Will states create health insurance exchanges after King vs. Burwell?

The Supreme Court's ruling in King vs. Burwell on Thursday drew outrage aplenty from Obamacare opponents, who had come to view the plaintiffs' fanciful legal claims as a hammer that would finally break the glass around the law. By ruling that federal subsidies are, in fact, available in every state, not just the 16 that run their own insurance exchanges, the 6-3 majority assured that the law will not collapse under its own weight anytime soon.

As a result, the anti-Obamacare faction found itself back where it started in 2011, seeking to change the law the old-fashioned way: through Congress. And for now, at least, it doesn't have the votes needed to get past a Democratic filibuster in the Senate, let alone override a certain veto by President Obama.

I understand why it's so galling to many that the court would rule that way. The plaintiffs appeared to have found an absolutely devastating hole in the fabric of the Patient Protection and Affordable Care Act: a provision that seemed to explicitly limit subsidies to the states that had established their own exchanges. But as Chief Justice John G. Roberts Jr. notes, the clarity of the language melts away if you read the rest of the law and stumble over the many contradictions and absurdities that would ensue if subsidies were restricted.

As Roberts put it: "A fair reading of legislation demands a fair understanding of the legislative plan."

Anyway, what I don't understand is all the wailing and gnashing of teeth from the law's opponents about how the decision eliminates the incentive that Congress supposedly gave states to set up exchanges. Consider this passage from Justice Antonin Scalia's dissent (minus most of the references to statutes and pleadings), which as usual is a must-read for anyone who loves a good turn of phrase:

"Setting up and running an Exchange involve significant burdens -- meeting strict deadlines, implementing requirements related to the offering of insurance plans, setting up outreach programs, and ensuring that the Exchange is self-sustaining by 2015. A State would have much less reason to take on these burdens if its citizens could receive tax credits no matter who establishes its Exchange. (Now that the Internal Revenue Service has interpreted §36B to authorize tax credits everywhere, by the way, 34 States have failed to set up their own Exchanges.) So even if making credits available on all Exchanges advances the goal of improving healthcare markets, it frustrates the goal of encouraging state involvement in the implementation of the Act."

His critique is typical, and there are two fundamental things wrong with it.

First, as noted in the brief filed by Virginia and 21 other states, no state legislature contemplated the prospect of losing the tax credits as it debated whether to establish its own exchange. This includes states such as California, which passed legislation to create an exchange in 2010 -- almost two years before the Internal Revenue Service issued the disputed rule that tax credits would be available in all states. (That rule was the target of King's lawsuit.)

The 34 states that didn't set up exchanges went that route not because the IRS enabled them to, but because their Republican-dominated governments didn't want to do anything that might sustain Obamacare. Many also were concerned about the long-term costs of operating an exchange.

Top officials from about eight of these states filed briefs urging the Supreme Court to rule in King's favor, showing that the availability of subsidies was a non-issue for them. On the contrary, in their minds the subsidies propped up a law that they wished would go away. The inescapable conclusion is that many, if not all, of the 34 states would have chosen not to create an exchange even if it meant leaving low- and moderate-income residents unable to afford coverage.

Second, as California's move in 2010 shows, states retain a powerful incentive to create an exchange even if subsidies are available on a federally operated one. With its own exchange, a state can wield a lot of influence over the insurance market within its borders, affecting how much competition emerges, shaping the options consumers have for coverage and care, and pushing for more cost controls and other reforms.

Here are several examples.

If a state wants an exchange that's an "active purchaser," negotiating for better deals with insurers on behalf of its citizenry, it has to set up its own. Similarly, if the state wants to make it easier for consumers to compare plans by requiring standard benefit designs, it will need its own exchange. Ditto if it wants to employ value-based benefit design to try to hold down the cost of care, or if it wants to rate the quality of care that consumers receive from doctors and hospitals.

Naturally, states that prefer a purely market-based approach to consumer protection wouldn't find such options appealing. But they might still want to operate their own exchange to have more control over the cost, which is passed on to insurance buyers -- assuming they can ever get past their visceral opposition to the Affordable Care Act.

It's important not to confuse correlation and causation here, and to remember that King's view of the law was far out of the mainstream until the lawsuit picked up steam. When it analyzed the various healthcare reform proposals and projected their costs, the nonpartisan Congressional Budget Office always assumed that subsidies would be available nationwide, even though it also assumed not every state would set up its own exchange. That was the conventional interpretation, not King's.

Nevertheless, Scalia offered this wrong-end-of-the-telescope view of the majority's opinion at the end of his dissent. "The Court’s revision of the law authorizes the Internal Revenue Service to spend tens of billions of dollars every year in tax credits on federal Exchanges," he wrote. "It affects the price of insurance for millions of Americans. It diminishes the participation of the States in the implementation of the Act. It vastly expands the reach of the Act’s individual mandate, whose scope depends in part on the availability of credits."

That's almost exactly backward. Had Scalia prevailed and the court sided with King, it would have eliminated tens of billions of dollars in spending that Congress has been fully expecting to make since it passed the Affordable Care Act. It would have affected the price of insurance for millions of Americans by sending the insurance markets in 34 states into "death spirals" (as Roberts put it), raising premiums inexorably as younger and healthier people abandoned coverage. And it would have reduced the reach of the Affordable Care Act's individual mandate by roughly 8 million people who, with no subsidies available, would be exempted from the mandate because insurance would be unaffordable.

But then, the whole King case had an upside-down quality to it, as the plaintiffs tried to use one poorly written passage to turn the purpose of the law on its head.

Follow Jon Healey's intermittent Twitter feed: @jcahealey

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