Please Note: This Healthcare Reform Update is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. Copyright © 2014 by Proskauer Rose LLP. All rights reserved.
July 22, 2014 marked a day when two different federal courts came out on opposite sides of the same question. In the morning, the U.S. Court of Appeals for the DC Circuit dealt a serious blow to the Obama Administration with a decision that called into question the structural integrity of the “pay-or-play” mandates under the Affordable Care Act (“ACA”). Later in the day, the U.S. Court of Appeals for the Fourth Circuit, sitting down the road in Richmond, came out on the other side of the question.
In Halbig v. Burwell, the Appeals Court for the District of Columbia Circuit, sitting in Washington, DC, sided with the plaintiffs and against the Obama Administration today when it held that the ACA, by its terms, does not allow for subsidies for individual coverage in exchanges established by the federal government. Today, a majority of the states—more than 30—have federally-run exchanges. This means that, at least according to this court, individuals purchasing insurance coverage on the federally-run exchanges will not be eligible for federal subsidies when they purchase insurance.
Not so fast, said the Fourth Circuit Court of Appeals later in the day. In King v. Burwell, the court addressed the same issue addressed in Halbig and reached the exact opposite conclusion. In King, four other judges found that Congress intended to make subsidies widely available. While the plain language of the ACA does not say it, the Fourth Circuit, found that the contextual meaning of the ACA dictated a different result.
At issue in Halbig and King is the statutory construction of the subsidy provisions. The plain language of the ACA provides that individuals purchasing coverage from a state exchange are eligible for the federal subsidy. The ACA, on its face, does not provide for a subsidy on the federal exchanges. The Internal Revenue Service (IRS) addressed this in May 2012 through a regulation, providing that an individual could obtain a subsidy if he or she “is enrolled in one or more qualified health plans through an Exchange.” In the same regulation, the IRS defined an exchange to include both state and federal exchanges. In other words, the IRS sought, by regulation rather than by amending the law, to clarify that the ACA provides the subsidy on both state and federal exchanges.
Plaintiffs in both cases challenged the IRS’s ability as a regulator to, in the plaintiffs’ perspective, rewrite the statute. The Fourth Circuit court agreed with the Obama Administration, finding that the context of the ACA supported the IRS’s clarification. The D.C. Circuit disagreed, however, and found that there was no basis for the IRS to effectively rewrite the statute.
If the Halbig decision is ultimately upheld, it will be important to employers because one of the triggers for assessment of a penalty against an employer under the ACA is that a full-time employee has obtained subsidized coverage on an exchange. If individuals in the federal exchange states are not eligible for subsidies on the exchanges in those states, employers in those states cannot be assessed a penalty. If the King decision is upheld, it will mean that both federal and state exchanges are treated the same with respect to subsidies and with respect to the play or pay penalties.
What should employers do now? Nothing. Clearly, this is far from resolved. It may eventually be decided by the US Supreme Court, but that may be a long way off. There is also a chance that this could result in overdue bi-partisan discussions in Congress to address this and other ACA issues. At this point, however, all that can be said is that two federal appeals courts disagree on whether the entire pay-or-play approach is in jeopardy in a majority of states. We suspect the Supreme Court will once again have the final say. Employers should simply stay tuned.