Last month, a federal appeals court ruled that the Affordable Care Act (ACA) does not authorize premium subsidies for low- and middle-income consumers who purchase health coverage through one of the law’s federally run insurance marketplaces. Whether the decision in Halbig v. Burwell will become the law of the land is far from certain. (Hours after the ruling was announced, a separate federal appeals court reached the opposite conclusion.) What is clear is that, if upheld, Halbig would have severe consequences for states with federal marketplaces. Millions of people in those states would lose their premium tax credits, making coverage unaffordable for many, increasing uninsurance rates, and dramatically disrupting the states’ insurance markets.
Though resolution of Halbig and similar cases may be years away, policymakers in states with federal marketplaces have options they can consider now. Because of flexibility provided to states under the health law, states can still establish their own marketplaces using operational models that ensure the continuity of federal subsidies and minimize market disruption.
Is it necessary to establish a state-based marketplace? It may not be. The IRS, the government agency responsible for implementing the ACA’s insurance affordability provisions, concluded that the health law allows consumers to access premium tax credits nationwide. This comports with what the drafters of the ACA say they intended, with the contemporaneous views of congressional staff and the Congressional Budget Office, and with how state decision-makers understood the law.
Plaintiffs in cases like Halbig have contended that, whatever the intent, the language of the ACA limits tax credits to consumers who buy coverage through a marketplace established by a state. (The central legal issue is whether the law unambiguously restricts subsidies; if the words, in context, are unclear, the Supreme Court has ruled in the past that the IRS interpretation wins out.) Although most judges who have heard this argument have rejected it, the Halbig court, by a 2—1 vote, found it persuasive.
How does a state with a federally facilitated marketplace establish a state-based one? The ACA itself offers only modest instruction on what a state must do to create a marketplace. Under the law, a marketplace must be a government agency or a nonprofit entity established by a state. It must perform enumerated functions such as conducting health plan management, maintaining a website, and establishing a consumer outreach program. And it must be financially self-sustaining (though states have broad discretion over funding arrangements and mechanisms to accomplish this).
Federal regulators have fleshed out the process by requiring states choosing to create a marketplace to submit a blueprint application. The blueprint prompts states to:
- Identify the legal authority under which it operates (for example, enabling legislation or an executive order);
- Explain how the marketplace will carry out critical functions (it may do so on its own or by agreement with other entities, by developing new processes or leveraging existing ones); and
- Establish governing principles for the marketplace and a governance structure (for example, a governing board that holds regular public meetings).
Options to ease the transition. The ACA’s marketplace models have evolved over time to give states more flexibility over their level of involvement. Currently, 16 states and the District of Columbia operate state-based marketplaces, while 34 use a federal model. Regardless of the label, however, most states are already deeply engaged in many aspects of marketplace functionality, including core components like plan management and consumer outreach.
Over the past two years, states considering establishing their own marketplaces have weighed a number of factors, including avenues for obtaining legal authority to operate, funding availability, desire to maximize state regulatory oversight, federally established deadlines, and their technological capabilities. This final factor, which includes the development of a marketplace IT system, has garnered special attention, particularly in light of the challenges faced by many states and the federal government during the first open enrollment season.
States do need to establish legal authority and craft approaches for funding and governance; but soup-to-nuts development and execution of certain functions, including an enrollment website and related IT systems, need not be a bar to marketplace creation. In 2014, two state-based marketplaces, in Idaho and New Mexico, opted to use the federal technology platform while handling remaining marketplace functions themselves. This model, known as a “supported state-based marketplace,” is potentially attractive because it allows states to draw upon pre-built IT while maintaining policymaking authority over other issues like plan certification, insurer participation and fees, marketing, and consumer engagement. These are areas which many states are well-positioned to manage directly, and many are already doing so. Capitalizing on the federal technology may be cost-effective, as well, an important consideration since federal marketplace establishment funding dries up in 2015. These advantages have led two state-based marketplaces which experienced technological challenges last year, Nevada and Oregon, to adopt the model for 2015. Idaho, meanwhile, plans to transition to its own marketplace IT system next year.
Looking forward. No matter what courts ultimately decide, elected officials in states with federally facilitated marketplaces have the power to ensure that their citizens maintain access to subsidized private health coverage. They also have a path to follow: the “supported state-based marketplace” approach already has offered value for a number of states and can serve others looking to develop their own marketplace while leveraging existing operations and know-how.
There’s no pretending that transition to a state-based model is a light task. But—and ironically given the nature of the Halbig suit—the ACA’s flexible approach to marketplace establishment provides options that complement ongoing efforts in many federal marketplace states to undertake key operational and policy responsibilities. In the coming months, it will be up to leaders in these states to evaluate these options and decide how best to respond to Halbig’s potentially seismic effects.