On July 22nd, two contradictory decisions on the application of the Patient Protection and Affordable Care Act of 2010, as amended (the “ACA”) were issued. In Halbig v. Burwell, the U.S. Court of Appeals for the District of Columbia (D.C.) held that only participants in state-established health insurance exchanges under the ACA were eligible for premium tax credits to buy insurance on those exchanges. In contrast, in King v. Burwell, the U.S. Court of Appeals for the Fourth Circuit (covering the states of Maryland, Virginia, West Virginia, South Carolina, and North Carolina) ruled that eligibility for the premium tax credit was available to participants in state-established and federally-established exchanges.
The ACA provides that states should establish insurance exchanges (or marketplaces) for individuals who do not otherwise have access to minimum essential health insurance. However, since the federal government cannot force a state to enact a law, the ACA also provides that the federal government will establish an exchange and make that exchange available to people in states that have opted not to set up a state exchange. Since the ACA’s enactment in 2010, only 16 states and the District of Columbia have clearly created a state exchange and so the federal exchange serves as the marketplace for many Americans. (Note, the Halbig court did not make clear what it considers a “state” exchange since there are several states that partner with the federal government in establishing an exchange).
The difference in the two decisions stems from a different interpretation of an ACA provision. The provision stipulates that a participant in an exchange established by a state will receive a premium tax credit to purchase his or her health insurance coverage. The Fourth Circuit interpreted this provision as ambiguous and accepted the federal government’s interpretation that participants in both the federal and state exchanges could receive the premium tax credit. The D.C. Circuit took the other view and deemed the provision as clearly providing that the premium tax credit was only available to those in exchanges established by one of the fifty states, the District of Columbia, or American territories (e.g. Puerto Rico).
The Halbig decision potentially has very broad ramifications for employers and may free them from the employer shared responsibility provisions (known as the “play or pay penalty”). Under the ACA, if employers with 50 or more full-time employees do not offer substantially all of their full-time employees health insurance coverage or the coverage is unaffordable or below a certain value, and one of their employees receives a premium tax credit to buy coverage on an exchange, then the employer must pay a penalty. However, if an employee lives in a state where he or she can only participate in the federal exchange and participation in the federal exchange does not entitle him or her to a premium tax credit, then employers in operating exclusively in those states face no penalties because none of their employees will receive premium tax credits.
Following normal court procedures, the Halbig decision was issued by a three-judge panel of the D.C. Circuit. The Obama administration has asked the full D.C. Circuit (consisting of 13 judges) to review the decision, and if they agree to do so, the Halbig decision may be overturned. The losing side in the King decision has appealed directly to the U.S. Supreme Court.
As there is now a split within the federal courts, and other federal courts are hearing similar claims, this dispute may ultimately be resolved by the U.S. Supreme Court. However, even if it is ultimately determined that the premium tax credit is not available to individuals purchasing health coverage through a federal exchange, individuals purchasing through a state-run exchange should remain eligible for the premium tax credit Therefore, the play or penalty should remain intact, although its full reach is not yet known. As such, employers, especially those with employees residing in different states, are encouraged to continue their health care planning as if the play or penalty will stay in effect.