Today, the Supreme Court heard oral arguments in King v. Burwell, a case with significant implications for the future of Obamacare. Most of the justices’ questions proceeded along expected lines. Most notable was a series of questions by Associate Justice Anthony Kennedy, who questioned whether it would be constitutional for Obamacare to induce states to set up exchanges. If Kennedy’s fears are right—that federal subsidies for state-based exchanges are “coercive”—then he might side with the Obama administration in the case. But if you understand how Obamacare’s insurance markets work, it’s clear that Kennedy should side with Obama’s challengers.
The ‘federalist’ argument advanced by Obamacare supporters
It was the biggest surprise to reporters who follow health care: Kennedy’s persistent questioning on whether state-based exchanges are “coercive.” The argument is that under Obamacare, the federal government is imposing mandates and regulations on a state’s insurance market, mandates that are unworkable if they aren’t accompanied by billions in subsidies. Said Kennedy:
Let me say that from the dynamics of Federalism, it does seem to me that there is something very powerful to the point that…the states are being told either create your own exchange, or we’ll send your insurance market into a death spiral. We’ll have people pay mandated taxes which [they] will not get any credit on—on the subsidies. The cost of insurance will be sky-high, but this is not coercion. It seems to me that under your argument, perhaps you will prevail in the plain words of the statute, [but] there’s a serious constitutional problem if we adopt your argument.
A Yale Law professor named Abbe Gluck, who supports the ACA, has been the main proponent of this “federalist” argument. In January, Gluck co-authored an amicus brief filed before the Supreme Court making the case that the challengers’ “interpretation would result in a significant intrusion on the usual balance between the state and federal governments.”
Gluck expounded on her theory in a Politico op-ed. If Obamacare conditioned exchange subsidies on the construction of state exchanges, wrote Gluck, that would be unfairly punitive against the states, decrying “the penalty the challengers would foist on the states—the loss of the subsidies and drastic consequences that would go with it.”
Gluck admits that she and her fellow Obamacare advocates are susceptible to being called "fair-weather federalists," or as the kids say these days, "trolls." She's right.
Make no mistake. The new health law has disrupted coverage for millions, and driven up costs for millions more.
1. Can Obamacare’s insurance regulations function without subsidies? Of course they can
First of all, the argument that havoc and destruction will ensue if subsidies go away is simply factually wrong. There will remain an individual mandate, forcing many people to purchase health coverage regardless of their eligibility for subsidies. It’s true that in a subsidy-free state, average premiums would likely go up, and that fewer people would enroll in Obamacare than originally hoped. But guess what? That has already happened, even with federal exchange subsidies.
Obamacare’s mandates and regulations have already led younger and healthier people to stay away from the exchanges: what wonks call “adverse selection.” Indeed, enrollment in the exchanges has skewed around 25 percent older than one would expect without adverse selection. And underlying premiums have skyrocketed; our Manhattan Institute analysis found that non-group premiums increased by 49 percent in the average county.
At the Supreme Court, Obama’s advocates called adverse selection and higher premiums a disastrous, chaotic, punitive result. So, then, do they also think that the insurance markets of today, imposed by Obamacare, are disastrous, chaotic, and punitive?
Another way to look at it: if today’s premium hikes and adverse selection are fine and dandy, then tomorrow’s greater premium hikes and adverse selection aren’t so bad.
Let’s not forget that we aren’t talking about the entirety of a state’s insurance market, either. We’re talking about the minority of people who shop for coverage on their own, instead of getting it from their employer or the government.
2. If exchanges without subsidies wasn’t Congress’ intent, why are there no subsidies for U.S. territories?
The Obama administration—and Gluck—make the argument that Obamacare’s insurance regulations, without subsidies, is an obvious disaster that Congress would never have intended. Well, then, why did Congress force U.S. territories like Guam and the Virgin Islands to do exactly that?
These U.S. territories are subject to all of Obamacare’s insurance regulations, but get none of the subsidies. In Guam, premiums went up by 35 to 55 percent—not dissimilar to what they did in the mainland—but no one disputes Congress’ intent in this area.
In addition, Obamacare originally contained a provision called the CLASS Act—a national plan for long-term care insurance championed by Ted Kennedy that even Kathleen Sebelius called “totally unsustainable.” Part of the government’s argument is that Congress could never have intended to create an unworkable health care program. Then why did Congress do so in the case of CLASS?
3. Is awarding trillions of dollars for state exchanges ‘punitive?’ No
Then there’s the fundamental absurdity of the argument that spending trillions of dollars on participating states is “punitive.” It’s a carrot, not a stick. The federal government is saying: if you set up an exchange, we’ll send you lots of taxpayer dollars. A punitive system would be: if you don’t set up an exchange, we’ll stop sending you the taxpayer dollars you are already receiving.
That’s what Obamacare tried to do with its Medicaid expansion; it said to states, “if you don’t expand Medicaid, we’re going to take away the Medicaid funding we’ve been sending you since the 1960s.” That was punitive, and it was overturned 7-2 by the Supreme Court in 2012. Indeed, the challengers’ lawyer, Michael Carvin, pointed out that the system endorsed by the Supreme Court in that case—giving states the option to expand Medicaid and receive subsidies—would be unconstitutional as well under Gluck’s theory.
