Does the sequester apply to cost-sharing subsidies?

Remember the sequester? That budgetary meat cleaver that indiscriminately slashes the federal budget, sparing few federal programs?

Well, the sequester also affects parts of the ACA—including its cost-sharing subsidies. These subsidies are available to people with incomes below 250% of the poverty line who buy a silver plan on an exchange. For anyone up to 400% of the poverty line, the subsidies will also cap total out-of-pocket costs at a reduced level.

Until recently, the Office of Management and Budget’s considered view was that cost-sharing subsidies were subject to the sequester and would have to be cut by 7.2% in 2014. As Loren Adler of the Committee for a Responsible Federal Budget first noticed, however, OMB released a report on Monday indicating that cost-sharing subsidies will now be exempt from the sequester.

What explains the administration’s about-face? The policy justification is obvious. Trimming the subsidies would have cost roughly $286 million in 2014 alone. Exchange plans would probably have had to eat those costs. As the Congressional Research Service has explained:

[The] ACA entitles certain low-income exchange enrollees to coverage with reduced cost-sharing and requires the participating insurers to provide that coverage. Sequestration does not change that requirement. Insurers presumably will still have to provide required coverage to qualifying enrollees but they will not receive the full subsidy to cover their increased costs.

Insurers couldn’t have been pleased at that prospect.

Does OMB have the legal authority to exempt cost-sharing subsidies from sequestration? Loren reported that the agency “may be basing the exemption on the fact that the low-income cost-sharing subsidies for Medicare Part D are explicitly exempted from sequestration.” But that’s an odd justification. The fact that Congress spared Part D subsidies doesn’t imply that it also spared ACA subsidies. If anything, the Part D exemption suggests the opposite: Congress knows how to exempt health-insurance subsidies from sequestration and declined to do so for the ACA.

Maybe OMB’s argument is more sophisticated, though. The Budget Control Act of 2011, which put the sequester in place, instructs OMB to use the rules of the Statutory Pay-As-You-Go Act to implement the sequester. The Statutory Pay-As-You-Go Act includes the language exempting Part D subsidies from the sequester. The Act, however, was passed in February 2010, a month before the ACA was enacted. Arguably, Congress would also have exempted similar cost-sharing subsidies in the ACA—except it couldn’t because those subsidies didn’t yet exist. On this view, OMB’s volte-face is an effort to honor Congress’s apparent intent to shield cost-sharing subsidies of all sorts from sequestration.

That’s not a strong argument, however. Congress could have exempted the ACA’s cost-sharing subsidies when it created the sequester in 2011, much as it crafted special rules to cap the sequester for Medicare. But it didn’t. What’s more, an argument based on congressional intent could just as easily cut the other way. The point of the sequester was to inflict enough pain on both political parties to get them to agree on a budget. Cutting the cost-sharing subsidies would undeniably serve that pain-inflicting purpose.

Now, it’s possible that OMB has a different legal justification in mind. I hope so, especially because there’s an outside risk that exempting the subsidies could lead to litigation. In an email exchange, Loren asked me a terrific question: “By exempting the cost-sharing subsidies, that increases the percentage reduction to all other sequesterable mandatory spending programs (and slightly lowers the non-defense discretionary spending cap). Would a farmer who now faces a bigger cut or a state now facing a bigger grant cut have standing?”

I think they might. The courts don’t generally interfere in budget disputes because no individual can claim a concrete, particularized injury. But if a plaintiff can make a convincing showing that she would have received more federal money but for the sequester, she would probably have standing to sue.

Sure, linking the sequester to a particular reduction could be hard: after all, government funding often varies from year to year for reasons having nothing to do with the sequester. And not every plaintiff that could make such a showing would welcome litigation. Nonetheless, there’s a non-trivial risk that the OMB decision could end up in court. If it does, I’ll be curious to see the administration’s legal justification. The one on offer so far looks shaky.


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