Roberts’ “Flying Squirrel” Maneuver Takes Down the Affordable Care Act

After a four month “death watch” in the mainstream media for President Obama’s health reforms (following an ineffectual defense in March’s Supreme Court hearings), instant analysts were quick to characterize last week’s Supreme court decision as a ringing vindication of the Affordable Care Act and a big political victory for a struggling President Obama.

However, on closer reading, the instant analysts were wrong. The Roberts Court actually punched a huge hole in the law, potentially reducing its historic coverage expansion by as much as a third. In addition, the Court’s ruling will set off serious political conflict in southern and mid-western states that will ripple through those states’ health care markets, and fracture hospitals’ and health plans’ support for health reform.

Unlike the Act itself, which was almost unreadable, the Court’s opinions were written in English and will reward readers with fresh understanding of this complex law. They reveal two incommensurable philosophical positions eloquently argued and improbably bridged. There were two big surprises: Justice Robert’s apparent last minute support of the Court’s liberal wing in preserving the mandate and the remarkable decision to render the Medicaid coverage expansion optional! (Justice Kennedy, the presumed swing vote, actually supported killing the entire law).

Roberts’ switch required a breathtaking bit of jurisprudential wizardry: declaring ACA’s clearly labeled “penalty’ for refusing to purchase coverage a “non-tax” for purposes of the Anti-Injunction statute (which kept this mess from landing on the Court’s desk yet again when it’s actually levied in 2014) yet, mere pages later, declaring it a valid use of Congress’ taxing power and thus sustaining the Constitutionality of the mandate.

Robert’s maneuver was the juridical equivalent of this remarkable hop-over-the-opponent “flying squirrel” wrestling takedown.

A progressive, pro-ACA legal scholar colleague pronounced Roberts’ “yes, it’s a penalty, no, it’s a tax” construction “absolutely incomprehensible”. An outraged Antonin Scalia, who clearly expected Roberts to support killing the entire law, could only fume that the argument “carries verbal wizardry too far, deep into the forbidden land of the sophists.’

But the biggest surprise was the Court’s handling of the law’s Medicaid expansion. Many legal observers were surprised that the Court agreed to review the Medicaid expansion at all, given the long history of incremental expansions of the program. The Roberts Court found that requiring states to add between 15-20 million new low income folk to Medicaid rolls on penalty of withdrawing the state’s entire Medicaid funding was a coercive  and thus unconstitutional abridgement of states’ rights- in Roberts’ words “a gun to the head”. In this, the conservatives were joined by Justices Breyer and Kagan, for a stunning 7-2 majority. For the Court effectively to rewrite the statute to render the Medicaid expansion “optional” for states was an outcome no-one expected.

Congress leaned heavily on Medicaid’s bargain basement provider payment rates to squeeze the maximum amount of coverage out of the ACA’s limited new revenues. Yet by relying on Medicaid for as much as half of the expansion ACA disproportionately affected southern and border states with hostile Republican controlled statehouses.

The Medicaid expansion intended to partially nationalize the program, agreeing to pay for 100% of the first three years’ cost for the newly eligible, and 90% thereafter. It also ended Medicaid’s welfare-era categorical program structure (that is, covering various needy groups). ACA raised income eligibility to 138% of poverty (quadruple the present income thresholds in many southern states), adding millions of single adults not in families that formerly were excluded from coverage. It also channeled Medicaid enrollment through the newly created Exchanges, and standardized Medicaid benefit packages. The net effect: ACA compelled sharp Medicaid enrollment growth in states with historically skimpy benefits, low income eligibility thresholds or both.

Those who’ve studied the uninsured problem closely know that a huge percentage live in the southern third of the country, whose Medicaid programs have historically enrolled far fewer of their eligible populations, and whose economies were devastated by the 2008 recession. Look here for an analysis of Medicaid takeup rates by states and the reasons. There are twelve million folk presently eligible for Medicaid but not enrolled, heavily skewed toward those same southern and border states. ACA would have doubled Medicaid enrollment in many of these states. Louisiana has estimated that 48% of its residents would be Medicaid beneficiaries at full implementation.

