D-Day For Healthcare – Three Potential Outcomes Of U.S. Supreme Court Ruling by Harlan Sonderling, Columbia Threadneedle Investments

  • The Supreme Court is about to rule on whether to uphold tax subsidies for individuals buying health insurance on the 34 federally administered state public health exchanges.
  • Congress and the Department of Health and Human Services will have to scramble to respond to invalidation and respond quickly to enrollees, providers and payers.
  • Hospital, managed care and other healthcare companies may also have to scramble to respond to the Supreme Court ruling.

Get ready for a momentous week in healthcare. The Supreme Court will rule by the end of June in King vs. Burwell on whether to uphold tax subsidies for individuals buying health insurance on the 34 federally administered state public health exchanges under the Affordable Care Act (ACA). Subsidies to enrollees on state-run exchanges are not under consideration. However the Court rules, there are likely to be judicial, legislative, regulatory and insurance market responses. Regardless, healthcare stocks will react, of course, particularly those of hospital and managed care companies.

Thirty-four states (including Washington, D.C.) use the federal exchange to operate their health insurance markets. Fourteen states are fully operating their own market. Three states are approved as state-based markets, but use the federal exchange for subsidy eligibility and enrollment. Subsidized enrollees are 87% of total 2015 enrollees in states using the federally run market. The ACA section under review is the wording in Section 1402 stating that subsidies are available in exchanges “established by the states.”  The Supreme Court must interpret whether this precludes states from using the federal platform, healthcare.gov, to operate their exchange.

Possible outcomes are:

  1. Side with the government (Burwell) and retain federal subsidies, continue the status quo.
    2. Side with the plaintiff (King) and invalidate federal exchange subsidies, though likely not for several months. Congress or the Department of Health and Human Services (HHS) will have to devise a replacement plan for the more than seven million people receiving subsidies. Their health insurance coverage does not cease, only their subsidies.
    3. So-called Medicaid interpretation of maintenance of effort (MOE); that is, the Court rules that federal exchange states cannot alter Medicaid eligibility requirements and/or pay rates, effectively returning the law to Congress for revision.

Congress and HHS will have to scramble to respond to invalidation and respond quickly to enrollees, providers and payers. Both political parties will be under enormous scrutiny. Republicans fear the political fallout if millions lose their health insurance subsidies. Democrats fear the conclusion that ACA is a failure. The Republican-controlled Congress will consider “bridging plans” to extend federal exchange subsidies through 2016 to give states time to create their own health insurance markets. The House or Senate may act first to repeal individual and employer mandates and allow purchase of health insurance across state lines, all perhaps tied in with some version of broad entitlement or medical liability reform. If the Court decision does not expressly forbid it, HHS could issue guidance allowing states to “lease” the federal healthcare.gov, in effect, deeming them state based.

Pennsylvania and Delaware have acted in advance of the ruling by applying to become the fourth and fifth state-based exchanges to use the federal platform. Even here, CMS regulations state that new state-based exchanges must be approved six-and-a-half months prior to the start of the year, meaning CMS will have to create regulations to remove this restriction for 2016. Then the states have to see what Congress does — call a special legislative session, determine funding, etc. — all under the calendar pressure.  Remember, many states do not even support establishing state exchanges and remain opposed to ACA, including Texas and Florida, where over two million individuals could lose subsidies.

Hospital, managed care and other healthcare companies anxiously await the Supreme Court decision. Hospitals have benefited from higher admissions and less bad debt under ACA. Health insurers have built exchange businesses that are profitable or almost profitable. Many healthcare companies have stated that they have plans to respond to any outcome, and this seems reasonable. One is reminded, however, of the boxer Mike Tyson’s comment that all boxers have plans until “they’re hit in the jaw.”

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