‘established by the state’

Four words. That’s what the protracted litigation, that for the second time in three years, challenged a key part of the foundation of the Affordable Care Act’s constitutionality all the way to the U.S. Supreme Court is focused upon. Four words: ‘established by the state’.

In a landmark ruling the Supreme Court today issued its view in the case entitled King versus Burwell and in doing so upheld the tax subsidies across the country including those in states without their own health exchanges that use the federal health insurance exchange. In a 6-3 opinion (click here for a copy of the ruling) written by Chief Justice John Roberts, the court rejected that challenge that was based on a four-word phrase which said tax credits would be available only on an exchange ‘established by the state’ and thus, should not be available to the states that use the federal exchange for purchasing insurance. Only 16 states have their own exchange.

The decision and today’s news stands to reinforce the ‘individual mandate’, as well as the ‘large group mandate’ that, together, act as the foundation of the new health insurance law. In their ruling the court stated that reading it narrowly “would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid”.

“Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.”

Chief Justice John Roberts in the majority opinion

The ruling is considered a victory for President Obama, as a ruling against the government would have largely dismantled the economics behind the still new law. The court said Congress made the guaranteed issue and community rating requirements applicable in every state, but those requirements only work when combined with the coverage requirement and tax credits. “It, thus stands to reason that Congress meant for those provisions to apply in every State as well,” the court said. The 6-3 opinion by Roberts was joined by Justices Anthony Kennedy, Ruth Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan. Justice Antonin Scalia wrote a dissent in which Justices Clarence Thomas and Samuel Alito concurred.

2012 Supreme Court Case

In order to understand what the Court decided and why, as well as it’s broader implication on Americans, it is helpful to understand why the law was challenged (again) all the way to our country’s highest court. In 2012 the Supreme Court narrowly decided that the 2010 law was constitutional and did so using the logic that since the Federal government is allowed to tax its citizens, and since the enforcement penalties are actually taxes policed by the Internal Revenue Service, the law was deemed legal.

2015 Supreme Court Case: King Versus Burwell

The more recent challenge came from a Virginia resident, David King, who took issue with four words found on page 61 (established by the state) of the 906 page law. Since insurance is regulated state by state the law’s authors expected each state to create its own marketplace (often called an ‘exchange’) from which individuals needing coverage could shop for a policy. In the event that a given state could not, nor did not, create its own marketplace the law concluded that a Federal marketplace would be created to offer coverage to residents in those states without their own state marketplace.

The law uses language that would limit authority for federal subsidy payments, by only permitting them inside states that have affirmatively established their own exchanges. However, the Internal Revenue Service issued a separate regulation directing that the ACA federal tax credit is available to all financially eligible Americans, regardless of whether they purchase insurance on a state or federally run exchange. In King v. Burwell, the plaintiffs had argued that the IRS exceeded its authority when it issued a rule that would “deem” any state defaulting into a federal exchange as the equivalent of a state-established exchange.

Today 16 states have their own marketplace while the other 34, Florida included, default to the federal marketplace. Mr. King, believing that the wording of the law required each state to create its own marketplace, sued current Secretary of Health and Human Services Sylvia Burwell. Thus, the case King versus Burwell which, today, he lost.

Is The Affordable Care Act ‘Affordable’ Without Subsidies?

The short answer is no. Not at all.

One of the stated goals of the Affordable Care Act is, of course, to provide individuals with ‘affordable’ health insurance. In most cases the law can only achieve ‘affordable’ pricing by authorizing a federal tax subsidy for eligible lower income individuals. While the law has many benefits such as covering pre-existing conditions and not asking applicants questions about their health it would be fair to say that little about the coverage is ‘affordable’, at least not without the subsidies.

A key part of the Obamacare individual policies are the subsidies the government designed to make coverage affordable. Those subsidies, which are actually income tax credits issued by the IRS based on one’s income, are what the government means when they use the term ‘affordable’. Without those subsidies (tax credits) the fact of the matter is that the coverage being offered is costly. As part of the health care law people who would have to spend more than 8% of their income on health insurance are exempt. That exemption would cover Mr. King if not for the tax credit subsidies provided in the federal marketplace that make him eligible.

