish nonprofit exchanges that would be capable of executing the workaround. That being said, actually convincing any of these seven state legislatures and state administrations to pass the necessary laws would certainly require some amount of lobbying, and close political coordination with the White House.

The first step in implementing the workaround described above would therefore be for the Obama Administration to work with one (or more) of these seven states to pass state laws that:

  • Establishes a not-for-profit health exchange with 50 subsidiary exchanges, or 50 not-for-profit exchanges, as described above.
  • Authorizes the new exchanges(s) to contract with the federal government to provide exchange services. There would be no need for the legislature to pass any provisions explicitly allowing (or requiring) the nonprofit exchange to provide ACA related exchange services in other states; all the state need do is authorize the nonprofit exchange to contract to provide services to the federal government (or others) related to the management of exchanges.
  • Includes any other provisions necessitated by the laws governing nonprofits, state-chartered institutions, and health-care related institutions in the state establishing the not-for-profit exchange.

The state would then staff and set up the new exchanges. Concurrently, the federal government would contract with the exchanges, or subsidiary exchanges, to take over the management of the federally facilitated exchanges in those states that had not established exchanges of their own to that point. This contract would, in addition to other factors, likely need to:

  • Provide federal dollars to cover the costs states would incur in setting up the new nonprofit exchanges.
  • Be structured in such a way, and be of a long enough term, that the arrangement would survive actions taken by political leaders hostile to the ACA should they come to power in the state creating the nonprofit exchange, or win both the Presidency and Congress. This would almost certainly require additional rulemaking in one, and maybe more, federal departments.
  • Insulate the state that creates the exchange from financial and legal liability for exchange activities in other states. No state, however supportive of the ACA, would be willing to sign on to an arrangement that gave anything less than total insulation from such liability.
  • Allow the exchanges to operate within the requirements of relevant health industry regulations, such as HIPAA, Medicare/Medicaid, and state-level insurance and health regulations in the states in which each exchange would be expected to operate.

Finally, while this workaround does provide a legally feasible way to ensure that the ACA exchange system continues to function in all 50 states in the event of an adverse ruling in King, the implementation of this workaround could be politically controversial. Opponents of the ACA would charge the Administration with taking advantage of a technicality, of exploiting the interaction of two little-noticed provisions of a huge act to seemingly get around the will of the Supreme Court, and the wills of the more than 30 states that have refused to establish their own exchanges. However, in the absence of alternative proposals that would enable the system to continue to function in all 50 states without the cooperation of either Congress or all 50 state legislators, it might ultimately be necessary for the Administration to confront the political controversy that would accompany the implementation of this, or any similar, workaround.

 

Conclusion

The Obama Administration, and other supporters of the ACA, should not overestimate their chances of prevailing over the King plaintiffs in the Supreme Court. Assuming that Justices Alito, Scalia, and Thomas replicate their votes against the ACA in NFIB v. Sebelius, and that Justices Breyer, Ginsburg, Kagan, and Sotomayor replicate their votes in favor of the Obama Administration, the ACA will only survive if one or both of Chief Justice Roberts and Justice Kennedy find against the King plaintiffs. While reasonable people can debate the probability of this occurring, it would be the height of shortsightedness for the Administration, or any other supporters of the ACA, to pretend that the ACA is not in grave danger. With that in mind, the Administration and supporters of the ACA should immediately begin to explore ways to ensure that the ACA survives a ruling for the plaintiffs in King, if they have not started doing so already.[7] One way to do so is the workaround sketched out in this essay. By incorporating the entire federal exchange operation into a not-for-profit health exchange system created by one of the states, the Obama Administration would ensure that health tax credits could be flow to all eligible taxpayers no matter their state of residence, and ensure that the Affordable Care Act is not made unworkable, without needing to achieve the impossible by gaining the buy-in of a hostile Congress and intransigent state legislatures.


[*] J.D. Candidate, Harvard Law School, 2016; B.S., University of Chicago.

[2] See Halbig v. Burwell, 758 F.3d 390 (D.C. Cir. 2014), cert. granted sub. nom King v. Burwell, No. 14-114 (Nov. 7, 2014).

[3] Patient Protection and Affordable Care Act of 2010 (“ACA”), Pub. L. 111-148, 124 Stat. 119.

[4] Nat’l Fed. of Indep. Bus. v. Sebelius, 567 U.S. 519 (2012).

[5] Timothy Stoltzfus Jost, Subsidies and the Survival of the ACA—Divided Decisions on Premium Tax Credits, 371 New England J. Med 890 (2014), available at https://www.nejm.org/doi/full/10.1056/NEJMp1408958 [https://perma.cc/TE9D-RLRH].

[6] ACA § 1311(f)(1), supra note 2 (codified at 42 U.S.C. §18031(f)(1)).

[7] As of December 23, 2014, HHS Secretary Sylvia Matthews Burwell refused to say whether the administration would be drawing up a contingency plan to be implemented in the event the Supreme Court rules for the plaintiffs in King. See Jason Millman, HHS won’t say if it’s preparing for a Supreme Court Obamacare nightmare, Wash. Post: Wonkblog (Dec. 23, 2014), http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/23/hhs-wont-say-if-its-preparing-for-a-supreme-court-obamacare-nightmare/ [https://perma.cc/HY43-TT3Z].

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1 thought on “Saving the Affordable Care Act if the King v. Burwell Challenge Succeeds”

  1. The main problem with your workaround is that a non-profit has to operate under the regulatory control of the State in which it is providing services. This is the same problem that occurred previously for the various insurance providers. They had to abide by the different regulatory schemes of each State in which they operate.

    Also you have the same problem of illegally circumventing the other State governments with no agreement between States. Similar to one cannot force DC (NY, IL, et.al.) to accept my Concealed Carry Permit from NM.

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