The recent decisions by the Fourth Circuit and the D.C. Circuit address a controversy that could have far-reaching consequences for the Patient Protection and Affordable Care Act (the “ACA”). Under the ACA, states and the District of Columbia are authorized to establish health insurance market places (“exchanges”) where each state’s citizens may purchase health insurance. If a state does not create an exchange, the ACA mandates that the Department of Health and Human Services establish a federal exchange to operate in the state. At this time, fourteen states and the District of Columbia have exchanges, while thirty-six states have federal exchanges.
The ACA also creates a tax credit program that subsidizes the cost of insurance for lower income Americans. The ACA’s individual mandate requires individuals to maintain “minimum essential coverage,” which, in general, is enforced through a tax penalty. However, the individual mandate only applies when an individual’s health insurance premiums (after applying the tax credit subsidy to the premiums) are less than eight percent of their projected household income. Therefore, the tax credit increases the number of Americans who must purchase insurance, and since thirty-six states have a federal exchange, a significant number of Americans receive these tax credits without participating in state exchanges.
The current controversy over the tax credit program centers upon this distinction between federal and state exchanges. Although one provision of the ACA says only individuals participating in state exchanges can receive tax credits for health insurance premiums, other sections of the ACA suggest tax credits are available nationwide. Due to this conflict, the IRS promulgated regulations that make tax credits available to all qualifying individuals, regardless of whether the exchange is state-run or federally-facilitated.
The Fourth Circuit held the statute was ambiguous and deferred to the IRS’s interpretation. Contrary to this, the D.C. Circuit held the statute was unambiguous, which thereby invalidated the IRS’s regulation and made it illegal for individuals in the thirty-six federally-facilitated exchanges to receive tax credits.
The D.C. Circuit’s decision does not have any immediate consequences, as President Obama has announced he will continue to offer tax credits to individuals who participate in federal exchanges and requested that the full D.C. Circuit review the recent panel decision. However, the split between the Fourth Circuit and D.C. Circuit places an ominous cloud over the ACA, with broad implications for businesses in the event the D.C. Circuit’s decision prevails at the Supreme Court.
What are the implications?
First, if tax credits are only available to individuals who participate in state exchanges, quality health insurance will likely become unaffordable for a large number of lower income Americans. Decreased access to health insurance could create a less productive workforce and lead to increased business costs. Further, since many lower income Americans cannot afford health insurance without the tax credits, insurance companies would likely see a drop in the number of insured individuals and these newly uninsured individuals would likely be exempt from the individual mandate’s tax penalty.
Second, the D.C. Circuit’s ruling kills the employer mandate that is set to take effect in 2015 and 2016. Under the ACA, all employers with fifty or more employees will soon need to provide employees with the option to enroll in affordable health insurance that meets certain quality requirements. The ACA links the employer mandate to the availability of tax credits because an employer only has to pay a penalty if at least one full-time employee purchases health insurance on an exchange and that full-time employee receives a tax credit to subsidize their individual insurance plan.
Thus, should the D.C. Circuit’s opinion prevail, employers in the thirty-six states with federally-facilitated exchanges would likely not need to provide insurance to their employees. Since the employer mandate goes into effect in a few months, employers are now being asked to prepare to provide health insurance to their employees, despite the possibility the Supreme Court will nullify the ACA’s relevant provision.
Although a ruling by the full D.C. Circuit that mirrors the Fourth Circuit’s decision would allay some worry, this controversy over tax credits may have some of the major consequences the D.C. Circuit reluctantly recognized at the close of its recent opinion.