SCOTUS Round II: Does King Really Matter?

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Richard Evans / Scott Hinds / Ryan Baum

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@SSRHealth

November 11, 2014

SCOTUS Round II: Does King Really Matter?

  • The Supreme Court of the United States (SCOTUS) will hear arguments in King v. Burwell, in February or March of 2015, with a ruling likely in June of 2015. A decision to uphold King would mean persons buying health insurance on federally (rather than state) managed health insurance exchanges (HIEs) are ineligible for subsidies
  • If King is upheld, governors in affected states (those with federally managed HIEs) can keep federal subsidies flowing on their HIEs by simply taking over management of the HIE. We believe most are likely to do so
  • In the 27 states with federally managed HIEs, we count roughly 11.8M persons who are likely to favor state control of the HIEs in order to keep $12.2B in subsidies flowing; included in this number are 3.8M persons currently receiving subsidies (which average +/- $3,216 / year), 2M persons who are likely to need federal subsidies in any given year because of job loss, and 6.5M healthcare employees. In these same states we count roughly 6.8M persons who oppose state control of the HIEs in order to shield themselves from penalties for being uninsured, which average about $590 per person per year, and total about $4.0B in aggregate. On net, voters in favor arguably outnumber those opposing, and voters in favor arguably are more motivated (the dollar impact of subsidies gained is far larger than the dollar impact of penalties avoided) (see Appendix 1 for details by state)

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. VRTX, BMY, SNY): Biopharma companies with pending major product approvals (e.g. TSRO, ALKS, HLUY, EBS, BMY, BVRX, CBST, ACRX, BMRN, PCYC); ABBV and ENTA on sales prospects in Hep C; CFN, BCR, CNMD and TFX on rising hospital patient volumes; XRAY and PDCO on rising dental patient volumes and rising average dollar values of dental products and services consumed per visit; CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: Biopharma companies with overvalued pipelines (e.g. GILD, ALXN, SHPG, REGN, CELG, NVO, BIIB); PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX, CTRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WAG, CVS, RAD); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE, VOLC)

Background

Last Friday the Supreme Court of the United States (SCOTUS) agreed to review King v. Burwell, one of two key cases[1] in which plaintiffs allege that persons purchasing health insurance on federally managed exchanges are (regardless of income) ineligible for federal subsidies. More specifically, plaintiffs allege that the Affordable Care Act (ACA) makes federal subsidies available only to persons (of qualifying incomes) purchasing coverage on health insurance exchanges operated by a state. SCOTUS is likely to hear arguments in February or March of 2015, with a ruling likely to arrive in June of 2015

Why a SCOTUS decision blocking federal subsidies to beneficiaries on federally managed exchanges is a real possibility

The decision to hear the case is at least somewhat unusual, in that there are as of yet no conflicting lower-court decisions that compel the Court to intervene. This implies that at least four justices – the minimum number who must agree to hear a case before a writ of certiorari is granted – believe that the lower court erred in King. This strongly suggests, but does not prove, that at least four justices oppose the status quo[2] – namely the IRS’ interpretation that subsidies can be given to beneficiaries purchasing coverage on the federally managed exchanges. By extension, the possibility that SCOTUS would reverse King must be taken seriously

We’ll leave it to others to handicap how SCOTUS might rule[3], and focus instead on what happens if SCOTUS in fact overturns King

What’s likely to happen if SCOTUS overturns King – most states are likely to take control of their exchanges in order to maintain their citizens’ access to subsidies

In 2014, the health insurance exchanges (HIEs) in 27 states were federally managed. There are 62.1M (potentially) subsidy-eligible persons living in these states. In 2014 49.3M of these 62.1M receive healthcare from a source other than the HIE, 3.8M persons purchase insurance through an HIE and receive a federal subsidy, and 9.1M subsidy-eligible persons remain uninsured. The 3.8M persons receiving subsidies in 2014 will receive on average roughly $3,216 for the year; total subsidies paid to eligible persons in these 27 states should total roughly $12.2B in 2014

If King is overturned, each of these 27 governors[4] faces a choice – restore its citizens’ subsidy eligibility by taking over management of the state’s HIE; or, refuse to take state responsibility for the HIE and in so doing place $12.2B (and growing) in federal subsidies beyond its citizens’ reach

We can reasonably assume that governors care about: 1) expanding voter support; and 2) improving their states’ economies. Thus whether to take state responsibility for the HIE arguably comes down to which decision favorably influences the largest number of votes (primarily) and has the most beneficial net effect on the state’s economy (secondarily)

Insured subsidy eligible persons – especially those enrolled on the federally managed HIE and currently receiving a subsidy – should favor a decision by the governor to take state control of the HIE, thus preserving their actual or potential access to subsidies. Hospitals in the state presumably also favor a decision to take state control of the HIE, as this mitigates the hospitals’ costs of uncompensated care. Finally healthcare employees in the state also are likely to favor state control of the HIE, as access to federal subsidies certainly improves job security for persons employed in healthcare

