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Change Is Coming to Obamacare?

Posted on July 28, 2014


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Josh Schultz works in New York City helping elderly and disabled people access health insurance and afford health care. He welcomes comments about this article or suggestions for future topics. This post consists of only his own views, and will be cross-posted to the American Emerging Local Government Leaders network under his column, “Taking Triple Aim on Health Care.”

Halbig v. Burwell Could Change the Politics of Obamacare

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By Josh Schultz, LinkedIn and Twitter

July 28, 2014

The health policy world is spinning over back-to-back federal appeals court rulings Tuesday.

Tuesday’s rulings were followed by the discovery and circulation of 2012 video and audio recordings showing Obamacare technical advisor Jonathan Gruber apparently confirm the Republican litigants’ position that the premium assistance tax credits at the heart of the federal lawsuits – and in many ways at the heart of the Affordable Care Act – shouldn’t be available to people who sign up for coverage on HealthCare.gov. Political leaders in states that didn’t establish their own health insurance marketplaces should be wary of the week’s developments, because the people who stand to lose most from this litigation are a different group of constituents than the poorest of the poor who lost out when Republican political leaders refused to expand Medicaid. In political terms, people living in HealthCare.gov states who stand to lose their premium tax credits actually matter.

[youtube http://www.youtube.com/watch?v=GtnEmPXEpr0]

Skip to 31:52 to hear Gruber speak about state-established exchanges and ACA tax credits.

Political leaders in states that didn’t establish their own health insurance marketplaces should be wary of the week’s developments, because the people who stand to lose most from this litigation are a different group of constituents than the poorest of the poor who lost out when Republican political leaders refused to expand Medicaid. In political terms, people living in HealthCare.gov states who stand to lose their premium tax credits actually matter.

Issue

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Health insurance premium assistance tax credits make Obamacare coverage affordable for most low- and moderate-income people in the 36 (going on 41) states using HealthCare.gov. These tax credits may be illegal, according to two Republican-appointed judges on a federal appeals court panel.

In July 2014, the U.S. Court of Appeals for the D.C. Circuit invalidated portions of a 2011 Internal Revenue Service rule that allowed HealthCare.gov to issue Obamacare premium assistance tax credits to people enrolled in private health plan coverage in states that opted out of setting up their own health insurance marketplaces, or exchanges. The D.C. Circuit’s decision will end up being stayed pending a review by all 15 judges on that Court, and is unlikely to go into effect until and unless the U.S. Supreme Court reviews the rule and sides with the Republican litigants. Everything won’t end up playing out until 2015 or later, by which time many millions of additional people – including Republican politicians and the people who vote for them – will have enrolled in private health plan coverage through HeatlhCare.gov with the help of premium assistance tax credits.

Why did Obamacare create premium assistance tax credits?

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From World War II through the enactment of the Affordable Care Act in March 2010, the United States has relied on employer-sponsored insurance as the means by which the vast majority of non-elderly people get their health insurance. Under the employer-based system, employees, their spouses and children receive coverage through an employer group plan. The employer contribution to employer-sponsored coverage is tax deductible for the employer and tax-free income to the employee. Importantly, while most tax deductions and exemptions are excluded only from a person’s federal taxable income, employer contributions toward the cost of employer-sponsored insurance are shielded not only from federal income taxes, but they are also exempt from Social Security and Medicare payroll taxes.

This method for obtaining health insurance for the non-elderly provides outsized benefits to employed people and their families, particularly in households with higher incomes because of the progressive structure of our federal income tax rates. The tax treatment of employer sponsored insurance cost federal taxpayers $250 billion dollars in reduced federal revenues and lower lifetime Social Security benefits in 2013 alone, according to the Congressional Budget Office. For people who don’t have access to affordable health insurance that meets minimum coverage requirements through their work, Obamacare allows them to purchase health insurance and receive premium assistance tax credits to help with the cost of coverage. In doing this, the Affordable Care Act extended some of the preferred tax benefits previously available only to people with employer-sponsored insurance, to people without access to job-based coverage. Opponents argue that Obamacare’s extension of preferred tax treatment for health insurance to people without good job-based coverage is only valid in states that build and run their own health insurance marketplaces.

What’s the basis for the lawsuit?

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Eighteen days after the Supreme Court upheld much of the Affordable Care Act in June 2012 on the grounds that the law’s individual mandate requiring non-exempt Americans to carry health insurance falls within Congress’s power to tax, two conservative lawyers published a working paper entitled “The Illegal IRS Rule to Expand Tax Credits Under the [ACA].” They drew attention to a provision of the law defining the maximum amount of a person’s Obamacare premium assistance tax credit by referencing the cost of the second cheapest mid-level plan a person could enroll in “through an exchange established by the state under section 1311 of the [ACA].” Section 1311 is the part of Obamacare requiring states to build their own health insurance marketplaces and providing them with unlimited federal funding (through December 2014) to do so.

In what the Republican litigants see as a contrast to what the plain text of the Affordable Care Act allows, the IRS decided to let people receive premium tax credits regardless of whether they enrolled in Obamacare through a state-established or a federally-facilitated exchange, or marketplace. That IRS rule was the subject of the two federal lawsuits decided last week. It turns out that Obama Administration adviser Jon Gruber, an influential MIT economist who also helped design Massachusetts’ RomneyCare program, has been found on video at a 2012 lecture stating that premium tax credits are intended to be available only to people who buy Obamacare coverage through private plans in states that establish their own insurance marketplaces, and not to people enrolling through the federally-facilitated HealthCare.gov marketplace.