If Congress is being punitive when it encourages states to set up exchanges by offering subsidies, then most of what Congress has been doing since 1937 is illegal. For example, the No Child Left Behind education reform conditions federal education subsidies on states that adopt various reforms and meet various criteria. If Obamacare’s supporters think the challengers’ case is a violation of federalism, so is every federal law that conditions federal subsidies on local action. Maybe we should render all those laws unconstitutional. But I don’t think that’s a result that Obamacare’s supporters want.
4. Are Obamacare’s insurance regulations punitive? Yes
Then there’s the question of remedy. If the Supreme Court wants to argue that Obamacare’s insurance regulations are punitive, the remedy isn’t to appropriate trillions of taxpayer dollars that Congress didn’t authorize. It’s to overturn the insurance regulations that the Court considers punitive. As Randy Barnett puts it in the Washington Post’s Volokh Conspiracy, under the Obama administration’s framework, “it is the latter expressed and unambiguous regulations that will cause the ‘coercive’ death spiral.”
5. Why did eight states argue that they prefer not to set up exchanges, even without subsidies?
If exchanges without subsidies are such a devastatingly coercive way to run an insurance market, why did eight states file amicus briefs in favor of the challengers, arguing that they did not want to build exchanges and didn’t want subsidies? Clearly these eight states didn’t find such a regime oppressive, or they wouldn’t have voluntarily chosen it.
One such brief was submitted by the states of Oklahoma, Alabama, Georgia, Indiana, Nebraska, South Carolina, and West Virginia. “Significantly,” they wrote, “the federal government’s payment of a subsidy—for even a single employee—triggers costly obligations for employers within that State (including the States themselves), placing such states at a competitive disadvantage in employment,” due to Obamacare’s employer mandate.
In addition, the law’s individual mandate has less bite in a subsidy-less environment, due to the fact that the individual mandate only applies in instances where someone’s net premium costs are below an income-related threshold.
6. Obama’s Solicitor General didn’t embrace the faux ‘federalism’ argument
President Obama’s Solicitor General, Donald Verrilli, was asked by Justice Samuel Alito whether he agreed with the ‘federalism’ argument. “If we adopt Petitoners’ interpretation of this Act,” asked Alito, “is it unconstitutionally coercive?”
Responded Verrilli: “I think that I’m not prepared to say to the Court today that it is unconstitutional. It would be my duty to defend the statute and on the authority of New York v. United States, I think we would do so.”
7. In the Affordable Care Act, ‘state flexibility’ is a lie
Oh, and while we’re on the subject of Verrilli. In oral argument, Verrilli several times made mention of the ACA’s citation of “state flexibility.” The challengers’ reading of the law, he says, “makes a mockery of the statute’s express textual promise of state flexibility.” Elsewhere, he says that “this statute is designed to afford state flexibility. State flexibility. It would be an Orwellian sense of the word ‘flexibility’ to use it in the manner that Petitioners say the statute uses it, because it’s the polar opposite of flexibility.”
Do you know what is the “polar opposite” of state flexibility? Obamacare. The law imposes a one-size-fits-all regulatory framework on states that enjoyed broad sovereignty in this area for the previous 234 years of American history. Indeed, the most novel aspect of Obamacare, as a matter of law, is the degree to which it undermines state flexibility by creating an entirely new layer of federal insurance regulation.
And yet the President’s top lawyer is arguing that “state flexibility” is the reason why Obamacare has been implemented in the way it has.
Is Kennedy inclined to side with the Obama administration? Probably not
All this matters, of course, because Kennedy is regularly one of the swing justices on the Supreme Court. In order for the Obama administration to win, either Kennedy or Roberts has to side with the four members of the predictably pro-Obama side of the Court.
When questioning Michael Carvin, Kennedy said: “It may well be that you’re correct as to these words [in the statute prohibiting subsidies for federal exchanges] and there’s nothing we can do. I understand that.”
This may signal that while Kennedy is interested in this issue of federal coercion of the states, he may not think it prevents a favorable ruling for the challengers in this instance.
So instead of worrying about Kennedy, you should focus all of your SCOTUS speculation onto Chief Justice John Roberts.
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UPDATE: Oklahoma Attorney General Scott Pruitt rebuts the Gluck 'federalism' argument in the Wall Street Journal:
There is no merit to the argument that the states were unaware of the consequences of refusing to establish an exchange. Oklahoma, for example, where I am attorney general, sued the Internal Revenue Service months before making its decision to decline to set up an exchange, arguing that the ObamaCare tax credits and subsidies could not be given in Oklahoma. Oklahoma knew the consequences of its decision but was not coerced into cooperating with implementation of the Affordable Care Act.
AVIK’S HEALTH-REFORM PLAN, Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency, is available online. Follow @Avik on Twitter, Google+, and YouTube, and The Apothecary on Facebook. Or, sign up to receive a weekly e-mail digest of articles from The Apothecary.
INVESTORS’ NOTE: The biggest publicly-traded players in Obamacare’s health insurance exchanges are Aetna (NYSE:AET), Humana (NYSE:HUM), Cigna (NYSE:CI), Molina (NYSE:MOH), WellPoint (NYSE:WLP), and Centene (NYSE:CNC), in order of the number of uninsured exchange-eligible Americans for whom their plans are available.
