Federal subsidies questioned

September 11, 2014

Conflicting appellate decisions cause confusion for federal exchange beneficiaries

By Molly A. Drake, Esq.

DrakeIn July 22, 2014, the U.S. Courts of Appeals for the District of Columbia and for the Fourth Circuit published their respective decisions in two high-profile Affordable Care Act (ACA) cases: Halbig v. Burwell and King v. Burwell. The cases addressed whether the IRS exceeded its legal authority by offering subsidies to assist lower-income individuals purchase coverage in the federal health insurance exchange, further fueling the ongoing political and media battles over the legality of Obamacare.

The fight in Halbig and King is essentially this: The ACA provides that subsidies can only be offered to “individuals who purchase health insurance through marketplaces . . . established by the State.” The plaintiffs in these cases argued that this verbiage should be interpreted narrowly; that subsidies are only for those who purchase through state exchanges, not the federally run exchange. 

The government argued that Congress clearly intended to offer subsidies on all exchanges, and that a possible minor drafting error should not change what Congress wanted. 

In Halbig, the D.C. Circuit found that the ACA does not authorize tax credits and cost-sharing subsidies for the purchase of health insurance on federally established exchanges. Faced with the same issue, the Fourth Circuit in King came to the opposite conclusion. 

While ACA opponents have hailed the Halbig decision as a victory, some are concerned about the negative impact it could have on individuals in the 36 states served by the federally facilitated exchange. Specifically, if the Halbig decision stands, nearly 5 million Americans who buy their insurance in the federal exchange will no longer be permitted to receive premium subsidies and could, therefore, see substantial premium increases.

Potential impact 

With this elimination of subsidies, and consequential premium increases, individuals that could previously afford to buy health insurance on the federally run exchange may think twice before buying in the future, or possibly refrain from doing so altogether. This has the
potential to affect the bottom line of some health insurers that have seen an increase in sales to individuals and small employer groups since the implementation of the ACA. 

Furthermore, of those who purchased coverage on the federally run exchange, the healthiest individuals may be the most likely to forego insurance as a result of the spike in premiums as they are the least likely to need it. Such a situation could negatively impact the overall risk pool and result in insurers covering a disproportionate share of sick beneficiaries.

The litigants in both cases have various options going forward, and there are also similar challenges pending in other courts around the country. Also, on August 1, 2014, the government in Halbig formally petitioned the D.C. Circuit to rehear the case en banc-meaning all 11 active judges on that court would conduct another oral argument, then decide whether to change the July 22 decision of the original three-judge panel. No decision from the D.C. Circuit regarding the government’s en banc request has been made yet.

In light of this, and the other pending lawsuits, nothing will change for the time being, and the health insurance premium tax credits status quo will continue.

Molly A. Drake, Esq. is a senior attorney in the Health Care and Life Sciences practice group of Calfee, Halter & Griswold LLP is a Cleveland-based law firm.