Re-Enrollment

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People living in one of the states with failed or only partially-functional health insurance exchanges – that is, Oregon, Maryland, Nevada, Minnesota, and (somewhat ironically) Massachusetts – may find themselves re-enrolling in Obamacare coverage and renewing their premium assistance tax credits through the federal HealthCare.gov marketplace starting in November. Because these five states will continue to have state-based exchanges for at least the remainder of 2014, Obamacare enrollees can be confident in their ability to access premium tax credits this year. Continuing coverage and tax credits into next year, however, may require a transition to using the HealthCare.gov website application and the move may be disconcerting. After all, two judges on the United States’ most important federal appeals court found that it is illegal for people in states with federally-facilitated marketplaces to receive premium tax credits.

Without the tax credits, Obamacare falls apart.

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The affordability of Obamacare coverage for low- and moderate-income people hinges on the tax credits. So does the individual mandate in most cases, because people for whom health insurance isn’t affordable – that is, low- and moderate income people who if this lawsuit prevails will be barred from receiving premium tax credits because their state didn’t establish its own insurance marketplace – are by law be exempt from Obamacare’s individual mandate to carry health insurance. Without a broadly-applicable individual mandate, only the sickest people would apply for coverage, driving up premiums in the states using HealthCare.gov to the point where few can afford coverage and insurers begin dropping out of the market.

The Affordable Care Act’s separate, twice-delayed requirement that large employers offer affordable health coverage that meets certain value requirements is also tied in a significant way to the availability of premium assistance tax credits. This is because one of the two types of penalties that will be levied on employers subject to Obamacare’s employer mandate who don’t offer affordable health coverage that meets minimum requirements can only be triggered – and the requirement for employers enforced – when an employee at a firm that doesn’t offer affordable coverage that meets the law’s requirements obtains premium tax credits through an insurance exchange. If premium tax credits are only available in states that build and operate their own marketplaces, but not in the 36 states (going on 41) that use HealthCare.gov, then at least part of the employer mandate can’t be applied in those states. This would mean even more people could go without access to affordable health insurance.

Halbig v. Burwell: Changing the Politics of Obamacare

Table: Reduced Costs on Health Insurance (h/t HealthCare.gov). Note the bottom row – people who “don’t matter” – and then look at the top row – people who could loose their tax credits and insurance that they already have, like, and want to keep.

When the Supreme Court ruled in June 2012 that Obamacare’s requirement that states expand Medicaid coverage to non-elderly adults earning up to 138% of the federal poverty level was toothless and states could opt out of the expansion, most Republican states chose to do so. People in those states who stand to gain most from Obamacare’s Medicaid expansion earn less than the federal poverty level, or about $1,000 per month for a one-person household. Most people below the poverty level in states not expanding Medicaid are barred from accessing premium tax credits because Obamacare’s authors assumed that instead of subsidized private coverage, the lowest income non-elderly adults would have Medicaid coverage instead. Before Obamacare, able-bodied adults in most states who earned less than the poverty line didn’t have access to any health coverage. Instead of taking away something from people who already had it, Republican governors and legislators were withholding Medicaid coverage from people who were uninsured before Obamacare. Many of these people still don’t know they lost out on the opportunity to receive free or low-cost medical coverage.

Not so for the lower- to moderate income people living in states that refused to establish health insurance marketplaces.

Figure 3: In states that do not expand Medicaid under the ACA, there will be large gaps in coverage available for adults.

Many of these low- to moderate-income people are currently receiving premium assistance tax credits under the IRS’ interpretation allowing those tax credits to flow through HealthCare.gov. Those people, who have household incomes between $11,490 and $45,960 per year for a single-person, or between $23,550 and $94,200 per year for a family of four, would face unaffordable premium costs for health insurance in states that don’t establish their own insurance marketplaces if the Republican litigants’ interpretation of Obamacare is upheld.

Unlike many of the lowest-income people to whom Republican governors and legislators refused to expand Medicaid and who still lack insurance as a result, low- to moderate income people in Republican-led states are currently accessing and affording health insurance through HealthCare.gov with the help of financial assistance from premium tax credits. These are the people who stand to lose most from the lawsuits. Many had health insurance before the Affordable Care Act, but lost their pre-Obamacare private insurance plans when those plans were cancelled after failing to measure up to the new law’s coverage standards and requirements. When people lost their pre-Obamacare insurance plans, most enrolled in new coverage and they often did so through HealthCare.gov, where they received premium assistance tax credits.

While nothing will be decided for at least another year and HealthCare.gov will continue issuing premium tax credits in the meantime, this litigation has the potential to change the political dynamics of Obamacare. Republican governors and legislators who refused to establish state-based marketplaces may hear from worried constituents who enrolled in Obamacare coverage that they like, with the help of tax credits that they can’t afford to lose. Political leaders who previously refused may now decide to work toward establishing state-based insurance marketplaces so that premium tax credits continue to flow to their political constituents who matter most.

Supplemental reading: Charles Gaba on some inexpensive Halbig v. Burwell workarounds

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