Halbig v. Sebelius and State Motivations to Opt for Federally Run Exchanges

One of today’s hottest Affordable Care Act debates is over whether federally facilitated exchanges can provide premium tax credits to low-income consumers or if this power is limited to state-based exchanges.  The IRS has interpreted the law to allow premium tax credits to be made available through federally facilitated exchanges, and now its rules are under attack. Opponents charge that Congress intended for tax credits to be limited to state-based exchanges as an inducement for states to take on the responsibility of running exchanges. The ramifications of this interpretation are huge: low income individuals living in one of the 34 states with a federally facilitated individual market exchange would be denied access to affordable health coverage. In addition, the employer mandate penalties, which only kick in if employees enroll in subsidized coverage through the exchange, would not apply in states with a federally run exchange.

On January 15th, a D.C. district court judge ruled in favor of the government on one of the leading cases on this issue, Halbig v. Sebelius. The challengers have already appealed the ruling, however, and are gathering their forces. Last week, eight states filed amicus briefs supporting the appeal. Alabama, Georgia, Nebraska, Oklahoma, South Carolina, and West Virginia joined together on one brief (available here) while Kansas, Michigan, and Nebraska (again) submitted a separate brief (available here).

The states’ amicus briefs imply that these states decided not to pursue state-based exchanges because they did not want premium tax credits to be available in their states, thus sparing “low-income individuals from the individual mandate and employers from the employer mandate.” The Oklahoma-led brief expresses concern that the prior court ruling upholding the IRS rule “unsettled” the amici states’ expectations that predicated their decisions not to establish state-based exchanges. The Kansas-led brief asks the court to invalidate the IRS rules and protect the amici states’ “deliberate and reasoned decision to opt out of the benefits and burdens of establishing a State exchange under the ACA.”

Nobody can know for certain what conversations may have happened behind closed doors. However, official public statements and reports from the states suggest that this issue was, at best, little more than an afterthought in their deliberations over establishing an exchange. My colleagues and I spent months tracking state decisions to establish state-based exchanges. We looked at a wide range of information – including press releases, letters, reports, and news coverage quoting public officials – and interviewed officials from twelve states to record which exchange model they had chosen for 2014 and to understand the factors that influenced their decisions. Our findings are available here.

From our interviews and analyses of public documents, it was clear that many states forgoing state-based exchanges were concerned that they would not be given enough flexibility and control over policy decisions to justify the additional costs of operating a state-based exchange. Politics also played a big role.  As we say in our paper, one state official “reported that opponents of the health care law are defaulting to federally facilitated exchanges as a strategic move, noting ‘They think that if states don’t participate, the Affordable Care Act will fail and they won’t get blamed.’” What we generally didn’t hear was the argument about avoiding the individual or employer mandate presented in the states’ amici briefs.

Taking a closer look back at the statements and reports we compiled from the amici states specifically, it is not evident that this line of reasoning played a significant role, if any, in most of their decisions to opt out of operating state-based exchanges.  Let’s look at them one by one:

  • Alabama: In his official statement rejecting the option to build a state-based exchange, Governor Bentley declares: “I am not going to set up a state-based exchange that will create a tax burden of up to $50 million on the people of Alabama. As governor, I cannot support adding such a tax burden onto our citizens.” Now, while the Halbig amicus briefs do frame the employer mandate as a tax burden, it doesn’t look like that is what Governor Bentley is talking about. Rather, $50 million reflects the high end estimate of the administrative cost of operating a state-based exchange in Alabama in 2015 (when state-based exchanges are first required to be self-sustaining).
  • Georgia: Governor Deal told the federal government that he opted out of building a state-based exchange out of concern about the “one-size-fits all approach and high financial burden imposed on the states by this federal mandate.” In an accompanying statement, he also expressed frustration with the number of unknowns about establishing exchanges. Yet the question at issue here was not an unknown at this time: the IRS had issued final regulations on premium tax credits nearly six months before this statement.

In addition, in a report to the governor dated Dec. 15, 2011 the Georgia Health Insurance Exchange Advisory Committee acknowledged that “Georgians will be eligible for these subsidies whether the [exchange] in Georgia is established by the state or federal government.” Some may argue that the term “these subsidies” is only referring to federal cost-sharing subsidies and not premium tax credits, but in our experience the term “subsidies” is often used generally to refer to both forms of financial assistance and is, in fact, used in such a manner in other areas of the committee’s report (see, for example, pages 5 (#2), 12 (#4(c)), and 13 (#7, bullet three)).

