On July 22, 2014, two federal appeals courts reached opposite conclusions that may affect the future of the Obama Administration’s signature legislative achievement – the Affordable Care Act (“ACA”).  The ACA requires all Americans to have health insurance or pay a fine.  To that end, it urges states to create exchanges, or marketplaces, where individuals can shop for insurance.  The federal exchange operates in those states that fail to establish their own exchanges.  To make insurance affordable for low-income consumers, the ACA offers federal subsidies, or tax credits to qualifying individuals through the state and federal exchanges.

In Halbig v. Burwell, a three-judge panel in the D.C. Circuit Court of Appeals ruled 2-1 that individual consumers purchasing health insurance under the ACA are only eligible for federal tax credits if they purchase coverage through a state-run exchange.  The argument involved a provision of the law that says tax credits are available to individuals who purchase health insurance through exchanges that are “established by the State.”  But the IRS interpreted the law more broadly, authorizing subsidies for insurance purchased through federal or state exchanges.  The Court found that the plain meaning of the statute prohibited the federal government from offering subsidies through federally-run exchanges.

That same day, the 4th Circuit Court of Appeal issued a 3-0 decision in King v. Burwell reaching a contradictory interpretation of the same provision.  The King Court found the language to be “ambiguous and subject to multiple interpretations” because Congress intended to increase the number of Americans with health insurance.  Further, other provisions of the ACA required the federal government to step in and create an exchange on behalf of states that failed to do so themselves.  Therefore, the Court deferred to the IRS interpretation as a permissible exercise of its discretion.  Consequently, the decision permits the government to offer federal subsidies to Americans who buy health insurance through both state and federal exchanges.

Why does this matter?  Only 14 states have fully established their own exchanges.  The federal exchange, Healthcare.gov, operates in the remaining 36 states.   The 4.7 million Americans who purchased subsidized coverage through HealthCare.gov could be affected if those subsidies are found to be prohibited by law.

Importantly, the decisions also call into question employer penalties under the employer-shared responsibility provisions of the ACA for states other than California.  A full-time employee must receive a subsidy in order to trigger a potential penalty under the employer-shared responsibility provisions.  If the Halbig decision stands, an employee purchasing coverage through a federal exchange could never trigger a penalty.

In the short-term, these decisions will not have any impact on California because our state implemented its own exchange, Covered California.  However, there may be long-term impacts that California employers should be aware of.