Subsidies Seen as Crucial to Implementation of Affordable Care Act
Two U.S. appeals courts issued conflicting rulings on whether consumers can get subsidies for health coverage bought on the Affordable Care Act’s federal exchange, escalating a legal battle that could complicate fall insurance enrollment and jeopardize tax credits for millions of Americans.
In a blow to President Barack Obama‘s signature legislative achievement, a panel of the U.S. Court of Appeals for the District of Columbia Circuit, on a 2-1 vote, invalidated an Internal Revenue Service regulation that implemented a key piece of the 2010 health law. The regulation said subsidies for health insurance were available to qualifying middle- and low-income consumers whether they bought coverage on a state or federally run exchange.
Two hours later, a three-judge panel of the U.S. Court of Appeals for the Fourth Circuit in Richmond, Va., reached the opposite conclusion, unanimously ruling that consumers in states relying on the federal marketplace could receive subsidies. That handed the White House a victory that counteracted the administration’s loss in the other case.
Tuesday’s rulings won’t have an immediate impact on the subsidies that an estimated 4.7 million Americans have received on the federal exchange. But they raise a new cloud of legal unknowns that likely won’t be settled before open enrollment begins Nov. 15, because the cases could take a year or more to conclude in the courts.
If the two courts remain in conflict, it is a near certainty the Supreme Court will have to step in to resolve the dispute, setting the stage for a third high-court ruling on the health law. Should the D.C. Circuit’s ruling eventually prevail, it could cripple the law by making subsidies unavailable in as many as 36 states where the federal government has run some or all of the insurance exchanges.
The Obama administration said it would ask the full D.C. appeals court, which might be more sympathetic to its position, to reconsider the case.
“This just lays another layer of uncertainty on top of an already confused environment,” said Ruth Krystopolski, president of nonprofit Sanford Health Plan, which sells plans to individuals in North Dakota and South Dakota.
Several insurers said they had no current plans to change how they sell policies through the federal exchange. Hospital executives said the cases complicate efforts to plan annual budgets, because losing the subsidies would likely increase the number of uninsured patients coming through their doors.
At issue was how to interpret a section of the health law allowing subsidies when consumers buy insurance on an exchange “established by the state.” The law gave states responsibility for setting up exchanges, but more than two-thirds of the states chose not to do so. Those states, mostly with Republican governors opposed to the law, decided to rely on the federal government instead.
Individuals and employers who challenged the subsidies in court argued the law’s language made clear subsidies weren’t available in those states without their own exchanges. The Obama administration argued Congress intended the subsidies to be available everywhere.
“You don’t need a fancy legal degree to understand that Congress intended for every eligible American to have access to tax credits that would lower their health-care costs, regardless of whether it was state officials or federal officials who were running the marketplace,” White House press secretary Josh Earnest said Tuesday.
The D.C. Circuit held the IRS regulation allowing the subsidies nationwide wasn’t a permissible interpretation of the health law. “We reach this conclusion, frankly, with reluctance,” Judge Thomas Griffith, a George W. Bush appointee, wrote for the court, saying the decision would likely have significant consequences for millions of people. He was joined by another Republican-appointed judge. But he said the court had to interpret the law the way Congress wrote it. Judge Harry Edwards, a Jimmy Carter appointee, said in dissent that the ruling “portends disastrous consequences.”
The Richmond court said language in the Affordable Care Act on the subsidies was ambiguous and could be read in different ways. “Applying deference to the IRS’s determination, however, we uphold the rule as a permissible exercise of the agency’s discretion,” wrote Judge Roger Gregory, originally nominated by Bill Clinton. Joining the ruling were two Obama appointees.
The average size of a federal subsidy for each enrollee getting one in 2015 will be $4,250, and the government is expected to spend $17 billion in fiscal 2014 on exchange subsidies, according to research by the nonpartisan Congressional Budget Office. Exchange enrollees who selected plans with tax credits pay an average of $82 a month in premiums after the subsidy, which is 76% less than the full premium, according to the Department of Health and Human Services.
Aetna Inc. said the tax credits played a significant role in attracting people to exchange plans. Insurance industry advocates have warned that a win for the challengers in the cases could destabilize insurance markets and lead to higher premiums for all exchange consumers.
“It could mean the collapse of the individual insurance market in states that are affected,” if the subsidies are ultimately struck down by the high court, said Timothy Jost, a professor at Washington and Lee University School of Law who supports the health law.
Will Ferniany, chief executive of University of Alabama at Birmingham Health System, said the decisions made it difficult to set next year’s budget, which is due to the board in August. “Do we take a conservative approach and assume these people aren’t going to be insured, or do we take an optimistic approach and assume it will be appealed [successfully]?”
Julie Thiets, 51 years old, of Decatur, Ga., gets an insurance subsidy of more than $600 a month through the federal exchange. She said she isn’t sure if she would have signed up if there was a possibility she could lose that tax credit.
“To me, it was the whole benefit of signing up,” said Ms. Thiets, who owns a small business that provides video tennis instruction. “It would devastate my life without it.”
The law requires most Americans to carry health insurance or pay a tax penalty, a mandate that was upheld by the Supreme Court two years ago. The subsidies were designed to work in tandem with the mandate to make coverage more affordable for lower-income individuals.
The D.C. ruling also could hobble the functioning of a delayed health-law provision that can requires larger employers to pay penalties if they don’t offer affordable coverage to full-time workers and those workers get a subsidized exchange plan. The penalties are triggered when a worker receives federal subsidies for purchasing insurance on an exchange.
The administration’s legal options include an appeal to the Supreme Court. But first it plans to ask the D.C. appeals court to rehear the case, with all active judges participating in the review. The full court has a more favorable political makeup for the administration, with a majority of judges appointed by Democratic presidents.
The White House’s Mr. Earnest said, given fierce Republican opposition to the law, the prospects for a legislative move that might fix the law “seem rather unlikely.”
House Speaker John Boehner (R., Ohio) said the court’s decision shows House Republicans are right in seeking to file a lawsuit accusing Mr. Obama of overstepping his authority in implementing the law.
“The president has demonstrated he believes he has the power to make his own laws. That’s not the way our system of government was designed to work,” Mr. Boehner said.
A senior administration official indicated the White House is used to challenges to the health law by now, and that the law would weather this turn of events, as it has previous setbacks. Officials emphasized there would be no near-term impact on policyholders’ subsidies or premiums.
As with past health-law challenges, multiple cases are working their way through the federal courts. In addition to Tuesday’s cases, two other similar lawsuits are being considered by courts in Indiana and Oklahoma.