Rulings on Subsidies Bring More ACA Confusion

Split among federal circuit courts could hasten Supreme Court appeal

By Stephen Miller, CEBS Jul 22, 2014

updated Aug. 1, 2014

In a decision stayed pending appeal, a three-judge panel of the D.C. Circuit Court of Appeals ruled 2-1 that federal subsidies in the form of tax credits under the Affordable Care Act (ACA) statutorily apply only to policies purchased on state-run health exchanges and not to coverage selected on one of the 36 marketplaces that the federal government operates on behalf of states that failed to set up an exchange on their own.

IRS rules provide subsidies/credits to low-income purchasers of health policies on either state-run or federally facilitated health exchanges.

The July 22, 2014 ruling, Halbig v. Burwell, is sowing yet more confusion over the future of health care reform, particularly because later on the same day a three-judge panel of the 4th Circuit Court of Appeals, in King v. Burwell, unanimously upheld the same federal subsidies and tax credits that the D.C. Circuit struck down.

Another Blow

“One of the centerpieces of the ACA is the establishment of marketplaces—also known as exchanges—in every state, where anyone can procure health insurance,” Steve Friedman, a benefits attorney at Littler Mendelson P.C. in New York, told SHRM Online. “Since so many states declined to establish marketplaces, the inability to provide subsidies to individuals in these states would deal a devastating blow to an essential component of the ACA.”

No Change for Now

In reporting on the Halbig ruling, the Wall Street Journal noted: “The administration has further legal options, including a possible appeal to the Supreme Court. But first it plans to ask the appeals court to rehear the case, with all active judges participating in the review, an administration official said.” The official added that the insurance subsidies would continue unchanged while the case continues.

Review of the Halbig decision by the entire D.C. Circuit panel of judges en banc could take several months, according to legal analysts (see box below).

“The importance of this issue, as well as the split in the circuits, make it a virtual certainty the Supreme Court will take it,” in the event that the full D.C. Circuit Court does not reverse the panel's ruling, noted Mark Rust, an attorney with Barnes & Thornburg LLP in Chicago.

Subsidies Trigger Employer Penalties

The ACA requires employers with 50 or more full-time employees or equivalents to pay penalties if they don't offer “affordable” health coverage as defined by the ACA to full-time employees. The penalties are triggered when a worker receives federal subsidies or tax credits for purchasing insurance on an exchange. The subsidies/credits are available only to those whose family income is less than four times the federal poverty level, which is approximately $95,000 for a family of four.

“This case also impacts employers in that if no credits are available, then individuals dropping employer coverage for exchange coverage cannot trigger ‘pay-or-play’ penalties,” said Paul Hamburger, a partner with Proskauer Rose LLP in Washington, D.C.

Census Bureau data indicates that the absence of federal subsidies in the 36 states with federal exchanges would eliminate employer-mandate penalties for more than 250,000 firms employing 57 million workers, states an analysis at by Michael Cannon, director of health policy studies at the libertarian Cato Institute, which is opposed to the ACA.

“This is not the final say on this issue but it certainly underscores the thin thread much of the employer penalty hangs on, particularly if other courts agree with this decision,” added Peter Marathas, a member of the policy board of directors of the American Benefits Council in Washington, D.C.

For small employers not subject to the ‘pay-or-play’ mandate, another consideration has been whether their employees might be better served through steady coverage in exchanges, especially for workers who move from job to job. “The lack of subsidies for workers in some states certainly would change the dynamics in that decision making,” Marathas said.

More than 5 million Americans have purchased health plans through the federal health exchanges and the majority received federal subsidies, paying an average of $82 a month in premiums—76 percent less than the full premium—according to a June report by the Department of Health and Human Services.

The Halbig decision overturned a trial judge's ruling from January that upheld the federal subsidies. The two judges in the majority on the D.C. appellate panel were Republican-appointed, while the dissenting judge was appointed by President Jimmy Carter, a Democrat. Of the 11 D.C. Circuit judges that could rehear the case, seven are Democrats and four are Republicans.

Stay the Course

“Large employers should continue to prepare for the Jan. 1, 2015 effective date for the employer penalties,” advises an alert from law firm Ice Miller Strategies LLC:

Employers who wish to avoid ACA employer penalties should continue to develop systems for tracking hours to determine the full-time employees to whom health coverage should be offered. They should continue to review their plan design to ensure that it meets the ACA's minimum value standards and they should review their health insurance premium structures to determine whether the employees' share of the premium is “affordable” under ACA standards. Finally, employers with calendar year plans who wish to avoid penalties should make an offer of affordable, minimum value health coverage to full-time employees and their dependent children by Jan. 1, 2015.

What Happens Next?

According to an analysis Timothy Jost, J.D., a professor at the Washington and Lee University School of Law, posted on the Health Affairs Blog:

Under the federal rules, [Halbig v. Burwell] is automatically put on hold until seven days after the expiration of the 45-day period the government has to request a rehearing by all 11 judges of the D. C. Circuit (plus the two senior judges who were on the panel). If the government requests such “en banc” review (and it already has said that it will); one judge requests a vote on the request; and a majority of the judges grant the request, the entire court will likely set aside the three judge panel decision and rehear the case itself. This will likely take several months.

The plaintiffs can, on the other hand, request Supreme Court review of the 4th Circuit decision rejecting their case. They could also request en banc review, but given the unanimous decision of the panel and the current composition of the judges on the 4th Circuit, review would be unlikely. The Supreme Court’s standard practice would be to delay acting on a King petition to see whether there is an actual Circuit split—that is, to see whether the D.C. Circuit en banc confirms the Halbig panel’s ruling, leaving a conflict with the 4th Circuit—but the Court is free to disregard that standard practice if enough Justices would like to decide the case now. In any event, a Supreme Court ruling would not occur for some time. In the interim, the White House has announced that the federally facilitated exchanges will issue premium tax credits.

On July 31, challengers to the 4th Circuit ruling filed a petition for review asking the Supreme Court to settle the dispute as soon as possible. As reported by SCOTUSblog:

Unless the Court were to return from its summer recess to take up the issue in a special session, the earliest that it would be likely to act on the dispute would be this fall, when it will return for a new term. Such special sittings have occurred in the past when a truly important and urgent national controversy had reached the Justices.

In any event, the Court is unlikely to take any action on the new petition at least until the federal government has filed an answering brief.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

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