Gaming Out the Scenarios in King v. Burwell

The case has the potential to invalidate substantial subsidies now being provided by federal taxpayers to millions of Americans using federal exchanges in 37 different states. Given the uncertainty created by the pending case, legislators on both sides of the aisle are considering how to react to various possible scenarios arising from a court decision.

Earlier this year the U.S. Supreme Court heard arguments in King v. Burwell, a case critical to the future of the Affordable Care Act (ACA, or so-called Obamacare). Readers interested in the details of the case should find them elsewhere. Suffice it to say here that the case concerns whether individuals can receive tax credits for buying health insurance on exchanges established by the federal government, though the text of the ACA indicates such subsidies are provided for those buying coverage through an “exchange established by the State.”

The case has the potential to invalidate substantial subsidies now being provided by federal taxpayers to millions of Americans using federal exchanges in 37 different states. Given the uncertainty created by the pending case, legislators on both sides of the aisle are considering how to react to various possible scenarios arising from a court decision. The House and Senate each recently passed budget resolutions allowing budget targets to be revised in the event of subsequent legislation modifying the ACA. The Senate resolution specifies that such legislation must be deficit-neutral.

There is not space here to review all of the complexities of the ACA pertaining to King v. Burwell. The case matters because if the subsidies are struck down, millions of Americans covered by the ACA might conclude they can no longer afford health insurance and decline to carry it. This would frustrate the realization of the ACA’s insurance coverage goals, likely cause premiums to soar, and destabilize exchanges in affected states. On the positive side, such a decision could ameliorate the ACA’s problematic fiscal effects. Scholars at the Urban Institute (UI) have estimated a decision for the plaintiffs would eliminate $340 billion in ACA spending over ten years. By coincidence $340 billion happens to be the same amount by which the ACA was estimated to worsen federal deficits over its first ten years relative to prior law (though not the same ten years because the time window has since shifted). A decision for the plaintiffs will almost certainly lead to calls for lawmakers to extend the subsidies to federal exchanges, despite the cost of doing so.

Jim Capretta and Yuval Levin have written that if the Supreme Court rules for the plaintiffs, Congress should take the opportunity to pass legislation creating an “off-ramp” from the ACA into “a far simpler and more flexible system.” Theirs and other ideas are worthy of consideration, but this piece deals only with the narrow question of what circumstances might cause lawmakers to expand the tax credits themselves. The scenarios that could play out fall into four broad categories.

Scenario #1: SCOTUS rules for the defense; the subsidies are upheld. If the Supreme Court rules that tax credits can be provided for the federal exchanges, this essentially means a continuation of the status quo. It won’t mean the end of legislation pertinent to the ACA – lawmakers must still consider how the ACA should be modified – but judicial decision will have created no new reason for legislative action.

Scenario #2: SCOTUS rules for plaintiffs, striking down the subsidies, but there is broad acceptance of an Obama Administration-devised “workaround.” Capretta and Levin have written that if the administration loses the case, it “will almost certainly develop a workaround for the states, allowing them to designate and use the federal exchange as if it had been built by the states. This would give administration officials a justification to continue paying federal subsidies in the states agreeing to the workaround, even if it were legally questionable.” If such a workaround were deemed illegitimate by a significant portion of the body politic, the legal and political wrangles over the ACA’s subsidies would continue. If, however, it is widely adopted as a legal if inelegant solution, then as in scenario #1 there would be no need for lawmakers to consider legislation expanding the subsidies to federal exchanges. Indeed, under this scenario new legislation would be actually more likely to constrain rather than expand such subsidies, in reaction to the administration’s action.

Scenario #3: SCOTUS rules for plaintiffs and states unanimously signal they will create exchanges. The primary concern expressed by the ACA’s advocates is that a ruling for the plaintiffs would have the intolerable result of cutting off low-income people from necessary subsidization of their health insurance. If that view is widely shared, then all states would be expected to create exchanges rather than allow this outcome. While this would be a significant administrative hassle for many states, it would not by itself create a necessity for federal lawmakers to expand the subsidies.

The point of this review is that under all three scenarios above, legislative action to expand the subsidies to cover federal exchanges would be unnecessary. The only scenario in which lawmakers need consider such an action would be a fourth one:

Scenario #4: SCOTUS rules for plaintiffs and some states decline to establish their own exchanges. In this scenario the first step Congress must take is to get a new Congressional Budget Office (CBO) estimate of the ACA’s coverage expansion costs. To date CBO has been assuming individuals in every state will receive the subsidies, whether their state creates an exchange or not. If that ceases to be true then the cost of the ACA will be lower than previously projected. Relative to such an updated estimate, expanding the subsidies could potentially add hundreds of billions of dollars in deficit-financed costs ($340 billion, per the aforementioned UI estimate).

This situation would create a conflict between coverage expansionists, who will want to extend the subsidies to federal exchanges, and fiscal conservatives, who will not want to add more spending to the law. The natural compromise between these positions would be to pay for such an expansion by reducing the scope of the subsidies in states where they already exist. This would not only be a rare example of bipartisan compromise concerning the ACA, it could also serve the additional purpose of addressing other problems with the subsidies’ current design (see for example Casey Mulligan’s important findings about the ACA’s detrimental effect on employment).

The following imaginary conversation summarizes this dynamic:

SCOTUS: “The ACA does not permit subsidies in federal exchanges.”

Congress to CBO: “Give us new estimates reflecting this development, making your best guess of how many states will now create exchanges.”

CBO: “Here are our best estimates. Some states will create exchanges, some won’t.”

Expansionists: “This is an outrage, we need to fix this.”

Fiscal conservatives: “We’re unwilling to spend more than this law already does.”

Expansionists: “We must act or millions of people will lose their health insurance.”

Congressional leadership: “Propose a solution and we’ll consider it.”

Expansionists: “Expand subsidies to federal exchanges.”

Fiscal conservatives: “Non-starter. That would add hundreds of billions to the law’s costs.”

Compromise advocates: “Pay for expansion by reducing the subsidy amounts in states where they now operate. For example, if one-third of the affected population is in states that won’t build their own exchanges, reduce the subsidy amounts by one-third but expand them to include everyone."

Fiscal conservatives: “I don’t like it. I’m not comfortable blessing the ACA’s subsidized expansion in any form.”

Expansionists: “I don’t like it either. The subsidies won’t be as generous as we originally intended.”

Compromise advocates: “That’s why it’s a compromise. Expansionists will get subsidized coverage in every state, and fiscal conservatives need not add to the ACA’s subsidy costs. Plus, now that it’s widely known that the original design of the subsidies was flawed and is harming employment, we can ameliorate that, too, killing two birds with one stone.”

Whether such a compromise can be brokered remains to be seen. If the court rules for the plaintiffs, expansionists will initially argue to just expand the subsidies irrespective of the new budget baseline. Their first preference will be to add the spending to the deficit, second to raise taxes, and third to cut other spending – all before dealing with the subsidy amounts themselves.

Nevertheless, Congress’s first step after such a decision should be to have CBO re-score the law and establish a new budget baseline. Within that framework, lawmakers should strive to broker a solution that maintains equity for individuals in different states, eases the law’s problematic effects on employment, and does not add to the updated cost of the law’s subsidy provisions. If nothing else, lawmakers should be forthright with the public about whether they favor adding new subsidy costs to the deficit, or limiting total subsidy costs to be no higher than what arises from the court’s decision. The ACA is already putting excessive pressure on taxpayers and on the rest of the federal budget. Lawmakers shouldn’t allow it to add any more.