Supreme Court will hear ACA tax subsidy challenge

The U.S. Supreme Court, in a decision expected by July of 2015, will hear arguments on the legality of the federal tax subsidies available to low and moderate income consumers that are a key component of the Affordable Care Act (ACA).

The justices accepted an appeal from the Fourth U.S. Circuit Court of Appeals for King v. Burwell, which argues that the language of the ACA allows subsidies to be applied only to healthcare plans offered on marketplace exchanges “established by the state.” 

Because only sixteen states plus the District of Columbia have set up their own exchanges, a Supreme Court ruling affirming the original argument would eliminate subsidies now offered on the remaining 34 federally-facilitated exchanges.

A similar challenge is pending in Halbig v. Burwell, where the District of Columbia U.S. Court of Appeals in July overturned a ruling for defendants, writing that “The IRS does not have the statutory power to grant subsidies to Federally-established insurance marketplaces known as Exchanges established under the Affordable Care Act, as the enabling legislation defines Exchanges as being established by states themselves.” In a move that could overturn that ruling, the full 11-member Appeals court agreed to hear the case beginning Dec. 17.

Federal tax subsidies reduce premium costs for healthcare plans purchased through the federal and state marketplace exchanges. The credits are tied to income and are available at the time of purchase or can be claimed as a deduction on a tax form at the time of filing.

Don Hall, MPH, of DeltaSigma LLC, a managed care organization advisor, noted that the loss of premium subsidies would have a serious impact on insurers' ability to retain their current subscribers who received subsidies. “It could create death spirals among the remaining high utilizers, because the premium on this smaller group would not cover their costs,” said Hall.

The Rand Corporation in a new study estimates that, if subsidies are eliminated, 11 million would lose their health insurance, marketplace enrollment would drop 68%, and premiums would rise by as much as 43%.

“If subsidies are eliminated entirely, our research predicts substantial disruption in the individual health insurance market,” said Christine Eibner, the study's lead author and a senior economist at RAND, a nonprofit research organization. “Without the subsidies, prices would jump sharply and many people simply could not afford to enroll.”

Read the full study, Assessing Alternative Modifications to the Affordable Care Acthere.

NEXT: Appeals Court ruling

In King v. Burwell, the ruling noted that “denying tax credits to individuals shopping on federal Exchanges would throw a debilitating wrench into the Act’s internal economic machinery: Insurers in States with federally-run Exchanges would still be required to comply with guaranteed-issue and community-rating rules, but, without premium tax subsidies to encourage broad participation, insurers would be deprived of the broad policy-holder base required to make those reforms viable.”

Judges writing in the affirmative noted that “it is therefore clear that widely available tax credits are essential to fulfilling the Act’s primary goals and that Congress was aware of their importance when drafting the bill. The IRS Rule advances this understanding by ensuring that this essential component exists on a sufficiently large scale.”

READ the full ruling here

Molly A. Drake, senior attorney in the Health Care and Life Sciences practice group of Calfee, Halter & Griswold LLP in Cleveland, Ohio, notes that, with the elimination of subsidies, “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.”

Read: Federal subsidies questioned

This is the third time that the high court will consider ACA challenges. In June, the justices ruled 5-4 that "closely held" for-profit corporations that have religious objections can opt out of the requirement to provide no-cost contraceptives for female employees.

On June 28, 2012, the court upheld the legality of the ACA’s mandate requiring Americans to have health insurance or pay a penalty.

In a nod to the legal challenges surrounding the subsidies, the U.S. Centers for Medicare and Medicaid Services (CMS) on Oct. 22 sent out an email to insurers that said insurers will be able to terminate policies linked to subsidies if those subsidies are eliminated.

Hall says that reasurance from the CMS gives some cover to insurers impacted by a negative Supreme Court decision. “However, the financial impacts on their book of business would negatively impact their profits,” he adds.

The next open enrollment period for consumers to buy plans on federal and state exchanges begins Nov. 15.