Like a cat with nine lives, the Patient Protection and Affordable Care Act (ACA) has survived its second trip to the U.S. Supreme Court. On June 25, 2015, the Supreme Court decided King v. Burwell, one of the most serious challenges to the scope of the ACA since its passage. In a split decision, the Supreme Court upheld the Fourth Circuit’s determination maintaining the availability of federal subsidies for individuals in low and middle income households to purchase health insurance on health insurance exchanges established in each of the states. The decision also assures continued life for the ACA's employer penalty structure. With the employer penalties still applicable in every state, employers must continue their course of ACA compliance.
King v. Burwell addressed the availability of tax credits - commonly referred to as "subsidies” - under the ACA. In particular, King raised the question of whether the subsidies are available to individuals in states whose health insurance exchanges are established and operated by the federal government. The ACA's subsidies provide financial assistance to individuals whose household income is between 100 percent and 400 percent of the federal poverty level so that they can purchase health insurance on the health insurance exchanges established in each state. The ACA contemplated that each state would establish its own health insurance exchange; however, 34 states opted-out of establishing their own exchanges and the federal government instead established and operates exchanges in each of those states.
The ACA provides that subsidies are available to individuals who are enrolled in qualified health plans “through an Exchange established by the State.” The Internal Revenue Service (IRS) issued regulations interpreting this phrase to apply to all health insurance exchanges, regardless of whether established by a state or the federal government. The plaintiffs in King alleged, however, that “an Exchange established by the State” means just that and no more: an exchange must be literally established by a state, not by the federal government, for subsidies to be available to an individual who obtains health insurance through that exchange. In other words, the plaintiffs contend that this phrase is not ambiguous and that the IRS regulations are, therefore, not entitled to any deference. However, according to the federal government, “an Exchange established by the State” is a term of art used throughout the statute, designating any exchange, whether established by a state or by the federal government. The federal government contended that this broad interpretation is supported by the full context of the ACA, its sweeping purpose, and need for internal statutory consistency, and that given the phrase's ambiguity, the IRS' interpretation was reasonable and entitled to deference. The federal government's position would make the subsidies available to any eligible individual, regardless of whether his or her state's exchange was established by the state or the federal government.
The U.S. Court of Appeals for the Fourth Circuit, relying on deference owed to the agency interpretation of an ambiguous statute, upheld the federal government's determination that “an Exchange established by the State” means exchanges established by both the states and the federal government. However, in a separate case, the U.S. Court of Appeals for the D.C. Circuit reached a contrary conclusion, finding that the ACA plainly provides for subsidies only in states that have established their own exchanges. This split in the Courts of Appeals set up the case for the Supreme Court to resolve the conflict.
The King Decision
The Supreme Court sided with the federal government. In a six to three decision, Chief Justice John Roberts delivered the majority opinion holding that subsidies are available to individuals who enroll in qualified health plans through an exchange established and operated by the federal government. He was joined in the majority opinion by Justices Kennedy, Ginsburg, Breyer, Sotomayor and Kagan. Justice Scalia filed a dissenting opinion, in which Justices Thomas and Alito joined.
The Supreme Court's decision did not turn on whether the IRS' regulatory interpretation or the phrase was entitled to deference. Rather, the Court noted that given the deep "economic and political significance" of the subsidies, it is unlikely that Congress would have delegated the decision as to whether subsidies are available on federally established exchanges to the IRS. The Supreme Court held that it was charged with the task of the correct reading of these words, "in their context and with a view to their place in the overall statutory scheme" and to enforce them according to their terms.
In reaching its decision, the Supreme Court first held that the phrase "an Exchange established by the State" is ambiguous. The Court stated that the ACA contains "more than a few examples of inartful drafting" and that a "fundamental canon of statutory construction" is to read the words of a statute "in their context and with a view to their place in the overall statutory scheme." The Court noted that Congress passed the ACA to "improve health insurance markets, not to destroy them" and that the Court's job was to interpret the ACA consistent with Congress' plan where possible. Following a review of the statutory scheme of the ACA, the Supreme Court concluded that it was compelled to reject the petitioner's reading of the phrase because to adopt such an interpretation would "destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very 'death spirals' that Congress designed the Act to avoid." The Supreme Court noted that it was "implausible" that Congress meant the ACA to work in this manner. The Court further concluded that the phrase viewed in the context of the ACA as a whole supports that subsidies are available to all eligible taxpayers and that to hold otherwise would create an "empty promise" in states with federally established exchanges.
The Impact of King
While clearly relevant to the prospective recipients of ACA subsidies, King also presented enormous implications for employers. The applicability of key ACA provisions, including the penalty provisions for large employers, depends on the availability of subsidies. The ACA's employer penalties are triggered if an employee receives a subsidy to purchase health insurance on an exchange when the employee's employer either does not offer health coverage or offers coverage that is not affordable or does not provide minimum value. If no subsidies are available in states with federally established exchanges, then an employer with employees residing in that state will not owe an employer penalty even if it fails to offer affordable, minimum value coverage to one or more full-time employees.
However, the Supreme Court's ruling means that subsidies will continue in all states and large employers will remain liable for employer penalties, regardless of where their employees reside, if they do not offer affordable, minimum value coverage to their full-time employees. As a result, employers' ACA compliance efforts must continue. Among the steps that employers should be taking are:
- Identifying their full-time employees using ACA measurement and stability periods and offering affordable, minimum value coverage to those individuals (or risk paying an employer penalty).
- Preparing for the ACA's employer reporting obligations which will require large employers and self-insured employers to report offers of health coverage to the federal government and to provide individualized statements to all of their full-time employees and to employees who take employee-sponsored coverage.
- Paying fees for the Patient Centered Outcomes Research Institute and the Transitional Reinsurance Program.
- Analyzing the cost of their employer-sponsored coverage in light of the upcoming tax on high cost health insurance (the so-called "Cadillac tax").
The primary take-away from King is that employers must remain vigilant and continue their ACA compliance efforts to avoid potential fines and penalties. At this point, there are no significant court challenges to the ACA, so any future modifications will have to come from Congress. With the 2016 election looming, the ACA will remain a hot campaign issue. Whether the campaign rhetoric will result in actionable legislation, however, remains to be seen.