ACA at the Supreme Court: Subsidies Are Here to Stay, Even if SCOTUS Finds for King

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Richard Evans / Scott Hinds / Ryan Baum

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@SSRHealth

June 7, 2015

ACA at the Supreme Court: Subsidies Are Here to Stay, Even if SCOTUS Finds for King

  • Congress cannot repeal the ACA; the President would almost certainly veto a repeal bill, and Republicans lack the two-thirds votes required in both chambers to overturn. (Republicans have 56 percent of House and 54 percent of Senate seats)
  • And, Congress almost certainly cannot pass ‘post-King’ measures that fail to restore subsidies. Assuming all House Democrats oppose the Republicans’ post-King ACA reform measure(s), House Republicans can afford to have no more than 30 of their own number opposing. The trouble here is that 30 House Republicans are from districts in which at least 12% of voting age persons are currently receiving subsidies – so whatever post-King reforms Republicans might pass, ongoing subsidies (although potentially in some different form) almost certainly will be included
  • Congress only gets ‘control’ of the ACA if a sufficient number of states refuse to make their own ‘post-King’ deals with the Administration. It seems reasonably clear that the Administration has options to allow willing states to configure their exchanges so that subsidies continue – but the states have to be willing
  • In the immediate wake of a SCOTUS finding for King, we believe most of the FFM* states would refuse to make deals with the Administration, specifically in order to hand Congressional Republicans an opportunity to pass ACA reforms. However the FFM states’ willingness to give Congressional Republican a shot at ACA reforms only lasts as long as post-King subsidies are extended. If and when the FFM states begin to believe Congress cannot pass reforms in time to ensure subsidies flow uninterrupted, we would expect these states to make deals with the Administration, ending Republicans’ shot at substantive reforms
  • Thus on net, if SCOTUS finds for King, Republicans cannot repeal the ACA, and they almost certainly cannot pass any type of ACA reforms that do not continue subsidies. With very limited time to work, the scope and scale of what can be achieved is severely limited
  • This being said, the Republicans’ draft proposals, once stripped of plainly unworkable clutter (ACA repeal, tort reform, etc.) contain politically and economically feasible reforms which could, ironically, save the ACA’s health insurance exchanges (HIEs) from the very real likelihood of collapse as a result of adverse selection
  • If the Court finds for King, we would view falling share prices for providers (e.g. Hospitals), suppliers of consumable goods to hospitals, and/or insurers as a buying opportunity

*Federally Facilitated Marketplace

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. VRTX, BMY, SNY, ROCHE); Biopharma companies with pending major product approvals (e.g. ALIOF, ALKS, AMGN, BDSI, ENDP, HLUYY, HSP, ICPT, JAZZ, NVS, PTCT, RLYP, RPRX, TSRO, UCBJY, VRTX); ABBV and ENTA on sales prospects in Hep C; SNY on undervalued basal insulin franchise and sales potential for Praluent (alirocumab), in addition to its undervalued pipeline; AZN and LLY on the likelihood that excess SG&A/R&D spending must be reined in, in addition to pending major product approvals; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: Biopharma companies with overvalued pipelines (e.g. GILD, ALXN, SHPG, REGN, CELG, NVO, BIIB); PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX, CTRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS, RAD); Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

Assuming the Court finds for King[1], question 1 is timing. The Court can choose to allow subsidies to continue for a period rather than eliminating these immediately, and precedent exists to support this possibility[2]. Conversely, if the court eliminates subsidies immediately, Congress might feasibly enact a measure allowing the subsidies to continue for a limited time. This option is championed by at least one Republican senator[3], and need not be viewed as a concession on Republicans’ part. To the extent that Republicans want to use a finding for King as a lever for meaningful revisions to the Affordable Care Act (ACA), the Republicans need sufficient time (and voter patience) to engineer and pass something broader and deeper than an emergency subsidies fix

Whatever the timing, question 2 becomes whether the Administration can, without the involvement of Congress, fix whatever the Court finds deficient in the Act; and, whether the Administration’s fix requires states’ cooperation

The Administration’s theoretical options (which do not require state cooperation) include:

