Last month, two federal courts of appeals issued opposing decisions on whether the Patient Protection and Affordable Care Act (the “ACA”) permitted subsidies, in the form of premium tax credits, to health coverage bought through insurance Exchanges operated by the federal government. As a quick refresher, those tax credits would help subsidize the cost of health insurance purchased by an individual. As for employers, those subsidies are the trigger for determining if and when the employer mandate, also known as the “pay-or-play” provision, comes into play. In its simplest form, if individuals do not receive a premium tax credit, employers would never be required to pay the pay-or-play mandate.
The D.C. Circuit panel, in Halbig et al. v. Sylvia Mathews Burwell, et al., No. 14-5018, ruled 2-1 that subsidies only may be provided to pay for insurance paid for through state-established Exchanges. Only a few hours later, the Fourth Circuit concluded unanimously in King, et al. v. Sylvia Mathews Burwell, et al., No. 14-1158, that there is no such limitation, and premium subsidies are allowed for coverage bought through both state and federal exchanges. If the D.C. Circuit’s decision in Halbig is upheld, it will have staggering implications for critical aspects of the ACA.
The Premium Tax Credit
The ACA established, in section 36B of the Act, premium tax credits for qualified individuals who purchase health insurance through Exchanges that are “established by the State” under the ACA. The IRS then issued a final rule implementing this provision and interpreted the meaning of “established by the State” to mean “an Exchange serving the individual market for qualified individuals…regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by the [U.S. Department of Health and Human Services].” Therefore, the question for the courts was whether the IRS rule is a valid interpretation of the ACA, i.e., whether “Exchange established by the State” can include the federal Exchange and, accordingly, if individuals qualify for premium tax credits whether they purchase insurance coverage on either a state or federal Exchange.
Halbig – the D.C. Circuit
On July 22, the D.C. Circuit panel (two Republican appointees voting together against one Democratic appointee) held that the IRS rule was invalid. The challenge came from a group of four individuals and three employers residing in states that did not establish Exchanges. They challenged the IRS interpretation on the grounds that it penalized them in violation of the clear, consistent and unambiguous language of the ACA, as well as the alleged congressional intent that premium tax credits apply only to state Exchanges.
The court concluded a federal Exchange is not an “Exchange established by the State,” and section 36B does not authorize the IRS to provide tax credits for insurance purchased on federal Exchanges. In reaching this conclusion, the court first noted that the ACA contains separate provisions authorizing the establishment of state and federal Exchanges and concluded that “in the face of the statute’s plain meaning, a federal Exchange is not an ‘Exchange established by the State,’” because the ACA unambiguously differentiates between state and federal Exchanges.
Although the government argued this construction generates “absurd results,” the Court ultimately found that the construction did not render other provisions of the ACA unworkable, “let alone so unreasonable as to justify disregarding section 36B’s plain meaning.” Finally, the Court narrowly viewed the ACA’s purpose and legislative history and concluded that the government “came up short” of its efforts to overcome the statutory text. The Court opined that the plain language prevailed because, in the absence of any clear, contrary indications, the text served as conclusive evidence of Congress’s intent.
King – the Fourth Circuit
Only hours after the Court reached its decision in Halbig, the Fourth Circuit unanimously reached the opposite conclusion, exemplifying the complexity of the ACA. In King, appellants were Virginia residents who did not want to purchase health insurance. Since Virginia declined to establish a state Exchange, it is served by the federally facilitated Exchange known as HealthCare.gov. Without premium tax credits, appellants would be exempt from the individual mandate under the unaffordability exemption. However, with the credit, the reduced cost of insurance policies subjected appellants to the minimum coverage penalty, which they claimed would lead to undue financial costs since they would be forced to either purchase insurance or pay the individual mandate penalty.