And adding these presently eligible to the rolls would cost states not an eventual 10% but between 30-50% right away, depending on the state’s current federal matching (FMAP) rate. The Exchanges would also become an express lane for these folks onto Medicaid rolls through expedited Internet based enrollment. When Jagdeesh Gokhale examined the fiscal consequences to states of the expansion, he found that when compounded by states’ expected population growth and continued medical inflation that several key large states would see their general revenue funded Medicaid costs double between now and 2020, despite the generous federal match for the newly eligible folks.  Two of those states, Florida and Texas, contained  in 2010 a combined ten million uninsured, and all-but-bankrupt California, another 7 million..

Of course, the classic problem with Medicaid is its countercyclical effect. In recessions, states see both falling general revenues and sharply increased enrollment – a recipe for recurring fiscal crises. For states with precarious economies, the Medicaid expansion effectively fills the ship of state’s hold with tons of loose cannonballs that will roll with the storm’s waves. If states are struggling now with 53 million Medicaid beneficiaries, imagine the gravitational effect of 80+ million in the next recession!

The reaction by Republican Governors (whose Attorneys General were plaintiffs in the Supreme Court case) was immediate and predictable. Seven southern and mid-western Governors said that they would decline the expansion and eight more said they were seriously considering doing so. These fifteen states, including the aforementioned Texas and Florida, contain 40% of the nation’s uninsured.

If half of their uninsured were Medicaid eligible, and the states follow through on opting out, that would take eight to ten million people out of the coverage expansion, leaving it well short of half of the nation’s 50 million uninsured.   Though several million people between 100% and 138% of poverty would be eligible for subsidies through the Health Exchanges, the fact that they would have to pay SOMETHING as their share would likely limit the uptake to the sickest fraction of the eligible group.

Hospitals are watching these developments with mounting alarm. National hospital organizations actively supported health reform, even if grassroots hospital executives remained major skeptics. And they gave up $155 billion in future Medicare payment reductions to gain 30 million new paying patients, and consented to the reduction of disproportionate share payments (DSH) payments intended to compensate them for their bad debts and charity care.   A cancelled Medicaid expansion would place the safety net hospitals in those states at serious economic risk, who would be forced to continue relying on Robin Hood economics to keep their doors open

For several reasons, health plans will also have trouble with the newly “optional” Medicaid expansion. The only reason health plans agreed to unprecedented federal restrictions on their business practices was the promise of near-universal coverage.

Cost shifting and adverse selection will remain in full cry in the opt-out states.

How can health plans in states which decline the expansion be expected to absorb, through guaranteed issue and guaranteed renewal, the flood of adverse selection, not to mention the above discussed provider cost shifting? If the federal government enforces the rate controls in ACA, health plans could run out of cash and exit those markets. And if CMS declines to enforce ACA’s rate controls, employer health premium increases could head back north into the high teens or low twenties.

Will the uninsured join their hospital and health insurance colleagues on the battlements to prevent Republican controlled states from following through on their Governors’ threats to opt out? Not likely. Last fall, Kaiser Family Foundation found that only about half of the uninsured were even aware of the Medicaid expansion, let alone whether they would benefit from it or not. 47% of the uninsured said they did not believe health reform would improve their access to health care, and 14% thought access would actually be harmed. The Court’s Medicaid decision could end up depriving millions of economically marginal folks of benefits they did not even know they were getting.

How all this will turn out is beyond this futurist’s grasp. My crystal ball is still in the shop. This fall’s election is a far bigger risk to health reform than what the Roberts court did last week. However, the Roberts Court has thrown the intricate web of “bargains” that made health reform possible into chaos and health reform has sustained a serious blow Watching the spreading chaos is going to make it an interesting summer and fall, leading to a consequential election. Health reform is far from a done deal.

Originally published on The Health Care Blog.