Conversely, (ignoring the trend of being uninsured simply because of being un- or mis-informed) persons who have chosen to remain uninsured despite the availability of subsidies, and who thus face looming penalties, are likely to oppose state control of the HIE, since such a refusal by the state shields these persons from penalties. Recall that penalties are levied only on persons who have access to minimum essential coverage at a net cost of ≤ 8 percent of income. If the state does not control the HIE, the state’s residents are ineligible for federal subsidies; this means a larger number can claim not to have an affordable source of minimum essential coverage, and can thus avoid penalties for being uninsured. Mid-sized employers (other than hospitals) also are likely to oppose state control of the HIE. Recall that any employer with 50 or more employees who offers coverage to fewer than 95% of its employees owes a penalty of $2,000 times the number of full-time employees (minus up to 30) if even one employee receives a federal subsidy for purchasing coverage on the HIE. If the state chooses not to operate an HIE, this (potentially very large) penalty could never apply, since no employee could receive the exchange-based federal subsidy that triggers the employer penalty

Summarizing the voters and dollars on either side of the argument:

Those who presumably favor state control of the HIE: As we outlined above, across the 27 federally-facilitated states there are 62.1M subsidy eligible persons (47.5% of these states’ voting age persons), 49.2M (37.7% of voters) of whom are insured under policies purchased somewhere other than an HIE, and 3.8M (2.9%) of whom are enrolled on the HIE. These 3.8M subsidy recipients take in an average subsidy of roughly $3,216 per year. These states have a total of 3,034 hospitals, and fully 6.5M (5.0%) healthcare employees

The 49.2M persons who are eligible for a subsidy but not using it because they have a non-HIE source of coverage presumably are (for the most part) gaining coverage through employment. And, even though these persons are not currently taking the subsidy, it’s reasonable to believe they place some value on being subsidy eligible in the event they lose their current source of coverage. The annual odds of losing employment are roughly 4 percent[5], thus we can loosely argue that around 2M (1.5%) of these persons place significant and immediate value on the fact that they are subsidy eligible

Those who presumably oppose state control of the HIE: Across these 27 states 6.8M persons (5.2% of voters) would be able to avoid paying penalties for being uninsured if the state refused to take control of the HIE; the average penalty owed would be roughly $590 annually, for a total penalty obligation of $4.0B. There are roughly 102,000 employers with more than 50 but fewer than 200 employees[6], roughly 5% or 5,100 of whom did not offer health insurance before the ACA passed, but would have to add health insurance to avoid penalties resulting from an employee receiving subsidized coverage on an exchange

On net, ignoring healthcare workers we see roughly 5.8M voters favoring state control of the HIEs, 3.8M of whom are defending an annual $3,216 subsidy and 2.0M of whom are defending their right to a similarly sized subsidy in the very real likelihood they’re soon going to need it. Adding in the 6.5M healthcare workers who presumably favor subsidies, and controlling for double counting[7], we estimate roughly 11.8M persons (9.2% of voting age persons) would support state control of the HIEs, along with 3,034 employers (hospitals, specifically). Opposing state control are roughly 6.8M persons (5.2% of voters) whose motive is to avoid an average penalty of $590, plus roughly 5,100 employers

Our view is that the grass-roots political balance is convincingly tipped in favor of state control of the exchanges. Even if we take healthcare workers out of the analysis, we still think the balance favors state control. 3.8M voters with an annual $3,216 subsidy, plus 2.0M voters who see a real likelihood of needing that level of annual subsidy, are paired against an admittedly larger number (6.5M) of voters who are trying to avoid a far smaller (average $590) payment. If we make any attempt to scale voter motivation by the dollar amounts involved – and we believe this is in fact the most accurate way of scaling voter motivation – then the ‘favors state control’ side wins, even ignoring the votes of healthcare workers

The economic argument is simply no contest – federal subsidies are material net inflows which would be lost entirely if the state refused to operate an HIE

Other things to bear in mind

If King is overturned, the decision facing these 27 states’ governors is wildly different than the decision each faced when the ACA was first passed. After the Act first passed, governors could choose not to operate an HIE without having to bear any negative political or economic impacts, since the federal government had obligated itself to step in and operate the exchanges if any state chose not to, and most importantly since the state’s citizens would get subsidies for purchasing care regardless of who operated the HIE. To put it simply, the decision not to operate an HIE was ‘free’

If King is overturned, the decision not to operate an HIE is no longer free. A post-King decision not to operate a state exchange almost certainly costs more votes than it gathers, and with no doubt whatsoever does net damage to the economy of any state taking that path

It should further be borne in mind that taking state control of the HIE is a task that is more administrative than operational. States have no need to replace the operational underpinnings of their state’s HIE – they need only replace the federal government as the manager of the HIE – a step the federal government would surely facilitate

  1. The other being Halbig v. Burwell
  2. See in particular “The Court with hear King. That’s bad news for the ACA” by Nicholas Bagley, posted November 7th, 2014 at scotusblog.com
  3. Experts on both sides of the argument regularly post their arguments on SCOTUSblog.com – while we’re uncertain anyone is reliably able to handicap SCOTUS rulings, at the very least readers can remain informed of both camps’ arguments by tracking this excellent forum
  4. Obviously the choice is faced by state government in its entirety – governors and legislatures – but for simplicity’s sake we’ll focus on governors
  5. See for example: R. Johnson and C. Mommaerts, “Age Differences in Job Loss, Search, and Reemployment”, www.urban.org
  6. We focus on this range of firm sizes since these are the firms that have had historically low health insurance offer rates as compared to their larger peers. I.e. we’re essentially arguing that firms above this size are offering coverage anyway and so don’t care as much about the effect of state HIE control on penalties
  7. About 9.2% of state employment, on average, is healthcare workers
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