King v. Burwell and the Federal Budget

The Supreme Court ruling on the King v. Burwell case being argued before the Court today will have major policy and political ramifications that have been widely discussed. But a ruling for the plaintiff (King) could also have significant budgetary implications that could complicate action on a legislative response to the Court ruling as well as any legislation to repeal and replace the Affordable Care Act.

The plaintiffs in King v. Burwell argue that language in the Affordable Care Act referring to subsidies to individuals purchasing health insurance in “an Exchange established by the State” means that individuals in the 34 states without a state-run exchange who purchased insurance through the federally-operated exchange are not eligible for the subsidies under the Affordable Care Act. If the Supreme Court rules in favor of the plaintiffs and strikes down subsidies for individuals in those 34 states, the number of people eligible for subsidies and total spending on subsidies would be significantly lower than it is under current law. According to estimates prepared by the Urban Institute, eliminating subsidies for individuals in all 34 states would affect 9.3 million people in 2016, reducing spending on subsidies for insurance premiums and cost sharing reductions by $28.8 billion in 2016 and $340 billion over ten years.

According to longstanding Congressional budget conventions, such a ruling would have a significant and immediate impact on the budget baseline used in scoring legislation and the cost estimates for legislation related to the Affordable Care Act. In general, the budgetary impact of legislation being considered by Congress is measured relative to the most recent spring baseline issued by the Congressional Budget Office (CBO). However, the exception to that rule is that the baseline is automatically adjusted for changes in law.  Obviously, the baseline is updated when Congress enacts legislation affecting spending or revenues, but the baseline is also updated when the law changes as a result of administration regulations or court decisions. As CBO explained in a 2013 letter to then-Budget Committee Chairman Paul Ryan (R-WI) regarding the impact of administrative decisions and potential court rulings regarding the Affordable Care Act: (emphasis added)

During the course of a year, however, events sometimes occur that are different from those anticipated in developing the baseline projections. In such cases, CBO follows long-standing procedures governing when and how to take into account such developments, which sometimes include the enactment of legislation, actions by the courts, or decisions by executive branch agencies.

If new information indicates that an action or event that would affect CBO’s baseline has happened or definitely will happen (such as a Supreme Court decision, for example, or an agency issuing a final rule or making an official announcement that clearly indicates an intended action by the Administration), CBO incorporates that information in its next regular baseline update. In addition, CBO immediately takes that information into account in assessing what will happen under current law when it analyzes the effects of legislation being considered by the Congress, even if the agency has not published new baseline projections.

Under these longstanding conventions, CBO would update the baseline following a Court ruling for King that struck down subsidies in federally-run exchanges to reflect its budgetary effects and would estimate any legislation considered by Congress after the decision relative to that updated baseline. This adjustment would primarily reflect lower spending as a result of the reduction in number of people eligible for subsidies, but could include other indirect budgetary effects of the ruling as well. 

Probabilistic Scoring

In the case of a ruling for King, the change in the baseline would not reflect simply reducing projected spending by the amount of spending currently assumed in the baseline for subsidies to individuals in the 34 states affected by the decision.  CBO would take several other factors into consideration in updating the baseline following a Court decision.

The most significant factor will be CBO’s estimate of how many states would decide to establish an exchange to ensure residents of their state would be eligible for subsidies and how long it would take for those states to take the necessary actions. This is very similar to how CBO assumed some states would go forward with the Medicaid expansion and others would decline it, in the wake of the Supreme Court ruling that states had the option of declining to adopt the Medicaid expansion in the ACA without losing all federal Medicaid funding. 

CBO will also have to consider other implications of the decision with potential budgetary effects, such as the effect of the decision on other insurance premiums, the impact, if any, that would have on spending on subsidies in the remaining states, how the ruling would affect the costs of the tax exclusion on employer-sponsored insurance, and whether the decision will result in an increase in Medicaid enrollment or participation in employer-sponsored insurance.

As a result, the change in the baseline is almost certain to be less than the total $340 billion estimated amount of projected spending on subsidies for individuals in the 34 states affected by the ruling.

What This Means for Legislation Modifying Subsidies

Nonetheless, if the Court rules in favor of the plaintiffs, the baseline is likely to include significantly lower spending than it does today, therefore making any proposal to restore the subsidies, even temporarily, score as costing money. Legislation to replace lost subsidies would be evaluated relative to a baseline that assumes people in states without state-based exchanges are not eligible for subsidies and would be scored as increasing spending, even if the replacement subsidies are less generous than the current subsidies struck down by the Court.  

Similarly, legislation to repeal and replace the Affordable Care Act’s coverage expansions with less expensive subsidies, which would be scored with significant savings today, might be scored as increasing spending if the new subsidies are more costly than the combination of full ACA subsidies in some states and no subsidies in states that forego creating their own exchange (in the distribution that CBO predicts). (Note: repealing the entire law would be judged by CBO as increasing the deficit, while just repealing the coverage expansions would decrease deficits)

If legislation providing assistance to individuals who lost subsidies as a result of the decision or repealing and replacing the Affordable Care Act is scored as increasing spending relative to the updated baseline, it would likely be subject to a Budget Act point of order for increasing spending above the budget allocations and would also be scored as increasing the deficit for purposes of the Statutory PAYGO Act.  In addition, replacement legislation could not be considered as part of budget reconciliation legislation unless it was accompanied by other tax and spending changes reducing the deficit because Senate rules prohibit reconciliation legislation from increasing the deficit.

Options to Address the Budget Scoring Dilemma

If Congress wishes to have the ability to pass legislation in response to a decision striking down subsidies without running afoul of budget rules, the Budget Committees have a few options at their disposal.

1. The Chairmen of the Budget Committees could use their authority under Section 312 of the Budget Act to supply budget estimates for purposes of budget enforcement that differ from CBO estimates by calculating budgetary effects relative to the law in effect prior to the King decision. However, the Budget Committee Chairmen may be reluctant to supply an estimate that is significantly different than the CBO estimate without specific authorization to do so.
2. The Budget Committees could establish a reserve fund in the budget resolution allowing the Budget Committee Chairman to adjust budget allocations to accommodate the costs of replacement legislation due to the change in the baseline. However, the legislation would still be scored as increasing the deficit, preventing it from being considered as part of reconciliation and subjecting the costs to statutory PAYGO.
3. The budget resolution could include a special directed scorekeeping rule, providing that replacement legislation be scored relative to the baseline prior to the Court ruling for purposes of enforcing the budget resolution, including compliance with reconciliation instructions. In effect, such a rule would evaluate legislation relative to the law in place today instead of relative to the law following a King ruling. Such a rule could also provide for use of an estimate relative to the pre-King baseline for purposes of the Statutory PAYGO Act if the legislation includes a provision incorporating the CBO estimate by reference as allowed by the Statutory PAYGO Act. In the absence of language providing for use of the CBO estimate for Statutory PAYGO, the legislation would be estimated by OMB relative to the current law baseline reflecting the King decision and scored with a cost increasing the deficit for purposes of Statutory PAYGO.

If the Court rules that the federal government cannot distribute tax subsidies to citizens in states that did not set up their own exchanges, Congressional budget rules will automatically shift to cover the new court ruling. As a result, without explicit direction from the Budget Committees, it will appear more expensive to pass new health care legislation that restores or modifies the existing health insurance subsidies.