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King v. Burwell Has Potential To Create Two Insurance Markets, One Functioning, One Broken

Supreme Court

Earlier this month, the Supreme Court heard arguments in the case of King v. Burwell, the latest legal challenge to the Affordable Care Act. At issue is the phrase “established by the state,” referring to individual insurance exchanges, which are managed on a state-by-state basis. The plaintiffs argue that the clause should only apply to states that run their own exchanges, not to states with exchanges managed by the federal government. If the court rules in favor of the plaintiffs, people on individual insurance plans in 36 states would lose their subsidies.

A decision is expected in late June or early July. Sound Medicine health policy analyst Aaron Carroll says that based on the arguments in this case and previous decisions by the high court on the Affordable Care Act, the chances the court will rule in favor of the Obama administration are good.

Sound Medicine: Based on reading the arguments, what is your sense of whether the justices where considering just the legal issues, or the inevitable real life fallout from the case? 

Aaron Carrol: A few things were very interesting. The first is that you could see in some of the conservative justices [a recognition of] the real world implications of finding for the plaintiffs: that there would be a significant number of people who would need the subsidies, and therefore lose the insurance. You see it through Alito's talking about whether not they might delay how long it would take for the ruling to go into play, to give people time to find insurance. [You could also see it in] Scalia’s positioning, thinking that Congress would somehow fix this. Then of course the Solicitor General joked: "This Congress?!" 

So I think that everybody does recognize that there are significant implications to this case. However I think the most interesting argument made was by Justice Kennedy, who kind of came out of left field. He actually talked about the constitutionality of this clause.

You have to almost go back the Medicaid expansion case. The Medicaid expansion was written into the law where it said [to states] 'Either do the Medicaid expansion, or you're going to lose your traditional Medicaid money.’ It was sort of the stick and the carrot.

And the justices said that's ridiculous. [They argued] that since traditional Medicaid is so important and so entrenched, that this new idea was so coercive that it's not constitutional, and that's why the Medicaid expansion is optional. 

And Kennedy made almost the same argument about this.  [He said] the idea that all the people in states [with federally-run exchanges] would lose their subsidies, -- even if it was written into the law as a way to try to get states to set up their own exchanges  as the plaintiffs alleged --  is so coercive and so over-the-top nasty that it's unconstitutional.

And that made a lot of supporters of the law very happy. Because they were thinking if Kennedy is actually making this argument, that will be very consistent with the way that everybody ruled for the Medicaid expansion, and makes it much more likely that at least five justices will come down in favor of ruling against the plaintiffs and keeping things the way they are.


SM: So if the case is decided for the plaintiffs, tax subsidies go away, and what then? 

AC: In the states that defaulted to the federal exchange, theoretically all of their citizens who were getting subsidies from the exchanges would lose them. Some states will immediately fix things. I'd imagine that a state that has accepted the Medicaid expansion has to find a way to accept the subsidy money. Because you're not going to screw your middle class, after having accepted money to help people lower on the socioeconomic spectrum. 

So I think many of those states will find a way to set up a state exchange as quickly as possible. There are also some administrative fixes that could happen at the federal government. They could come up with some nuances to say maybe a state could set up an exchange and then immediately subcontract the work out to the federal government.  [Such an exchange] would, by the letter of the law, qualify for the federal subsidies, but would still in spirit let the federal government run the exchange. 

But there could be some states that just refuse to fix things. And depending on the number of states that refuse to fix it, somewhere between six and nine million people stand to lose their subsidies pretty quickly. Insurance would immediately become out of reach in expense. And even worse, that will immediately destroy the private insurance market in those states. 

We'll have guaranteed issue [a regulation of the ACA which prevents insurers from denying coverage for preexisting conditions] and community rating [prevents insurers from setting price based on individual differences such as gender], but no mandate or subsidies. And insurance will become very expensive, very quickly. We'll get the death spiral, and at least another million or more people will probably find insurance too expensive for them to afford, even if they were willing to pay for it. 

SM: Let's talk about the death spiral. That's the idea that healthy young people will leave the insurance pool if premiums are too high, leaving just the sick or old people needing coverage, sending those premiums up, and forcing even more people to drop coverage. 

AC: So New York State before the Affordable Care Act was put into play had guaranteed issue and community rating, but no mandate or subsidies. They basically had the regulated market, but none of the good things that came with the Affordable Care Act.

And because of that insurance companies had to give out policies, and they couldn't charge people more if they were sick, and because of that, really healthy people opted out of buying the plans, and more sick people bought the plans. So in 2013 an individual policy in New York State was on average about $1400 a month, which is unbelievably expensive. When the Affordable Care Act was put into play in 2014, and now there were the mandate and the subsidies, the average price for an individual plan dropped to about $500 a month.  [The reverse] is what's likely going to happen in all the states that lose the subsidies. 

SM: But when we talk about a death spiral we think catastrophe. We think of the whole plan just kind of collapsing. 

AC: Well, still some healthy people will want to buy insurance.  We're not talking about insurance companies going belly-up. They will always find a price to charge that will keep them solvent. But when we talk about the death spiral it just means insurance becomes prohibitively more and more expensive until it's really out of reach for the vast majority of people. I mean 13-14 thousand dollars a year for an individual policy is almost as much as family policies cost [now]. 

SM: So does this mean that we would be in a situation worse than we were in terms of number of uninsured than before the Affordable Care Act?

AC: No. Because we have to remember that only about 16-17 million people total were expected to buy insurance on the exchanges. We're talking about a half of the people who were expected to buy insurance through the exchanges losing that coverage. It's not everybody. 

It's not as if this will be worse than what existed, accept for the fact that who is insured will change. In the past it used to be the people who were insured were young, healthy people who could afford a cheap policy. The guaranteed issue and the community ratings will get rid of that. Instead it will likely be sicker people who are buying insurance. But it will be very expensive. 

SM: How does this case stack up against all the other attempts to dismantle Obamacare? 

AC: I think each successive attack becomes less and less potent. Making the Medicaid expansion optional was a huge blow to the Affordable Care Act. And we've seen a lot of states let that go, but still progress is being made. Losing the individual mandate would have been absolutely crushing [for the success of the law]. [The individual mandate which requires nearly everyone to have health insurance or face tax penalties was challenged before the Supreme Court and upheld in 2012.] Because without the individual mandate every market in the United States would have been like New York State. We would have still had the guaranteed issue and the community rating, but no mandate, making the subsidies irrelevant; we would have had a fractured market.  

This one could bring down subsidies in some of the states, but it won't be nationwide. We'll be left with two insurance markets: a fully functional Affordable Care Act in more liberal-leaning states, and an absolutely broken individual private insurance market in more conservative-leaning states. That's bad optics. And it will be more and more difficult  as time goes on for legislators in conservative-leaning states to say ‘well, there's nothing we can do about this,’ when right next door, everything is so much better. 

SM: So everyone's making predictions. Whose prediction do you like, or do you have your own?

AC: I'm happy to go on record. I'm freely admitting that this is a guess, and I'm not even a Constitutional scholar. But I have said for a long time, I think that things will probably go for the government. The Supreme Court on the whole seemed unwilling to destroy the Affordable Care Act three years ago. I think it's just as likely that they won't want to now, and I think the arguments this time are a lot weaker. And especially now that Kennedy brought out this constitutionality argument which they've already decided for Medicaid, I think it's much more likely that they're going to go for the government.

Aaron E. Carroll, MD, MS is a Professor of Pediatrics and Assistant Dean for Research Mentoring  at Indiana University School of Medicine, and the director of the  Center for Health Policy and Professionalism Research. He blogs about health policy at Dr. Carroll can be reached at