Premium Tax (Subsidies) Credit Financial Impact & Importance

To consider the importance of the current Supreme Court ruling and its impact on the Affordable Care Act, consider these figures:

  1. According to the Centers for Medicare & Medicaid Services (CMS) most recent, June 2, 2015 data, 11,700,000 Americans enrolled in coverage through the Federal Health Insurance marketplaces in 2015. In comparison, 6,300,000 people were enrolled in 2014 as of December 31st and, thus, enrollment this year, over last, nearly doubled.
  2. The state of Florida led the nation this year with 1,415,981 people enrolling in individual coverage through the Federal Marketplace versus about 700,000 last year.
  3. 94% of those who enrolled in coverage in Florida this year received a tax credit subsidy to make their premium ‘affordable’. In comparison, nationally 85% of those who purchased coverage through the Federal Marketplace received tax credit subsidies.
  4. This year, the 10 states with the highest rate of consumers receiving financial assistance from premium tax credits were: Mississippi (94.5%), Florida (93.5%), North Carolina (93.2%), Wyoming (92.9%), Louisiana (92.0%), Arkansas (91.1%), Georgia (91.1%), Alabama (90.7%), Wisconsin (90.7%), and Alaska (90.5%). The states with the lowest rate of consumers who received advanced premium tax credits include: District of Columbia (10.0%), Minnesota (49.5%), Colorado (55.3%), Hawaii (59.3%), Vermont (64.3%), New Hampshire (65.8%), Massachusetts (66.7%), Utah (67.3%), Maryland (68.2%) and Kentucky (69.3%).
  5. The average advanced premium tax credit in 2015 for those enrollees who qualified for the financial assistance was $272.00 per month. In Florida the average subsidy was $294.00 per month.
  6. Without these tax credit subsidies reducing the true cost of coverage it is estimated that approximately 7,000,000 Americans who have obtained coverage through federal exchanges would have lost their subsidies and many of those would likely have elected to drop their coverage all together because of the high cost without the subsidy. Had the court ruled in favor of Mr. King many have been concerned that healthier individuals on the exchange would have been the first to drop their coverage, while the elderly or less healthy would have held on as long as possible, leading to a disproportionate pool of unhealthy people and, therefore, raising premiums on the exchange at an alarming rate. Had the subsidy payments for Americans purchasing from the federal exchange been invalidated the employer mandate attached to the Affordable Care Act would likely have eroded because the law’s penalty trigger mechanism is so directly tied to whether an employee who would otherwise be entitled to coverage instead opting to use the marketplace exchange and receive federal money to help fund that coverage.

The news of the day, simply stated, is that nothing has changed. The law has now weathered two legal challenges over that last three years in the U.S. Supreme Court and with no other material challenge on the horizon the law will likely revert to being a topic of ‘hot’ political debate in the November 2016 presidential election. We here at Morris & Reynolds would hope that in light of the court’s ruling our country will focus on finding solutions that actually control the alarming cost of health care.

The fact of the matter is that those items that ‘drive’ the cost of care higher by the day including ever increasing prescription costs, our aging population and wonderful, yet costly, new technology create challenges that demand affordable solutions. I will say this; the current ‘system’ of increasing insurance rates without seriously controlling the cost of care, drugs and technology is simply not sustainable. Insurers, nor the Affordable Care Act law, appear to have any lasting solutions (dramatically increasing insurance rates over time, reducing coverage by way of larger copays or deductibles and offering ‘narrow’ networks are not sustainable, long term, solutions in our view) to control health care costs and without such solutions the current approach is simply not sustainable and remains terribly broken.

For now, the law and its various aspects for individuals (the individual mandate) and businesses (including the ‘large employer mandate’) are the law of the land. As has been the case since the law was passed in 2010 the agents and underwriters here at Morris & Reynolds are well prepared to answer your questions and help with your coverage. We proudly represent the entire market of insurers and have deep expertise on all of the available options, subsidies and compliance topics for yourself, your family and your business. Each agent and underwriter is a certified healthcare reform expert and offers the advice and solutions you need so please contact us at any time that you have a question.

As always, thank you kindly for allowing us to provide your protection.

Click above for a copy of the Supreme Court Ruling.


Click above for a copy of US Supreme Court Upholds ACA Subsidies in Federal Exchanges.


Click above for a copy of The Individual Mandate Presentation.


Click above for a copy of The Individual Mandate.

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