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Millions of Americans in Danger of Losing Key Obamacare Tax Subsidy

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Millions of Americans in Danger of Losing Key Obamacare Tax Subsidy

February 20, 2015

This article originially appeared in MarketWatch.

On March 4 the U.S. Supreme Court will hear King v. Burwell, the case challenging health insurance-premium subsidies for those who buy their insurance on the 37 federal exchanges.

The Reply Brief written by the counsel for the petitioners, the Jones Day team of Michael Carvin, Yaakov Roth, and Jonathan Berry, was released late Wednesday. It carefully addresses the government’s case in an understandable and at times witty manner. It is a useful guide to how some of the arguments may proceed during the hearing.

The Justices need to decide whether those who buy health insurance on federally run exchanges are eligible to receive subsidies to help pay their premiums.  The letter of the law says that people on state exchanges can get subsidies. But in May 2012 the Internal Revenue Service decided in a ruling that those on federal exchanges could also receive subsidies.

In October 2013 column, “The Court could block Obamacare subsidies in 34 states,” I noted: “The IRS extended the subsidies to those getting health insurance on any exchange by defining an exchange as a ‘State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.’ ”

The IRS’s action, and the definition of the exchange, is the question in the forthcoming Supreme Court case. Now 6.5 million people on 37 federally run exchanges are getting tax subsidies for their health insurance, according to estimates published earlier this month by the Department of Health and Human Services. These subsidies total about $12 billion a year. People earning below 400% of the poverty line for a family of four, or about $95,000 annually, qualify for subsidies on a sliding scale.

The case is important to both people and states because if these subsidies are not legal, then they will eventually stop. Perhaps not right away, when the Court issues its opinion, but two months afterwards. Then, states will have to find another way to help low-income residents afford health care.

The government argues that the Affordable Care Act does not limit subsidies to state exchanges.  Rather, it says that Congress intended subsidies to apply to people in all exchanges, both federal and state. The term “exchanges established by HHS” is in reality a “term of art” that includes all exchanges, argues the government.

The problem is that the language of the ACA does not bear this out.  According to section 36B of the law, subsidies are available to those who get their health insurance “through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.”

Carvin, Roth, and Berry argue in their Reply Brief that “Section 36B’s text is unambiguous and consistent with the rest of the ACA, and concededly is not objectively absurd.” They continue: “It would certainly be convenient, for an agency seeking to rewrite a statute, if an English phrase can become a term of art on the Government’s mere say-so. It cannot.”

The attorneys also suggest that the ACA’s original language is consistent with Congress’s purposes. Congress wanted to encourage the states to set up their own exchanges, so it put in a carrot of subsidies on these exchanges to persuade them to do so. They write, “Indeed, Congress had not reason to doubt that all (or virtually all) states would establish Exchanges to ensure citizens’ eligibility for subsidies.”

The idea of making tax credits, or funding, conditional on state funding is not new.  In the health field, the Senate HELP Committee bill, a precursor of the ACA, made tax credits conditional on state action. In the failed Clinton health-reform effort, President Bill Clinton sought to use withholding funds as a way of getting states to participate. 

In the transportation area, federal transportation funds were withheld if states did not raise the drinking age to 21 years of age. Between the mid-1970s and the mid-1990s, funds could be withheld if states did not have highway speed limits of 55 miles per hour.

It is impossible to believe that the Justices will not take this Reply Brief seriously. If they should rule for King, what lies ahead?

Writing in the New York Times last weekend, Galen Institute president Grace-Marie Turner and I suggested that Congress consider short-term legislation to help the 6.5 million affected individuals should their subsidies be ruled illegal.

First, Congress could extend the subsidies until the end of 2015, and allow people to keep those subsidies that they have already received.  This would avoid disruption in health care and in insurance markets, whose terms are set months ahead.

Second, Congress could create a new temporary state-based option for continued health insurance coverage beginning in 2016 until it could craft a long-term solution. Its centerpiece would be Health Checks, funded by the government from subsidies that would otherwise flow through the ACA. States would distribute Health Checks to residents to offset the costs of health insurance when the subsidies ended. 

Health Checks funds would be distributed to the states from the government much like the Children’s Health Insurance Program (CHIP) to fund the Health Checks. States know how to manage CHIP, so they would be able to handle Health Checks.  People could spend their Health Checks on any insurance plan approved by the states.

This is one of many proposals that will arise to deal with the potential end of ACA subsidies on the federal exchanges. With the release of the Jones Day Reply Brief and the upcoming Supreme Court hearings, it is essential that Congress focus on the issue and be prepared to take action if the need arises.


Diana Furchtgott-Roth is the director of the Economics21 program at the Manhattan Institute for Policy Research. You can follow her on Twitter here

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