States with hybrid exchanges could face ‘difficult’ decision

As the Supreme Court gets set to hear oral arguments next month in King v. Burwell, a case challenging the permissibility of subsidies to those who purchase health insurance on the federal exchange, states with hybrid exchanges could face a difficult decision should the Supreme Court ultimately rule the use of tax credits on the federal exchange is impermissible.

At least five states – Iowa, Illinois, Arkansas, Delaware and New Hampshire – have opted for state-federal partnership exchanges, according to data from the National Conference of State Legislatures. Under this hybrid model, people enroll through Healthcare.gov but the states retain control over administering certain aspects of the exchange.

“One of the arguments opponents make against the availability of tax credits on the federal exchange is that the ACA clearly sets up an either/or choice when it comes to exchanges: a state can either choose to run its own exchange or defer to the federal exchange,” says Michael Maddigan, a partner in the Los Angeles office of law firm Hogan Lovells. “The reality, however, is more complex, as a number of states have chosen, with HHS’s permission, ‘hybrid’ or ‘partner’ exchange models where the state elects to defer to the federal marketplace but retains control over some aspects of plan selection, rating, monitoring, oversight, or consumer assistance functions.”

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Maddigan outlines the issues at stake in King v. Burwell and how hybrid exchanges may have to adapt. 

What’s the background in King v. Burwell?

Under the Affordable Care Act, Section 1311, the Act requires the states to establish exchanges. It says declaratively: The state shall establish exchanges. There's a different section, Section 1321, that is kind of a fallback provision of sorts. What it basically says is that if the states don't establish exchanges, then the federal government will establish an exchange for them. That's consistent with the purpose of the Act which was to make sure that there are these exchanges set up in every state.

The IRS, in its rulemaking capacity, interpreted the ACA to mean that the subsidies provided by the Act would be available regardless of whether someone purchased from an exchange that was established by a state or the federal government.

But, probably contrary to the expectation of most of the people involved in the process of drafting the ACA and envisioning it, a lot of states did not choose to set up their own exchange.

[Thirty-four] states defaulted to the federal exchange. Basically opponents of the ACA said, "Well, wait a minute. The IRS rule saying that subsidies are available to people who purchase from this [federal] exchange is in direct conflict with the actual language of the statute, which says that subsidies are available only to people who purchase insurance on an                                                                                                                                                                                                                                                                                                                                                                                                                                                                 exchange that was established by a state under Section 1311."

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The real world of exchanges is far more complex than just an either/or sort of argument, either state or federal. Can you elaborate on that?

What's happened in reality is that a number of states did not want to entirely set up an exchange but also didn't want to totally default to the federal government. Some states wanted a voice on things like the terms of the plans that are going to be offered on the exchanges, the type of companies that get to offer plans on the exchanges – things of that sort that are really very much traditionally in the province of state insurance commissioners, state insurance departments and state regulators.

Some states have retained control over the more consumer-oriented aspects of these exchanges and others states have maintained broader control over the plan regulation pieces.

Opponents [of the ACA] would argue that those are still federal exchanges. … Technically, they are federal exchanges. In practice, though, they are hybrids.

Also see: Were brokers an ‘afterthought’ on state exchanges?

How do you see this playing out? Is the Supreme Court likely to address this issue of the hybrid exchanges?

I think it will be interesting to see if the Court picks up anything about this. The existence of hybrid exchanges is actually mentioned at least in the opening brief filed by the challengers of the subsidies on the federal exchanges. It's interesting to see if the Court will be interested in the ‘real world’ facts, as it often is in other areas. What's actually happening? What does the world look like? I think that'll be interesting to see if it has any impact on their decision-making.

From the practical perspective, I think that it would be helpful for people in the industry, particularly those who are involved in hybrid exchanges, to do a little bit of thinking about what might happen to them, depending on what the Court does.

If the Court says that subsidies are not available on federal exchanges, then it seems to me that states that are operating hybrid exchanges will, even more than others, perhaps have a difficult decision about whether they want to opt to create a state exchange. They are actually involved in operating the exchanges that they're involved in, and have chosen to take an active role, but then all of a sudden, potentially, subsidies will be unavailable for them.

Also see: Are exchanges weakening the role of the broker?