Behind the Lawsuit that Could Upend the Affordable Care Act Exchanges

By Kevin Rizzo | April 24, 2017

After Republicans’ first attempt to swiftly repeal and replace the Affordable Care Act failed, President Donald Trump finds himself in a difficult position: he has to administer a law that he has frequently called a “disaster.” The question now becomes: will President Trump and Tom Price, his Secretary of Health and Human Services, try as hard as possible to support the law that’s already on the books or will they take steps to undermine it?

As Republicans continue to try to broker a compromise between their more moderate and conservative wings–and there’s at least some evidence they are making progress–questions about the existing law may need to be answered before any new legislation makes its way to the president’s desk. While many of these pending decisions are somewhat small or would require a long time before taking effect, there’s one relatively arcane component of the Affordable Care Act–cost-sharing subsidy payments–that could swiftly pull the rug out from under the health insurance exchanges that about 12 million people rely on for health insurance. Read on for an overview of the Affordable Care Act exchanges and to see how a pending lawsuit gives President Trump unique control over the fate of a major part of his predecessor’s landmark accomplishment.

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An Overview of the Health Insurance Exchanges

The Affordable Care Act, more commonly known as Obamacare, is an extraordinarily long piece of legislation that touched almost every part of the U.S. health care system–an industry that accounts for nearly one-fifth of the entire economy. One of the law’s primary goals was to lower the number of people without health insurance coverage. To do this, the law dramatically increased the number of people on Medicaid–the government-run health insurance program for low-income Americans–by expanding outreach and eligibility to a larger number of Americans. It also created federal and state-run health insurance exchanges on which people who do not get health insurance through their employer and also don’t qualify for Medicare or Medicaid can buy health insurance. While most of the coverage gains came from expanding Medicaid, creating regulated exchanges and offering subsidies made health insurance available to groups who previously did not have access to it on the individual market, notably those with preexisting conditions.

Individuals could buy health insurance before the Affordable Care Act’s passage, but insurers could charge people with chronic health conditions a lot more for insurance and could even deny coverage outright. The ACA introduced significant marketplace reforms to ensure that all insurance plans offered on the exchanges cover a minimum set of services, known as the 10 essential benefits, and prevented companies from denying anyone coverage because of a preexisting condition. The law also included provisions that prohibited charging people higher premiums based on certain characteristics like gender or health status. For other characteristics, the law set specific ranges at which companies can use to price premiums. For example, companies can charge no more than three times as much for their elderly customers as they can for their youngest customers.

The law had a number of provisions to try to make the marketplaces stable for insurers and consumers. One of the most discussed (and controversial) market stabilization components of the law is the individual mandate–the requirement that everyone get health insurance or pay a tax penalty. To help make insurance affordable for consumers, the ACA provided premium subsidies to people making less than 400 percent of the federal poverty line. The premium credits are tied to a benchmark plan to ensure that an individual or a family’s healthcare spending is capped at a certain percentage of their income. This means that if insurance premiums change dramatically from one year to the next then the subsidy will also adjust for those who are eligible. Finally, the law also had several stabilization programs that sought to reduce the risk that insurers would face when beginning to sell plans on the new exchanges.

Cost-Sharing Reductions

One of the many ways the law sought to make care affordable for low-income Americans is the cost-sharing reduction requirements. The cost-sharing reduction provision is relatively small in the overall scope of the law, but remains an important component because it addressed costs that people face when going to get care. In addition to premiums, health insurance plans typically include several forms of cost-sharing, which involve out-of-pocket costs when someone visits the doctor or fills a prescription. The Affordable Care Act sought to reduce these costs for people with incomes up to 250 percent of the federal poverty level. People who are eligible for cost-sharing reductions must enroll in silver insurance plans, the middle tier plans, on the insurance exchanges. Based on an eligible consumer’s income, insurers adjust the value of the plan to ensure that they cover a certain percentage of all costs. The government then provides a subsidy to insurers so they recoup those costs. A typical silver plan has an actuarial value of 70 percent, meaning that the insurance company will, on average, pay 70 percent of the cost for covered services–the other 30 percent typically comes through different cost-sharing. In plans eligible for cost-sharing reductions, the actuarial value of a silver plan increases based how close a person or family is to the federal poverty level. For the lowest income Americans who buy insurance on the exchanges, the actuarial value goes as high as 94 percent.

This year there are 7.1 million Americans who have plans with cost-sharing reductions, accounting for 58 percent of all plans on the exchanges. The total cost of the subsidies provided by the government is about $7 billion each year. This process–in which insurers are required to reduce cost-sharing for certain low-income customers and then the government subsidizes the insurers–is key to understanding the current challenge, which we’ll get to in the next section.

It’s worth noting that the law was not implemented exactly as it was designed, as legal and legislative obstacles played a significant role in the way the law took effect. Additionally, while the law has many provisions to reduce the burden on insurers and consumers, there are a number of local marketplaces that are particularly fragile at the moment. Several insurers have pulled out of the exchanges and there are several counties where people buying insurance on the health exchanges have only one insurance plan to pick from. At the same time, there are several places where the exchanges have been particularly successful–where strong competition between insurers has created a stable market for consumers. Debating the overall success of the Affordable Care Act and what should be done going forward is clearly important, but that is beyond the scope of this piece. What is clear is that the law led to a significant legal and political backlash, which brings us to the next part of the story.

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The Lawsuit

The passage of the Affordable Care Act sparked a number of legal challenges, several of which have made their way to the Supreme Court. But the lawsuit that is the most important right now is the one challenging the cost-sharing subsidies. Interestingly, this lawsuit didn’t come from private citizens, small businesses, or religious institutions, but from another branch of the government.

