King v. Burwell: What a Subsidy Shutdown Would Mean for Consumers, Insurers, Providers and States

Authors: Joel Ario, Managing Director | Deborah Bachrach, Partner | Michael Kolber, Associate

Editor’s Note: On Wednesday, March 4, the Supreme Court heard oral arguments in King v. Burwell, a case that will determine whether the Affordable Care Act (ACA) permits individuals who buy individual health insurance coverage through federally facilitated health insurance Exchanges to receive federal subsidies. Virtually all commentators on King v. Burwell agree that a Supreme Court ruling against the government’s position—that subsidies are available—would be hugely disruptive. Few, however, have focused on the real-world consequences of a decision that would terminate health insurance subsidies for residents of the 34 states that have federally run health insurance Exchanges. In a new four-part series for The Commonwealth Fund Blog, Manatt Health examines what a Subsidy Shutdown could mean from the perspectives of four key stakeholders: consumers, insurers, providers and states. The series, summarized below, looks at the potential effects if millions of people were to lose their subsidies. To read the posts in full, click here.

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The Potential Impact on Consumers

More than 7 million people in states with federally run marketplaces currently receive health insurance subsidies. If they suddenly had to pay unsubsidized premiums, most would no longer be able to afford their coverage. Faced with sharp premium increases, consumers would have to choose between health insurance and food, rent and other essentials.

With costs spiking, a Subsidy Shutdown could put insurance out of reach for healthy and sick individuals alike. Potential consequences for consumers are dramatic, including:

• 9.6 million fewer people with healthcare coverage through the individual market, both inside and outside the Exchanges.
• A 47% jump in insurance premiums next year, as healthy people drop coverage.
• 9,800 more preventable deaths a year, because, in many cases, going without insurance means going without healthcare.
• Millions of consumers at increased risk of crippling medical debt.
• “Job lock,” with people staying in their current jobs just to keep their health benefits, discouraging entrepreneurship or other more productive employment—and putting small businesses that can’t afford to provide insurance at a disadvantage.

The ACA has given people who must buy coverage in the individual market nearly equal access to affordable health insurance as people with group coverage. A Subsidy Shutdown could reverse that progress.

The Potential Impact on Insurers

Under the ACA, health insurers have been big winners, enrolling record-high numbers and earning strong profits. Consumers, meanwhile, are benefiting from increased competition in the marketplaces—with 25% more insurers participating in 2015 than 2014 and no increase in nationwide premiums.

A Subsidy Shutdown would reverse these dynamics. Most of the 7 million people who would lose their subsidies are likely to drop their insurance, because individuals are exempt from the coverage mandate if their insurance is unaffordable. Those remaining in the federal Exchange would primarily be the approximately 15% who buy health plans without a subsidy or previously subsidized individuals with serious medical needs, who are better off paying high premiums than having no coverage at all. The result for insurers could be:

• A 70% decline in enrollment among people buying individual market plans.
• Healthy consumers dropping coverage, leaving insurers with a risk pool filled with high-need, high-cost people, after having priced their 2015 premiums on a balanced pool containing both sick and healthy people.
• Insurers exiting the market—some as early as mid-2015—creating a less competitive environment.
• Insurers needing to decide whether to remain in the Exchanges for 2016, after 2016 rates already have been filed. Insurers would seek last-minute rate increases, which would reduce 2016 enrollment but may be necessary to limit insurer withdrawals.

Even if a Subsidy Shutdown were short-lived, the effects could prove long-lasting. States likely would see a return to insurance markets dominated by one or two large insurers.

The Potential Impact on Healthcare Providers

With millions of people unable to pay for insurance, providers would find many of their recently insured patients suddenly without coverage. As a result, providers would quickly face financial shortfalls and ethical quandaries. Doctors’ ethical and legal obligations would prevent them from terminating services during an ongoing course of treatment, even if patients have no way to pay the bills. In fact, HCA, the nation’s largest for-profit hospital chain, reports that it collects zero payment from nearly 90% of its uninsured patients.

At the same time, state prompt-pay and continuity-of-care laws would not help providers or patients. These laws require insurers to pay doctors in a timely manner and prevent disruptive treatment changes when consumers change insurers, but generally do not impose obligations on insurers when individuals fail to pay their premiums.

Hospitals would be hit especially hard. For the second time in three years, they would see the bargain they struck in the ACA undermined by the Supreme Court. As part of the legislative compromise to fund the law’s coverage expansion, the major hospital trade associations agreed to $269 billion in Medicare and Medicaid payment cuts over a decade. In exchange, hospitals, clinics and physicians were to receive millions of patients newly covered under Medicaid or federally subsidized commercial insurance.

But in 2012, the Supreme Court ruled that states were not required to expand Medicaid eligibility under the ACA and, to date, 22 states have declined to do so. Should the Court rule that health plan enrollees in the 34 states with federally run Exchanges are not entitled to subsidized coverage, there could be a serious impact on providers, including:

• More than $9 billion in lost revenue a year.
• More than 7 million patients losing subsidies, with most dropping coverage.
• Closures or reduced services in rural hospitals, community health centers and nonprofit hospitals that serve low-income patients. Since 2010, 43 rural hospitals already have closed.

The Potential Impact on States

If there is no federal solution to the Subsidy Shutdown, it will be up to the 34 states now depending on the federal Exchange to decide whether they are willing to take the steps necessary to establish a state Exchange and restore the subsidies. The results could mirror what happened in 2012, when the Supreme Court made the expansion of Medicaid eligibility voluntary. Three years later, 28 states and the District of Columbia have expanded and several others are actively considering doing so.

Because the cost of subsidies is borne entirely by the federal government—and is therefore in some respects a better deal for states than the Medicaid expansion—we would expect many of the 13 states that already have expanded Medicaid but still have a federal Exchange to consider establishing a state Exchange to restore the subsidies. Nevertheless, there are logistical, political and financial challenges to establishing state Exchanges, and there will undoubtedly be holdouts, at least for some time. In fact, there may be more than a dozen states willing to let their residents become uninsured again—leading to significant coverage inequalities across states.

There is little doubt that states refusing to act in the face of a Subsidy Shutdown will face significant consequences:

• The ACA’s insurance market reforms, such as the prohibition on preexisting condition exclusions, will not work properly in the absence of subsidized coverage. (Prior to the ACA, five states had provided consumers with guaranteed access without individual mandates or sufficient subsidies to make coverage affordable. The results were escalating prices and shrinking enrollments as premium increases drove young and healthy people out of the market.)
• Market deterioration would start as consumers drop their coverage, with healthy people the first to leave.
• Insurers would raise premiums dramatically or exit the state’s individual market altogether.
• Hospitals, doctors, nurses and other healthcare providers would go unpaid.
• There would be widening coverage inequalities across states.

The Department of Health and Human Services would likely be open to innovative approaches, letting states propose alternative paths to a state Exchange. This flexibility, however, may not be enough for the dozen or more states that strongly oppose the ACA. In fact, five governors already have pledged not to address the loss of subsidies—driving a growing gap between “have” and “have not” states.