One of the most important provisions of the Patient Protection and Affordable Care Act (ACA) makes premium subsidies (referred to in the legislation as “Advance Payment of Premium Tax Credits,” or APTCs) available to low- and moderate-income individuals. These subsidies, in conjunction with guaranteed issue requirements and the individual mandate, have resulted in nationwide exchange enrollment of about 7.3 million members, over half of whom were previously uninsured. There is an expectation that enrollment will grow considerably larger during the upcoming 2015 open enrollment period,¹ yet the legality of providing these subsidies in states with a federally facilitated exchange (FFE) has been questioned given ambiguities around language in the enabling legislation. On November 7, 2014, the U.S. Supreme Court decided to hear the King v. Burwell plaintiff’s appeal of the legality of APTCs. What is the significance of this event for health plans?

A brief history of the litigation in lower courts

Opponents of the ACA had brought four cases in federal court regarding the ability of the Internal Revenue Service (IRS) to grant APTCs in states that use the federal exchange platform. At the core of these lawsuits is language in the ACA stating that eligible individuals purchase coverage through an “exchange established by the state.” A strict reading of this language could imply that premium tax credits are only available in state-based marketplaces (SBMs). This distinction is important, because subsidies are a key driver of enrollment into the individual market starting in 2014, and the framers of the law claim that it is clear from the entirety of the law that their intent was for APTCs to be available regardless of which exchange platform is used.

In King v. Burwell (the appeal of which the Supreme Court has agreed to hear), a three-judge panel of the 4th Circuit Court sided with the government (affirming the legality of offering APTCs in FFE states), whereas in Halbig v. Burwell, a three-judge panel of the D.C. Circuit Court sided with the plaintiffs. While the D.C. court’s decision was vacated pending a hearing by the entire 11-judge panel, different courts have seen merits of both arguments. Neither Pruitt v. Burwell nor Indiana v. IRS has yet made it to the circuit court level, but that will almost certainly prove to be a moot point given the Supreme Court’s decision to hear the plaintiffs’ appeal. At the moment, the highest standing court opinion is the 4th Circuit, and, as noted by Health Affairs² among others, the D.C. Circuit is widely expected to agree that APTCs are legal in FFEs after review by the 11-judge panel, resulting in no conflict of opinion between circuit court rulings.

What does this mean to health plans?

The uncertain status of APTCs in FFEs will eventually be resolved, but the Supreme Court is not expected to take up the case until spring 2015, and won’t deliver a decision until the process for filing plans and premium rates for 2016 is already well under way. So issuers in FFE states will continue to make decisions and set assumptions with increased uncertainty surrounding the market forces that will be at play in 2016. Here are a few issues health plans should consider as this situation develops.

How many people will use FFEs?

As mentioned earlier, APTCs are one of the major legs upon which the ACA stool stands. Individuals are required to maintain minimum essential coverage as long as it is affordable to them. Of those who enrolled in coverage through an FFE, 86% received these credits. Removal of these credits will likely reduce participation. A RAND Corporation study³ commissioned by the U.S. Department of Health and Human Services (HHS) estimates that this would decrease enrollment to 32% of what it would otherwise be. Impacts of decreased enrollment on economies of scale and volatility of claims experience should be considered when planning for 2016.

What will the morbidity of these individuals look like?

The removal of subsidies would encourage adverse selection, as there will be a tendency for the sicker of those who would otherwise receive subsidies to maintain coverage, while the healthier will tend to lapse. The same RAND Corporation study concluded that removal of the APTCs would result in a 43% increase in premiums in the individual market, which would primarily be due to the higher claims levels. Individual issuers should consider the extent to which these forces may impact their memberships and the memberships of their competitors when setting rates for 2016.

Will health plans still have sufficient incentives to participate in the exchange?

APTCs are only available to enrollees through the exchange, which has been a substantial incentive for insurers to offer their plans in the exchange market. In the absence of APTCs, the exchange user fee (3.5% of exchange premiums) may be too high relative to any remaining benefits of exchange participation. In recognition of this, the 2015 FFE contracts with health plans include a clause that these contracts may be terminated by the health plan⁴ in the event that APTCs are no longer available, subject to state and federal law. However, doing so may engender bad will from members who signed up through the exchange and enjoy the transparency it creates. This should be taken into account when considering exchange participation for 2016 and beyond.

What effects will this have on off-exchange enrollment?

Insurers that elect to remain off the exchange are not immune to the increased morbidity. The ACA’s permanent risk-adjustment program spreads any exchange morbidity risk across the entire single risk pool, and an insurer electing to remain off the exchange and ending up with a theoretically healthier population would still have to pay into the risk-adjustment pool to compensate any health plans that remained on the exchange and enrolled less healthy members. The resulting single risk pool morbidity level will depend on whether those who lapse their exchange coverage move to non-exchange plans, get coverage outside the single risk pool, or become uninsured.

What will happen to cost-sharing reduction plan variations?

In the current federal regulations, eligibility for APTCs is required to enroll in any of the silver cost-sharing reduction (CSR) plan variations for those with incomes under 250% of the federal poverty level (FPL).⁵ Issuers are not allowed to charge different premiums for these CSR plans, so any extra costs for these members are ultimately paid by other members. The ACA itself is ambiguous about whether the availability of CSR plans is tied to the availability of APTCs, but as these members receive APTCs in addition to lower cost sharing, issuers should carefully consider their CSR enrollment assumptions and any impacts they have on premiums going forward.

What impacts does this have on the employer market?

The availability of premium subsidies also affects employer coverage. Small-business employers that may have previously terminated existing coverage or opted not to sponsor a health plan because of the lower costs of the individual market including APTCs may choose to (re)enter the small group market. It is unclear how these members would affect the small group single risk pool, but this factor should be considered when setting enrollment and morbidity assumptions in this market.

Additionally, the employer-shared responsibility payment for employers with 50 or more employees is only assessable if an employee actually receives premium tax credits or cost-sharing reductions. Removal of APTCs in FFE states reduces⁶ the impact of the employer mandate for those that only employ individuals from those states, and so these employers would be able to shift more costs to their employees as a result.

At this point, there is uncertainty around the availability of APTCs and the impact on health plans, which is due to their potential removal. In addition to having an extraordinary impact on who will enroll in 2016, premium rates set for 2015 may prove to be inadequate if subsidies are terminated during 2015. Much will depend on the exact timing and structure of the eventual decision. Health plans have a great deal to consider, and we all anxiously await the Supreme Court’s decision.