  • Arguing that the finding is relevant only to the four plaintiffs[4] (this seems highly unlikely); and/or
  • via regulatory rule-making[5], ‘deeming’ at least some of the FFM’s[6] to be state exchanges (this seems feasible, but might only apply to states which have some material role in their FFM’s). The seven states that operate exchanges with the federal government on a ‘partnership’ basis would be obvious candidates[7], as would the seven FFM states who participate actively in plan management functions[8]

Limitations to ‘deeming’ any of the FFM exchanges to be exchanges ‘established by the state’ include that the designation could be rolled back by any subsequent president; and, that this tactic may only address a subset of the states in question. A further risk is that states may take immediate steps to counteract the effect of the Administration’s designation

If the Administration does not have or cannot make use of alternatives that preserve subsidies without states’ active cooperation, the Administration’s next best options of course become those that require states to play along, but that still do not require action from Congress. The ‘lead a horse to water approach’ requires at least two major steps by the Administration:

  • Allow any willing states to ‘re-banner’ the existing FFM systems and services deployed in that state as a ‘state exchange[9]’, thus minimizing states’ need to raise funds and/or create de novo services and infrastructure; and,
  • lower regulatory hurdles[10] so that states could realistically establish exchanges before the 2016 enrollment deadline (or whatever deadline applies in the event loss of subsidies is temporarily delayed)

These steps ease states’ paths to establishing their own exchanges, but we’re still left with the issue of whether states will want to go along. For sound political (a lot of voters get subsidies[11]) and economic (it’s a lot of money[12]) reasons, we believe all states ultimately want to keep the ACA subsidies flowing – the only questions are how the subsidies are kept flowing, and whether any measures that keep subsidies flowing also result in broader ACA reforms

This leads to question #3: whether necessary reforms will be accomplished wholesale (by Congress) or retail (in multiple separate deals between the Administration and the affected states). The wholesale solution – Congress gets control of the issue and uses the pending loss of subsidies as a lever to force a broad list of revisions into law – can occur only if the retail solution is held at bay. In other words, Congress only gets control of the issue if a sufficient number of states refuse to make their own deals

To get some sense of each state’s politics and economics as they relate to ACA subsidies, we pulled together the data in the Appendices. We consider such variables as: party control of the governorship and either legislative chamber; the margin of victory in the last gubernatorial election: when the governor is up for re-election; the percent of voting age persons who are receiving subsidies; whether the state expanded (or is actively considering expansion of) Medicaid; and, whether the state’s legislature has passed a law requiring legislative approval of a state exchange. We then rank the states, with those at the top being (to our way of thinking) most likely to cooperate with the Administration in a one-off deal to preserve subsidies in that state, and those at the bottom being least likely to cooperate (Exhibit 1)

At the top of the list, Delaware seems quite likely to make its own deal. The state is led by a Democratic governor, has an upcoming gubernatorial election, has a bicameral Democratic majority, expanded Medicaid, and is Vice President Biden’s home state (whom he represented as a US Senator). The only strike against Delaware is that they have a relatively small percentage of voting age persons receiving subsidies

After Delaware, no other state on the list has Democratic control of the governor’s mansion and both legislative chambers. In three states (Montana, New Hampshire, Missouri) the Republican-controlled legislatures have passed laws requiring the states’ Democratic governors to get legislative approval for state exchanges. Illinois and New Jersey both have bicameral Democratic majorities but Republican governors. In the Illinois case the governor won by narrow margin and is up for re-election, making Illinois reasonably likely to deal with the Administration. However in New Jersey, the governor is likely to join the Republican presidential field, and this seems to reduce the odds that he will take steps that conflict with the national Republican agenda before the upcoming primaries. Iowa and Maine have Republican governors and Democratic control of only one legislative chamber. In all but one (Alaska, who has an independent governor) of the remaining 23 states Republicans control the governor’s mansion and both legislative chambers

On net, this looks like a very tough playing field for the Administration, and we doubt more than a third of states would be willing to make independent deals. Because of this, it seems quite likely that Congressional Republicans would inherit responsibility for revising the ACA for a post-King world

