Submitted by Tyler Durden on 06/26/2015
Via Goldman Sachs,
- The US Supreme Court upheld the Obama administration's interpretation of the Affordable Care Act (ACA). This resolves most of the uncertainty regarding the subsidies under the law, though a few less significant legal challenges continue to work their way through the system. Congress looks unlikely to make any significant changes to the ACA this year, though a few smaller changes, like repeal of the medical device tax, are possible.
- While there was some uncertainty regarding the outcome of today's ruling, we do not expect it to lead to the same kind of rise in health employment that the resolution of uncertainty may have spurred in mid-2014. That said, continued strength in health employment and consumption seems likely.
The Supreme Court ruled yesterday (June 25) in favor of the Obama Administration's current implementation of the Affordable Care Act (ACA), denying claims from challengers that health insurance subsidies were improperly paid for enrollees in states that did not operate their own health insurance exchanges.
Q: What was the case about?
By way of background, the ACA (also known as "Obamacare") provides subsidized insurance coverage for low- and middle-income individuals through two main channels: an expansion of the existing Medicaid program to cover individuals with incomes up to about $16,000 and the establishment of a new system of “health exchanges” providing standardized insurance, which is subsidized for individuals with incomes up to about $47,000. To maximize coverage, the law requires insurers to provide coverage to anyone who applies for it, individuals face tax penalties for failure to purchase it, and employers face penalties for failing to provide it.
The case that the court ruled on today, King v. Burwell, hinged on the interpretation of one phrase in the ACA: the challengers contended that, when Congress stipulated in the law enacted in 2010 that subsidies would be allowed for insurance purchased through an "Exchange established by the State,” Congress intended that benefits would not be subsidized if purchased through the federally operated exchanges that operate in 34 states. The Obama Administration argued that the broader context of the law makes clear that insurance from both types of exchanges are eligible for subsidies and that other aspects of the law would be impossible or pointless to implement under the alternative interpretation.
Q: What did the court rule?
In a 6-3 ruling, the court sided with the Obama Administration's interpretation. The court took two steps to reach this conclusion. First, it showed that although the plain text of the legislation (i.e., the meaning of "established by the State") is straightforward, the meaning becomes ambiguous in the context of the broader law. Second, in light of this ambiguity, it judged the alternative interpretations of the purpose of this phrase put forth by the challengers to be "implausible."
The upshot is that the current system of subsidies is maintained and the Obama Administration will not need to make any changes to the program. The strong wording of the ruling also suggests that future administrations would have little flexibility in interpreting it differently. (This had been an open question prior to the ruling, though as a political matter the likelihood that a future administration would want to wade back into this debate was low in any case.)
Q: Will there be any more legal challenges?
Other legal challenges to the ACA are waiting in the wings. In May, the Federal District Court for DC heard another challenge to the law brought by House Republicans (House of Representatives v. Burwell). In that case, the challengers claim that the subsidies provided to low-income individuals to lower deductibles and other cost-sharing—these are separate from the premium tax credits at issue in the case decided today—were never specifically appropriated by Congress. The dollars at stake in this challenge are smaller (around $10bn in FY2016) but without these subsidies the cost-sharing associated with the insurance offered through exchanges would become unaffordable, and could lead to much lower enrollment (and hence lower subsidy payments in general). In addition to this challenge, a few other ACA-related cases are pending in federal courts, though they generally look unlikely to have a significant effect on the law.
Q: How will Congress respond?
Congressional Republicans will not be able to repeal the law this year or next, but might still try to block a few aspects of it.In theory, congressional Republicans might be able to use the budget "reconciliation" process to repeal major sections of the law. In their annual budget resolution earlier this year, they laid the groundwork for using this process, which allows Senate passage with a simple majority rather than the 60 votes normally required. However, such a strategy faces three hurdles. First, important parts of the law, like the requirement that insurers must grant any applicant insurance regardless of health status, probably cannot be repealed using this approach because it is reserved for budget-related matters. Second, repeal of the law is estimated to add $353 billion to the deficit over ten years ($137bn when macroeconomic feedback or "dynamic scoring" is included). Third, and most importantly, President Obama would surely veto a repeal of his signature health care law, and Congress would lack the votes to override it. The upshot is that until at least 2017, we can see no viable legislative path for major changes to the program.
Short of repeal, congressional Republicans may still aim to make incremental changes to the law. One of the annual spending bills winding its way through Congress would make it more difficult for the Administration to backstop risk in exchange plans (so-called "risk corridors"). The House has also recently passed legislation to repeal a tax on medical devices, and another bill to eliminate the Independent Payment Advisory Board (IPAB), which the ACA established to set the payment rates necessary for Medicare to stay under a given growth rate each year—these would take effect automatically unless overturned by Congress. Repeal of the medical device tax later this year is slightly more likely than not, in our view, though how and when remain unclear. By contrast, IPAB repeal seems unlikely.
Q: How could this affect spending and employment in the health sector?
Relieving residual uncertainty should support continued strong hiring in the sector. Uncertainty in 2013, ahead of insurance changes and the onset of ACA subsidies in 2014, may have been an important factor behind slow hiring in the health sector, shown in the left panel of Exhibit 1. The sharp rally in the stocks of health care providers following today's ruling suggests that the outcome was perceived as genuinely uncertain. That said, the consensus among investors and the health industry seemed to lean toward the court ruling as it did today, and the level of uncertainty surrounding this ruling seems to have been far lower than in 2013. Likewise, while health consumption may have been pulled forward from early 2014 to late 2013 in anticipation of ACA-related disruptions (for example, consumers may have wanted to have less time-sensitive services performed in late 2013 before they changed insurance at year-end), public awareness of this legal challenge was much lower and seems unlikely to have affected spending plans. The upshot is that employment and consumption trends in the health sector are already strong, and today's ruling should do little to change them.