Supreme Court Hears Latest Obamacare Challenge

Analysis: King v. Burwell arguments illustrate federalism issues at heart of Obamacare debate


The Obama administration and its opponents squared off today in oral arguments before the Supreme Court that highlighted the central issue in the case: the relationship between the federal government and the states.

The plaintiffs in King v. Burwell are arguing that the federal government can only give subsidies for insurance bought on state-built exchanges—meaning only in the 13 states that set up their own exchanges—instead of in every state, as the administration has been doing. As most states have not built their own health-insurance exchanges, millions of people could lose federal assistance for buying insurance.

Justice Anthony Kennedy, seen as the swing-vote on the Court in many cases, raised the potential that the challengers’ reading of the law created unconstitutional coercion of the states by the federal government, which would violate the Constitution’s division between federal and state government.

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Without the federal subsidies, Kennedy implied, the state insurance markets would collapse because the cost of insurance would rise as people with expensive health conditions bought insurance. This collapse, known as a "death spiral," could be a form of coercion of the states.

Congress may attempt to step in and fix the law if the Supreme Court sides against the administration. Republican leaders from the House and Senate have written op-eds in recent days laying out how they would handle such a decision and the resulting fall-out.

The Obama administration’s lawyer expressed skepticism that Congress would act even if the consequences were dire for the states, according to the Wall Street Journal’s live coverage of the arguments. Justice Antonin Scalia was more hopeful: "Yes, I think this Congress would act," he said.

Federal coercion featured in the last case that threatened the law, National Federation of Independent Businesses v. Sebelius, as well. In it, the Supreme Court decided that the federal government could not force states to choose between accepting the Medicaid expansion or losing all federal Medicaid dollars. The Court ruled that the Medicaid expansion had to be optional for the states, a win for conservatives.

However, the coercion issue could work against conservatives in King v. Burwell. If the court rules in favor of the plaintiffs, an insurance market "death spiral" could afflict the ACA in those states that have declined to set up their own exchanges, absent intervention from the federal government. This is because when the individuals in those states are denied subsidies, the other regulations—most notably, the one requiring insurers to sell to everybody regardless of their health—would still be in effect. Because they would no longer be subsidized, the cost of insurance would rise for lower-income people, leading healthy people to drop their insurance and causing the pool of people with insurance to shrink. But sick people would retain their insurance, and prices would rise further for this smaller pool. This pattern of a shrinking pool and rising prices would continue, leading to the likely collapse of the insurance markets in the states.

This possible collapse could be viewed as federal coercion of the states. If the federal justices do view this scenario as coercion, then they might be more likely to side with the government, whose reading of the law’s text does not lead to an insurance-market collapse.

If the subsidies do fall, a patchwork of regulations—some places with subsidies and exchanges, others with a federal exchange that does not provide subsidies—could be in place across the country.

This patchwork would be a result of the way Obamacare was initially crafted and the Obama administration’s approach to health-care reform. King has arisen because Obamacare takes a particular, originally state-level vision for health-care reform and applies it to all 50 states, while simultaneously co-opting state governments to carry out this centrally mandated vision.

Obamacare is broadly based on a health-care reform in Massachusetts, signed into law by Mitt Romney. Both Obamacare and "Romneycare" have mandates to buy insurance, subsidies to help reduce the cost to individuals, and requirements that insurance companies sell to everyone who wants to buy insurance from them.

Obamacare took Massachusetts’s reform and turned around and applied it to the whole country—a point President Obama once made in a debate with Romney: "We’ve seen this model work really well—in Massachusetts," Obama said.

But the Massachusetts plan came out of a particular regulatory context in a deep-blue state. Health insurance was heavily regulated in Massachusetts long before Romneycare, and the last time Massachusetts voted for a Republican nominee for president was 1984—when Ronald Reagan won 49 states.

Romney had to work with a Democratic-controlled statehouse, and the result was a compromise that was more liberal than many conservatives would want but more conservative than many liberals would want.

Robert Moffit, a health-policy expert at the conservative Heritage Foundation who worked on part of the Massachusetts reform, said of Romneycare, "I hoped the exchange would work out the way we and others had projected, but after months of negotiation and compromise, it was a mixed bag and ultimately didn’t work as many had hoped." Moffit and a colleague wrote a paper after the law came out arguing that while the law made some good improvements, it was also flawed in certain respects.

Moreover, the national application of a policy designed for one small state would be problematic. "Demographic differences, medical practice patterns, and cultural patterns vary among the states," Moffit wrote in an email. "Therefore, states are best suited to regulate the health insurance market."

Indiana offers a useful counter-point for the kind of health-care reform states can pursue. Under Republican Gov. Mitch Daniels, who was in office from 2005 to 2013, Indiana moved insurance toward a more market-driven model that emphasized health savings accounts (HSAs) and high-deductible plans. Daniels and the Republican-led legislature made the changes for state employees and the state-run insurance program for the poor, Medicaid.

Indiana’s reforms reflected the state’s conservative temperament. But the state struggled under Obamacare to keep its reforms, with the Obama Administration finally approving a watered-down version of Indiana’s Medicaid reform.

Obamacare, in essence, takes a moderate reform from one state and applies it to all states, regardless of local factors. The result is predictable: unhappy states that are none-too-eager to cooperate. Polling bears this out, as Obamacare’s approval rating is a dismal 39 percent in Texas and 38 percent in North Carolina. Neither state has worked with Washington, and Texas has led the way in suing the Obama administration over the law.

King v. Burwell, and the potential it brings for insurance-market collapses and patchwork regulations, is one of many consequences of this one-size-fits-all approach.