Health insurance premiums are likely to skyrocket as a result of President Donald Trump’s announcement last week that his administration will halt subsidies for insurers that cover lower-income individuals and families. But while the president’s decision appears to have been designed to disrupt the Affordable Care Act exchanges, states now have an opportunity to restore order to their insurance markets.
Specifically, states can step in to make the subsidy payments themselves - and then turn around and sue the federal government for reimbursement. The law is on their side, and while it might take months or years, the states are highly likely to be repaid in full, plus interest. In the meantime, the backstop provided by the states will encourage insurers to stay on the exchanges rather than rushing to the exits.
The president’s latest attack on the ACA takes aim at an important provision affecting silver-level plans, the most common plan on the ACA exchanges. The 2010 law requires insurers to make cuts to co-payments and deductibles - known as “cost-sharing reductions” - for lower-income households enrolled in silver plans. The statute also says that the federal government “shall make periodic and timely payments” to insurers “equal to the value” of cost-sharing reductions.
The trouble is that Congress refused to appropriate funds for those payments. The Obama administration decided to pay the subsidies anyway, reasoning that not doing so would lead to “bizarre consequences.” Indeed, without these subsidies, insurers will have to charge significantly more for silver plans. The Urban Institute estimates that once the subsidies stop, the average annual silver-plan premium will rise by more than $1,000 per person.
If premiums go up, the size of the tax credit for lower-income households on the exchanges goes up commensurately. The IRS will therefore have to pay out more to lower-income households to offset the premium hikes. For these households, the consequences of Trump’s decision may be contained.
But Trump’s move is more problematic for households with incomes above four times the poverty line, which are ineligible for the tax credits. These households will face much higher premiums for silver plans - without larger tax credits to offset the cost.
To be sure, these credit-ineligible households will still have the option to purchase other types of coverage that aren’t directly affected by cost-sharing reductions - such as bronze, gold or platinum plans. But across most of the country, the silver plans account for the lion’s share of the individual insurance market: 70 percent of consumers on the ACA exchanges are enrolled in silver plans. The abrupt subsidy cut-off also may generate uncertainty and cause insurers to withdraw from the ACA exchanges entirely.
But creative state governments can avert these risks. As University of Pennsylvania law professor Tom Baker and I first suggested in April, states can make their own subsidy payments to insurers if the federal government won’t. They can also take subrogation rights, meaning that if and when the federal government pays up, those payments will go to the states rather than the insurers.
The states can then sue the Department of Health and Human Services in the Court of Federal Claims for failing to follow through on payments required by law. As the Obama administration acknowledged, HHS would likely lose that lawsuit. Indeed, the Supreme Court has interpreted similar statutory language to require the federal government to make payments even in the absence of a congressional appropriation.
When an agency such as HHS loses a lawsuit, damages are paid out of the federal government’s Judgment Fund. And while House Republicans have made noise about limiting the use of the Judgment Fund for ACA-related purposes, failure to pay a court-ordered judgment would mean defaulting on a federal debt. The fallout for financial markets should be dire enough to deter congressional Republicans from interfering with Judgment Fund payouts.
In effect, states would be playing a bridge-financing role. And if they can’t come up with the money immediately, they can turn to the private sector for help. As Darien Shanske, a law professor at University of California at Davis, has suggested, states could raise funds by issuing tax-exempt “Obamacare bonds,” repaying the bondholders when litigation with the federal government is resolved. Those bonds might be an attractive investment for wealthy liberals looking to add an anti-Trump asset to their portfolios.
Not every state is likely to pursue this approach. But even some Republican governors - such as John Kasich of Ohio - might be amenable to a plan that prevents chaos on their states’ exchanges.
For much of the ACA’s short life, the statute’s reliance on states has been its Achilles heel. But now the best prospect for the law’s survival is for states to fill in for a presidential administration that won’t carry out the law. Hopefully, they can muster the will to do so.
Hemel is an assistant professor at the University of Chicago Law School.