  • Kansas: Governor Brownback’s opposition to building a state-based exchange first manifested publicly in August 2011, when he returned an “Early Innovator” grant from the federal government. The Kansas Insurance Benefit Exchange Steering Committee noted in a subsequent meeting that if the state defaulted to a federally facilitated exchange, “the feds then determine which citizens qualify for the various subsidized programs and tax exemptions”—not that the subsidies are no longer available. While it is possible that this issue was raised in later, private deliberations, it appears that Kansas was already leaning against building a state-based exchange when this issue rose in prominence.
  • Michigan: In his declaration letter and accompanying press release announcing Michigan’s interest in partnering with the federal government on exchange implementation, Governor Snyder made clear that his decision not to pursue a state-based exchange in 2014 was based on time constraints. Specifically, he says that he “continue[s] to believe that a State-Based Exchange that provides the highest level of customer service and is tailored to meet Michigan’s needs is the optimal solution for our state. However, given the current federal framework and time frames, a State Partnership Exchange is more operationally feasible at this time for the open enrollment period scheduled to begin October 1, 2013.” He made no reference to any desire to protect Michigan residents from the employer or individual mandate penalties and, in fact, expressed interest in moving to a state-based exchange model in the future.
  • Nebraska: Echoing the primary concerns among states we reported on in our paper, Governor Heineman justified his decision to reject a state-based exchange on “concerns that the State of Nebraska would not have any significant control of a state exchange,” and even greater concerns “about the cost of an exchange.” As the materials enclosed with his statement explain, the costs he was referring to do not extend to costs related to the employer or individual mandates, but only encompass the administrative and operational costs of building and maintaining a state-based exchange. Notably, Governor Heineman also commented that “[o]n the key issues, there is no real operational difference between a federal exchange and a state exchange. A state exchange is nothing more than the state administering the Affordable Care Act with all of the important and critical decisions made by the federal government.”
  • Oklahoma: Governor Fallin told the federal government that Oklahoma would not be pursuing a state-based exchange in light of the costs and lack of flexibility under the federal framework. While she does not specifically cite a desire to avoid the employer mandate as a reason for rejecting a state-based exchange, Governor Fallin also notes in her accompanying statement that the state was pursuing new legal challenges to the Affordable Care Act. Like Kansas, however, Oklahoma’s opposition to the Affordable Care Act’s exchanges is long-standing (see here, for example), and it is not clear that the issues raised in the brief were a driving force behind Oklahoma’s decision not to run a state-based exchange.
  • South Carolina: Similarly, Governor Haley both cited concerns about a lack of flexibility to states and outstanding legal questions in her letter to the federal government declining to run a state-based exchange in November 2012. However, as she wrote to Senator Jim DeMint in July 2012, she had actually made up her mind the previous December, after the South Carolina Health Planning Committee recommended that South Carolina not pursue a state-based exchange, and we have found no mention of the premium tax credit/employer mandate question in the Planning Committee’s 400+ page report.
  • West Virginia: As our report notes, West Virginia initially enacted legislation to establish a state-based exchange, but ultimately decided to enter into a partnership exchange for 2014. State officials told the press that this decision was based on concerns about the IT costs of running a state-based exchange. Officials did not mention any desire to avoid the application of the employer mandate. In addition, at least as late as May 2012, state officials were explicitly telling stakeholders that premium tax credits would be available through federally facilitated exchanges.

Of course, it is important to acknowledge that the desire to spare residents from the employer or individual mandate may have been raised in forums that were outside the scope of our review or in documents that we missed in our review process. We focused primarily on administrative materials and statements unless the legislature was clearly implicated in deliberations (for example, as we note in our report, Washington State’s legislature set up a Joint Select Committee on Health Reform Implementation, which included an Advisory Group on Exchange and Insurance Reforms). In addition, certainly some discussions only occurred behind closed doors and are not on the public record.  To the extent we missed any relevant information in our review, we welcome states to let us know and, more importantly, make this information available to the public.

The decision to establish a state-based exchange or defer to a federally facilitated exchange has significant consequences for the public regardless of the outcome of the Halbig case, and voters should be fully informed of the reasons why their public officials chose to proceed as they did.  As states potentially reconsider their decisions over the next year or more, transparency in decision-making will be just as important.

To read the issue brief and explore the findings this analysis is based on, visit here. This report is part of the Center on Health Insurance Reforms’ “Implementing the ACA Project” and was generously supported by The Commonwealth Fund. The views presented here are those of the author(s) and not necessarily those of The Commonwealth Fund or its directors, officers, or staff.

Editor’s Note: Ms. Monahan is a former Senior Research Analyst at the Center on Health Insurance Reforms. She is currently pursuing a law degree at Yale University.

6 thoughts on “Halbig v. Sebelius and State Motivations to Opt for Federally Run Exchanges

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  5. The links to your report and findings are broken.

    Does a similar examination of states that declined to expand Medicare under the ACA, where loss of federal money was unquestionably involved, reveal that state policymakers focused on the federal money that would be lost? My impression is that they spoke about the same issues that you cite here: expenses to the state and increased federal regulation. It doesn’t seem surprising that a politician who is arguing to opt out of a federal program would talk about the downside of accepting the program rather than the upside (federal dollars).

    And what are we to make of the statements Jonathan Gruber made on at least two different occasions?

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