Question #4: What is a feasible range of outcomes if and when this gets to Congress? To begin with, we seriously doubt the ACA could be repealed, or that Congress could pass any ACA revisions that failed to replace the subsidies eliminated by the Court’s decision

For political reasons a Republican-led Congress might send a narrow measure to repeal the ACA to the President’s desk, simply to force a veto. Congress lacks sufficient Republican votes to override a veto; a two-thirds majority is needed in both chambers yet Republicans have just 54 percent of the Senate, and 56 percent of the House. So the ACA stands

Whatever changes Congress might make to the ACA, the existing scope and generosity of subsidies is unlikely to be meaningfully reigned in. Nationally, 6.1% of voting age persons will receive an ACA subsidy in 2015 – a significant percentage. However when we consider what it takes to build a coalition in the House behind any ACA reform measure, the impact of voting age persons currently receiving subsidies becomes even more important. Imagine for a moment that Republicans put forward a bill eliminating, or dramatically reducing, future subsidies. We can expect all or very nearly all of the 188 House Democrats to oppose the measure, but if all 245 Republicans support the bill it would pass. The trouble here is that many of the Republicans would be voting to eliminate (or dramatically reduce) subsidies received by very large percentages of their voters. In Exhibit 2, we list Republican House members (from FFM or partnership states) in descending order according to the percentage of voting age persons in their districts who currently receive ACA subsidies. To keep its simple majority behind any ACA reform measure, the House Republicans can afford to have no more than 30 members break ranks. Working from the top of the list down, this means that to pass a Republican measure eliminating or limiting subsidies, 30 House Republicans having between 32% (Ros-Lehtinen, R-FL) and 12% (Crenshaw, R-FL) of their voters currently receiving subsidies, would have to vote to eliminate those subsidies. It’s just not going to happen

Question #5: So if the ACA and the subsidies both survive, what’s the likely scope of Congressional action? Paul Ryan, John Kline and Fred Upton[13], in a WSJ editorial published March 2, provided a preview of at least one emerging outline for reform[14]. In the editorial these three Republican House committee chairmen proposed (following ACA repeal) to: loosen minimum coverage requirements to create a wider range of plans; allow states to opt out of individual and employer mandates; allow the sale and purchase of health insurance across state lines; allow small businesses to band into buying groups; and – of course – medical tort reform. The authors proposed to keep provisions such as kids’ eligibility under parents’ insurance policies until age 26, no lifetime limits, no medical underwriting, and guaranteed renewability. A prominent feature of the author’s proposed changes is to allow tax credits (a.k.a. subsidies) for people ‘in the affected states’, and to vary the size of tax credits by age – with higher credits going to older persons

More recently, the Republican Study Committee (RSC) issued its proposed legislation[15]. The RSC consists of 168 (of the elected 245) House Republicans, including Ryan and Kline (but not Upton). The draft legislation repeals the ACA, establishes a standard federal tax deduction for health insurance[16]; limits guaranteed availability to persons who can demonstrate continuous coverage; establishes state risk pools for high-risk persons who cannot otherwise obtain coverage[17]; allows the sale and purchase of health insurance across state lines; and, reforms medical torts. The RSC draft also favors health savings accounts (HSAs); establishes a $15B, 8 year ‘Medical Breakthrough Fund’; and, repeals the Federal Coordinating Council on Comparative Effectiveness Research (FCCCER)

Ignoring the unrealistic common denominators (ACA repeal and tort reform) between the WSJ editorial and the RSC draft, we’re left with a reasonably strong indication that Republicans would seek to:

  • reform (rather than replace) subsidies for persons buying health insurance;
  • ease or eliminate individual and employer mandates;
  • ease the definition of a qualified health plan (QHP), thus allowing plans with narrower scopes of coverage;
  • limit the ACA’s guaranteed issue requirements to persons who can prove continuous coverage;
  • enable small employer buying groups;
  • enable the sale and purchase of health insurance across state lines; and,
  • eliminate various politically susceptible programs brought into existence by ACA (e.g. the FCCCER, IPAB[18], etc.)