In November 2014, Republicans in the House of Representatives filed a lawsuit against the executive branch to challenge two aspects of the ACA’s implementation. The lawsuit first argued that President Obama overstepped his constitutional authority by delaying the implementation of the employer mandate–a requirement that companies of a certain size must provide health insurance for their employees or pay a fine. Second, it claimed that the Obama Administration’s payments to insurers for the cost-sharing subsidies were illegal because the money had not been properly appropriated. A federal judge dismissed the first claim but allowed the second to proceed.

The Arguments

Both sides of the lawsuit agree that money cannot be spent unless it is properly appropriated, but the dispute focuses on the question of whether or not the current law amounts to an appropriation. House Republicans argue that although the ACA created the subsidy, the payments are not linked to a specific appropriation. Although the law calls for the payments to be paid, it doesn’t specify a source for the payments. This is not the case for the law’s premium subsidies, which are paid out in the form of refundable tax credits and are appropriated by the statute that allows the IRS to make refund payments. When the issue first emerged, President Obama asked Congress for a specific appropriation but Congress declined. After the lawsuit began, the Obama Administration argued that the same appropriation that is used for the premium subsidies can be used to make the subsidy payments to insurers.

Nicholas Bagly, a law professor and health care expert at the University of Michigan, has studied the implementation of the Affordable Care Act and argues that the Republicans’ lawsuit has a point. The justification used by the Obama Administration doesn’t quite make sense because tax credits are not the same thing as direct payments to insurance companies. As Bagley puts it, “It’s an enormous stretch to read an appropriation that governs refunds for individual taxpayers as also covering payments to insurers.” However, he also argues that the Republican lawsuit should have been thrown out by the courts in the first place. The White House and Congress are two coequal branches of government and they have the authority to resolve the dispute between themselves. If Congress has a problem with something the president is doing, it can pass a law that stops him from doing it. Congress could also pass a law appropriating the funding for the cost-sharing payments and the problem would be resolved. Allowing one branch to take an issue with another branch to the courts could set a problematic precedent as political disputes should ideally be resolved by elected officials.

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What’s Next and Why It’s Important

After the district judge’s initial ruling–which allowed the cost-sharing subsidy claim to continue but dismissed the employer mandate claim–a separate ruling in 2016 ordered President Obama to stop making the payments. Obama immediately appealed the decision and the judge stayed her ruling so the White House could appeal. This means that right now, if President Trump decided to stop reimbursing insurers for cost-sharing reductions, he could drop the appeal and the judge’s injunction blocking the payments would stand. Doing so would have massive consequences for the fate of the health insurance exchanges. This is also something that the president has publicly considered, but the fate of these payments remains unclear.

On April 10, the Department of Health and Human Services told the New York Times that it planned to continue making the cost-sharing payments to insurers while the lawsuit was being litigated. But a few days later, in an interview with the Wall Street Journal, Trump said that he would consider withholding the payments as a way to force Democrats to negotiate on health care legislation. This was, in effect, a threat to undermine the insurance markets as a way to force a deal. Democrats have also reportedly considered demanding a specific appropriation for the payments for their support in a funding bill that will be needed before the end of April to avoid a government shutdown. While the politics of the issue remain unclear, the ultimate effects that ending the payments would have are fairly clear.

Consequences for Health Insurance Markets

Ending the cost-sharing subsidy payments would have dramatic consequences for the individual health insurance market. Ending the payments would not change the fact that insurers who sell plans on the exchanges would still need to provide cost-sharing reductions for customers who qualify–whether they get reimbursed by the government or not. The Kaiser Family Foundation, a non-partisan organization that analyzes health care policy, estimated that average premiums would need to increase by 19 percent to offset the lack of government funding. These estimates varied by location, ranging from a projected 9 percent increase in North Dakota to a 27 percent in Mississippi. Alternatively, insurers may simply leave the exchanges altogether.

After several insurance companies had difficulty turning a profit in the early years of the ACA’s implementation, several companies decided to stop selling plans in many markets. The current uncertainty surrounding the cost-sharing payments and health care policy more generally, could lead many companies to pull out from the exchanges. Trade groups have already started to warn lawmakers that blocking the payments may cause insurers to drop out of the markets. By June 21, all health insurers will need to decide whether or not they plan to sell insurance on the ACA exchanges next year. This year there are more than 960 counties in the country with just one insurer offering to sell plans on the exchanges, and if companies decide to pull out, several markets could collapse altogether.

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Conclusion

As Republicans continue their efforts to repeal and replace the Affordable Care Act, President Trump may need to make decisions about the current law before he has an opportunity to sign a new law overhauling it. Arguably the most pressing of these challenges is what to do about the lawsuit challenging the cost-sharing subsidy payments. Trump could decide to stop the pending lawsuit and block the payments almost immediately, throwing exchanges that provide insurance to 12 million Americans into chaos. He could continue the current policy–allowing the appeal to move forward and payments to be made to insurers–or he could ask Congress to appropriate the required funding and resolve the issue once and for all.

In the meantime, the subsidy payments will continue to play an important role in legislative negotiations, particularly the funding bill needed to keep the government open past April 28. Meanwhile, insurers must deal with uncertainty as they decide if they want to continue to sell plans on the state and federal exchanges. While much remains in question, the end result will largely be the product of Congressional politics. Both parties seem to think they have the upper hand–assuming the other will be blamed if subsidy payments are blocked and insurers hike premium prices or leave the markets altogether.