August 8, 2014

Affordable Care Act—What Will Be The Impact of Recent Court Decisions?

Cary Gibson

The courts are taking another look at the Affordable Care Act. On July 22nd, two courts released rulings in cases challenging the Affordable Care Act’s subsidies for the purchase of health insurance. The two rulings contradicted each other, signaling potentially significant consequences for the health reform law down the road.

At the heart of both cases, is a provision of the Affordable Care Act that provides subsidies, in the form of tax credits, to people who need financial assistance to purchase health insurance policies on the health insurance exchange. Right now, the Obama administration is making the subsidies available to individuals in all 50 states. The recent court cases challenge the legality of the subsidies being provided to those who live in a state where the exchange is being run—ether in full or in part—by the federal government. Challengers contend the statutory language of Section 1311 of the Affordable Care Act only allows subsidies to be provided in states where the state is running its own exchange. The Administration argues that Congress intended them to be provided in all states and argues that Section 1321 creates ambiguity about eligibility, allowing the IRS to have flexibility in its interpretation of the law.

In the first of the decisions handed down last month, the U.S. Circuit Court of Appeals for the District of Columbia ruled in Halbig v. Burwell that subsidies being provided for the purchase of health insurance in the federal exchange were not legal. In that decision, the court concluded that a federal exchange is not an exchange established by the state and that the Affordable Care Act does not authorize the administration to provide tax credits for the purchase of insurance on a federal exchange. The court also rejected the Obama administration’s argument that it was Congress’ intent to make the subsidies available in every state, regardless of the type of exchange. The second decision was handed down in the case of King v. Burwell by the 4th Circuit Court of Appeals in Richmond, Virginia. In that decision, the court ruled the subsidies could be provided for insurance purchased on the federal exchange. In their opinion, the judges noted “. . .the applicable statutory language is ambiguous and subject to multiple interpretations.”   The judges also found that it is appropriate to defer to the IRS’s interpretation of the Affordable Care Act.

Although some speculate that conflicting circuit court opinions indicate the issue is bound for the Supreme Court, that scenario is far from certain. The Obama Administration has asked for an “en banc” review of the Halbig decision. If the D.C. Circuit Court agreed to the review, the case would be reargued before all 11 judges, rather than just the two who issued the recent decision. There are more Democratic appointed judges than Republican ones on the D.C. Circuit Court and that may give the government’s case an advantage. A new decision in favor of the subsidies would resolve the current conflict among the circuit courts. However, the plaintiffs in the King decision have appealed their case directly to the Supreme Court and the Court will eventually decide whether it will choose to hear the case. There are two other similar cases pending in Indiana and Oklahoma and the outcomes of those cases could help determine whether the Supreme Court will preside over the issue.

On a practical level, nothing about how the subsidies currently operate will change while the legal process is still underway. Qualified individuals who receive subsidies now will continue to receive them. However, if the subsidies for insurance on the federal exchange are ultimately found to be illegal, the ramifications for the Affordable Care Act could be substantial. Right now, the federal exchange operates in over 30 states. If the Halbig decision is upheld, the tax credits would only be available in a limited number of states and millions of people who currently receive subsidies to purchase insurance on the federal exchange would lose access to their health insurance. This, in turn, would also mean the risk pool for the federal exchange would be smaller, potentially threatening the ability of the exchange to provide good plans at a reasonable cost. Additionally, there could be ramifications for the employer mandate in the Affordable Care Act because penalties for the mandate are tied to how many employees receive subsidies to purchase insurance on the exchange. The individual mandate could be affected as well as it exempts individuals who cannot afford to buy health insurance. Of course, if the Halbig ruling is upheld, some of these negative ramifications could be avoided if states working under a federal exchange switch to a state-based exchange instead. However, the process for doing so could be difficult, making such an option far from easy.