Split Subsidy Decisions No Excuse to Delay ACA Preparation
On July 22, 2014, two federal Circuit Courts of Appeals handed down conflicting decisions on whether subsidies in the form of tax credits can be provided to individuals who purchase health insurance coverage through health insurance exchanges (or marketplaces) administered by the federal government. A panel of the U.S. Court of Appeals for the District of Columbia Circuit (DC Circuit) held that the Internal Revenue Service (IRS) exceeded its authority by providing the subsidies to such individuals in Halbig v. Burwell
. Mere hours later, the U.S. Court of Appeals for the Fourth Circuit (Fourth Circuit) issued its own opinion in King v. Burwell
upholding the IRS's extension of the subsidies for coverage purchased on federally administered exchanges. Employers should not use these conflicting decisions to delay their preparation for the January 1, 2015 effective date of the employer shared responsibility provisions (employer penalties) of the Patient Protection and Affordable Care Act (ACA).
What Did the Cases Hold?
The ACA requires most U.S. residents to purchase health insurance coverage and provides federal subsidies (in the form of tax credits administered by the IRS) to assist low to middle income individuals to purchase coverage on health insurance exchanges established by the ACA. Health insurance exchanges have been established in all states and, while the ACA calls for states to administer their own exchanges, the ACA requires the federal government to establish an exchange in any state where the state opts not to do so. The plaintiffs in the Halbig
cases asserted that the ACA does not authorize the IRS to provide subsidies to individuals who purchase coverage on exchanges in states where the federal government administers the exchange. The federal government administers the exchanges in 36 states.
A panel of the DC Circuit, in a split two-to-one decision, agreed with the plaintiffs and held that the IRS misinterpreted the statutory language of the ACA when it issued a regulation allowing for subsidies on federally administered exchanges. The court narrowly read the ACA's language to mean that federal subsidies are only available on exchanges that are actually administered by the states. A panel of the Fourth Circuit, on the other hand, read the ACA more broadly and interpreted the subsidy provisions in the context of the entire ACA and held that the subsidies are available on all exchanges, regardless of whether they are administered by states or by the federal government. The Fourth Circuit's case was a 3-0 unanimous decision.
The federal government has requested a rehearing of the case in the DC Circuit by a larger panel of judges, known as an en banc
hearing. In the meantime, the federal government has indicated that subsidies will continue to be available on all health insurance exchanges. If the DC Circuit grants the request for an en banc
hearing, a decision could still be months away. In both cases, the losing party still has the option to request that the U.S. Supreme Court render a decision. The U.S. Supreme Court can decide to take the cases, but it is not required to do so.
Pending final resolution of this issue by the courts, implementation of the ACA will move forward, and subsidies will remain available to qualified individuals. If the Fourth Circuit's opinion remains in place and
if an en banc
hearing in the DC Circuit reverses the original panel's decision, a conflict in the federal Circuit Courts of Appeals will not exist, and therefore, there may not be a pressing need for the U.S. Supreme Court to take the cases (although there are still similar cases working their way through federal trial courts in Indiana and Oklahoma). However, if an en banc
panel of the DC Circuit upholds the original panel's decision, a conflict will exist, and the likelihood of Supreme Court review increases.
What Might Happen if Subsidies are Not Available on Federally Administered Exchanges?
What Should Employers Do Now?
Large employers should continue to prepare for the January 1, 2015 effective date for the employer penalties.
Employers: Employers with 100 or more full-time equivalent employees (and some with 50 or more full-time equivalents) become subject to employer penalties as of January 1, 2015. Penalties are triggered if a full-time employee purchases health coverage on an exchange and qualifies for a subsidy because the employer either does not offer coverage to the full-time employee or the coverage offered does not provide minimum value or is unaffordable to that employee. However, if it is ultimately determined that subsidies are not available in states where the federal government administers the exchange, then employees in such states would not be eligible for subsidies, which means their decision to purchase coverage on an exchange could not trigger a penalty for their employer. While this could provide relief to some employers, it will complicate the ACA structure for employers with some employees in states with federally administered exchanges and some employees in state administered exchanges.
Individuals: If subsidies become unavailable to individuals in states with federally administered exchanges, exchange coverage may become unaffordable for some individuals. As of April 19, 2014, approximately 4.6 million individuals who signed up for coverage through federally administered exchanges qualified for a subsidy. The average percent reduction in premium costs was 75% after the subsidies on federally administered exchanges. When exchange coverage exceeds 8% of an individual's household income, that individual is no longer subject to the individual mandate. So, the unavailability of subsidies could result in some individuals being exempt from purchasing insurance. For others, however, the unavailability of the subsidies will create an economic burden if they remain subject to the individual mandate and those individuals would have to find other means to purchase health insurance or they will be required to pay a penalty tax for failing to obtain coverage.
Insurers: The subsidies were intended to provide assistance to a large percentage of the population so that they could purchase insurance and meet their individual mandate under the ACA. Widespread participation in the insurance markets is fundamental for health insurers, which are now required to provide guaranteed issue coverage to individuals without imposing any pre-existing condition exclusions. Without the subsidies, it is possible that a large number of individuals will not meet the individual mandate, resulting in a smaller risk pool for insurers, which could mean higher costs for insurers and higher premiums for those that do take coverage.
Health Care Providers: Some health care providers have already expressed concern that the unavailability of subsidies will result in fewer insured individuals, which can increase the likelihood that providers will not get paid for services they provide to uninsured patients. Indeed, one reason that many providers supported the passage of the ACA and accepted lower reimbursement rates from the federal government was the increased possibility of payment due to the fact that more individuals would be insured as a result of the individual mandate and the availability of subsidies to individuals to help pay for coverage.
The federal government has indicated that subsidies will remain available on federally administered exchanges pending the resolution of the court cases. At this time, we have seen no indication from Washington that the employer penalty provisions will be delayed again. While there has been initial talk of a Congressional fix to the ACA to make clear that the subsidies are available on federally administered exchanges, the new normal of Congressional gridlock, combined with the fact that this is an election year, would seem to make such a fix unlikely. States could also react by converting federally administered exchanges into state administered exchanges to ensure subsidies will be available to their citizens; however, both administrative and political obstacles exist that make this an unlikely possibility for most states over the next year or so.
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 January 1, 2015.
We will continue to monitor this fluid situation and provide updates. In the meantime, for more information about ACA employer responsibilities or any employee benefits matter, contact Mary Beth Braitman
, Sarah Funke
, Melissa Proffitt Reese
, Shalina Schaefe
r, Tara Sciscoe
, Chris Sears
, Tiffany Sharpley
, or any member of the firm's Employee Benefits Group
. Insurers and providers may contact Kevin Woodhouse
or Myra Selby
in the firm's Health Law Group
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.