This is hardly a destructive list. Ignoring that the specific numbers proposed around the Republicans’ standard health care deduction are unworkable[19], the core idea (a means of favoring health insurance coverage using the tax code that works whether or not you’re employed) is both politically and economically workable

Republicans’ proposed modifications to the individual mandate and guaranteed issue provisions also seem politically and economically feasible. The individual mandate is wholly unpopular, but in the context of the current insurance market it is also wholly necessary, because it (weakly) helps to offset the incentive to wait until you think you’ll need insurance to buy it, since you can buy at the market rate regardless of your health status. The Republican alternative is to allow insurers to refuse coverage to persons who have not been continuously insured. In the real world ‘mainstream’ coverage would still be available to the healthy, but insurers would deny coverage to those who were ill. On balance, this creates a strong incentive to maintain consistent coverage, and substantially lessens the adverse selection pressures that already threaten the long-term viability of the ACA’s health insurance exchanges (HIEs)

The Final Crucial Variable: Time

Congressional Republicans’ shot at restructuring the ACA is time-constrained to whatever period the existing subsidies are allowed to continue. If it begins to appear that Congress cannot pass an ACA reform package before the ‘pre-King’ ACA’s subsidies run out, many of the states who were willing to forego deals with the Administration and give Congressional Republicans control of the issue will come under intense pressure to make deals with the Administration – and in all likelihood will make such deals

  1. A finding for King would mean that federal subsidies for the purchase of health insurance on the ACA’s health insurance exchanges would, without further intervention by the Administration and/or Congress, stop flowing to the 34 states that did not establish ‘state exchanges’.
  2. In an exchange with the Administration’s Solicitor General Donald Verrilli, Justice Alito suggested the Court could stay its mandate until the end of the tax year, as the Court has done in other cases. In this comment Justice Alito referenced Northern Pipeline as an applicable precedent. Verrilli agreed with Alito. (official transcript, pg. 53, lines 1 thru 10
  3. http://www.wsj.com/articles/ben-sasse-a-first-step-on-the-way-out-of-obamacare-1424908814
  4. http://www.nytimes.com/2015/03/17/opinion/could-obama-bypass-the-supreme-court.html
  5. http://www.yalelawjournal.org/forum/no-good-options-picking-up-the-pieces-after-king-v-burwell
  6. FFM = ‘Federally Facilitated Marketplace’
  7. See Nicholas Bagley’s arguments at:
    http://www.yalelawjournal.org/forum/no-good-options-picking-up-the-pieces-after-king-v-burwell
    ; the seven partnership states are: AR, DE, IL, IA, MI, NH, WV
  8. ME, VA, OH, KS, NE, SD, MT
  9. We’re aware of language in ACA section 1311 stating that ‘each State shall, no later than January 1, 2014, establish an American Health Benefit Exchange’; and of arguments that imply states cannot establish exchanges after this date. Our sense of the legal consensus is that the effect of the date in section 1311 is to trigger the federal exchange as a fallback option, rather than to preclude a state from ever establishing its own exchange
  10. Specifically, the so-called ‘Blueprint’ issued by HHS, which outlines requirements for state-based exchanges, would have to be revised, especially as it relates to timelines
  11. At current enrollment, 6.1% of voting age persons are receiving subsidies in the 34 states with FFM’s or ‘partnership’ exchanges; ranging from a low of 2.9% (Ohio) to a high of 15.6% (Florida)
  12. The average annual subsidy is roughly $3,264 per person
  13. Ryan is Chairman of the House Ways and Means Committee; Kline is Chairman of the House Education and Workforce Committee; Upton is Chairman of the House Energy and Commerce Committee
  14. “An Off-Ramp From ObamaCare”, WSJ, March 2, 2015
  15. http://rsc.flores.house.gov/uploadedfiles/roe_007_xml.pdf
  16. The ‘SDHI’, $7,500 for individuals or $20,500 for families, regardless of age or income
  17. Premiums in the state-based risk pools are limited to 200% of premiums outside of the risk pools
  18. Independent Payment Advisory Board
  19. The proposed numbers would almost certainly reduce absolute dollar subsidies to the poor and raise dollar subsidies in the middle- and possibly upper middle-classes
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