In considering the IRS’s interpretation, the Court analyzed the issue under a commonly used two-step framework for analyzing agency construction of a statute known as the “Chevron test,” In step one of Chevron, which looks at the ambiguity of the statute, the Court determined that “Exchange established by the State” was susceptible to multiple interpretations and Congress had not directly spoken on the question at issue. Notably, the D.C. Circuit disagreed with this point, which had a large part in the split rulings. Moving on to step two, the court defers to the agency’s interpretation so long as it is based on a permissible construction of the statute. The Fourth Circuit determined that the IRS rule applying the premium tax credit to insurance also purchased on the federal Exchange was valid.
Under this ruling, individuals residing in states without state Exchanges are also eligible to receive the benefit of premium tax credits when they purchase insurance coverage from the federal Exchange. Although this more liberal-leaning opinion out of the Fourth Circuit, a historically more conservative bench, may appear surprising, it is in keeping with the recent Democratic appointments (the three-judge panel was made up of three Democratic appointees).
What Does this Mean for Employers?
Under the ACA, employers that do not comply with the mandate, and fail to provide affordable health care coverage to 70 percent of their full-time workforce in 2015 and 95 percent of their full-time workforce in 2016, will be penalized only if an employee buys subsidized insurance coverage, meaning there is an applicable premium tax credit through an Exchange.
The penalty varies and applies in two different situations: (i) if the employer fails to offer minimum essential coverage, and (ii) if the employer offers minimum essential coverage, but it is not affordable or does not provide minimum value. Essentially, the employer mandate uses the threat of monetary penalties to induce large employers – those with at least 50 employees – to provide their full-time employees with adequate, affordable health insurance. These penalties literally hinge on the availability of tax credits.
If King is upheld, then the status quo will remain. However, if the D.C. Circuit ruling is upheld, and subsidies do not extend to the federal Exchange, an employee buying insurance in a state without its own Exchange would not receive a premium tax credit, and accordingly, his or her employer would not be penalized should it fail to follow the employer mandate. Additionally, another element of (complicated) guesswork would be added for employers with employees living in different states – states that have established Exchanges and those without. In this case, the penalty will differ depending on whether it is applied based on the employer’s failure to offer coverage, or failure to offer coverage that is not affordable or does not provide minimum value. Halbig adds another layer of complexity to an already difficult law. Overall, without the threat of a monetary penalty, employers may choose not to provide insurance, or provide insurance that does not meet ACA minimums. As a result, one of the ACA’s key provisions (the employer coverage mandate) could essentially become nonexistent in the 36 states that do not run their own Exchange.
The Future of Premium Tax Credits
On July 29, appellants in King filed a petition for certiorari with the Supreme Court seeking review of the Fourth Circuit’s decision. A day later, the Obama administration filed a petition for an en banc rehearing (consideration by the entire court) in Halbig, hoping to overturn the three-judge panel’s decision. Given the extreme rarity for the D.C. Circuit granting en banc review (the D.C. panel makes roughly 500 rulings per year and averages one en banc rehearing), political analysts have differing opinions on whether the petition will be granted. Because Democratic nominees now hold a decisive 7-4 majority (two senior judges who could sit in on the case make the ratio 8-5 Democratic majority) in the D.C. Circuit, ACA proponents are hoping that the en banc petition will be granted, and potentially save the ACA from the tumultuous impact of invalidating the IRS rule. If the petition is granted, the D.C. Circuit will almost assuredly vacate the decision, and there will no longer be a split.
The only way to overturn the decision in King is for a Supreme Court review, and four justices must agree to hear the case for that to happen. If the decision in Halbig is vacated, and a split does not exist among the circuits, it would go against the Supreme Court’s normal practice to grant review. Even so, given the challenges the Circuit split poses to the ACA, and broad impact the premium tax credit provision has on the effectiveness of the ACA, nearly all analysts agree that the final word will lie with the Supreme Court. Although we do not know how long it will take, or by what path, these issues will be resolved, we know for sure that these opposing rulings have added yet another dimension of uncertainty and complexity for employer compliance with the ACA.
Until there is finality on this issue, employers should focus on continued compliance with the ACA and work with their advisors and attorneys who can provide them with up-to-date information on judicial developments and important ACA changes.