Federal Health Care Subsidies at Risk: What Would a Supreme Court Invalidation Mean for the Affordable Care Act?

Category: Private Education Matters
Date: Feb 6, 2015 05:26 PM

On November 7, 2014, the Supreme Court of the United States ("Supreme Court" or "Court") granted review in King v. Burwell to decide whether the Patient Protection and Affordable Care Act ("ACA"), requires the Federal Government to offer subsidies, or tax credits, to individuals purchasing insurance through federally-run exchanges.

The ACA requires all American citizens to have health insurance or pay a fine for refusing to purchase insurance.  This provision of the ACA is popularly referred to as the "individual mandate."  To incentivize individuals to purchase insurance, the ACA encourages states to create exchanges where individuals can shop for insurance.  Where states fail to set up state-run exchanges, the Federal Government operates exchanges within these states through HealthCare.gov.  California elected to set up its own state-run exchange, Covered California.  However, California is one of only 14 states to create a state-run exchange.  The federal exchange operates in the remaining 36 states.

The Federal Government offers federal subsidies, or tax credits, to qualifying individuals through state and federal exchanges.  Thus far, the average subsidy has been approximately $4,700 per person.  To date, nearly five million individuals have received federal subsidies.

This is where King v. Burwell comes into play.  The challengers in the suit are asking the Court to invalidate the subsidy program run by federal exchanges.  They argue that the language of the ACA limits the Federal Government's distribution of subsidies to those qualifying individuals who purchase insurance through state-run exchanges.  Specifically, the challengers contend that the ACA's language, which implements the subsidy scheme for exchanges "established by the State," suggests that Congress intended to limit the subsidy program to exchanges actually created by states.  On the other hand, the U.S. Department of Justice ("DOJ"), which is defending against the challenge, argues that the Court should adopt the Internal Revenue Service's ("IRS") interpretation of the ACA.  The IRS interprets the contested language more broadly, finding that because one of the purposes of the ACA is to provide affordable health care to all citizens, Congress meant to permit the provision of subsidies in all exchanges, whether federal or state-run.

Earlier this year the Fourth Circuit Court of Appeal heard arguments in King v. Burwell and sided with the DOJ, adopting the IRS' interpretation of the ACA.  A three member panel of the D.C. Circuit created a split in authority when it came to the opposite conclusion in Halbig v. Burwell, adopting the challenger's interpretation. 

Why does this matter for California?

If the Supreme Court overturns the Fourth Circuit decision by holding that the ACA prohibits federal exchanges from issuing subsidies, many individuals and employers living and operating in the 36 states without state-run exchanges will experience immediate impacts.  For employers, an exchange's provision of subsidies triggers potential penalties under the employer shared responsibility mandate.  Therefore, an employee purchasing insurance through a federal exchange could no longer trigger an employer penalty.

While California would be insulated from any immediate impact because the State created its own exchange, a finding in favor of the challengers may have long-term implications for employers in California.  For instance, a decision prohibiting the provision of subsidies through federal exchanges is likely to polarize health care access across the nation, leading to a much more state-centric political debate.

The Supreme Court is not likely to hand down a decision in King v. Burwell until late June of 2015.  We will continue to monitor this case and update you as it proceeds. 

Departments Issue Proposed Regulations Re: Summary of Benefits and Coverage

Employers who offer fully-insured plans to employees are jointly responsible with the insurer for providing a summary of benefits and coverage (SBC) to applicants, participants and beneficiaries.  Employers offering self-insured coverage are solely responsible for providing the SBC.

Last month, the Departments of Health and Human Services, Labor, and the Treasury (Departments) issued proposed regulations regarding the SBC, along with a proposed uniform glossary, an SBC template, and a sample completed SBC.  The SBC summarizes key features of the plan, including covered benefits, cost-sharing provisions and coverage limitations.  The proposed rules reduce the SBC from 8 pages to 5.5 pages.  Information that is not required by statute and has been deemed less relevant through consumer testing has been removed.  The proposed regulations will maintain the two current coverage examples of having a baby and managing type 2 diabetes, and will add a third example describing costs associated with a foot fracture.  These examples are designed to help consumers and employees better understand plan options.  The proposed regulations are designed to help employees compare plan options and make informed choices when shopping for coverage.

If finalized, the new requirements would go into effect for plan years beginning on or after September 1, 2015.  Until then, the existing SBC forms remain in place.

Regulations, guidance, templates and instructions can be found at:  http://www.dol.gov/ebsa/healthreform/regulations/summaryofbenefits.html.

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