By Tara Schulstad Sciscoe and Christopher Sears
Like a cat with nine lives, the Patient Protection and Affordable Care Act has survived its second trip to the U.S. Supreme Court. On June 25, the court decided King v. Burwell – one of the most serious challenges to the ACA since its passage – and upheld the availability of federal subsidies for low- and middle-income families to purchase health insurance on health insurance exchanges established under the ACA. The decision also maintains the ACA’s employer penalty structure; therefore, employers in every state must continue ACA compliance efforts.
King v. Burwell addressed the question of whether tax credits – commonly referred to as “subsidies” – are available to individuals in states where the federal government operates the health insurance exchange. The subsidies provide financial assistance to low- and middle-income individuals to purchase health insurance on the exchanges. The ACA contemplated that each state would establish its own 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 interpreted this phrase to apply to all 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 that the state, not the federal government, must actually establish an exchange for subsidies to be available to individuals who obtain health insurance through that exchange. However, the federal government argued that “an Exchange established by the State” is a term of art used throughout the statute, designating any exchange, whether established by a state or the federal government. 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. A split in the federal Circuit Courts of Appeals – the Fourth Circuit taking the government’s side and the D.C. Circuit Court accepting the plaintiffs’ arguments – set the issue up for review by the U.S. Supreme Court.
The King Decision
The court sided with the federal government. In a 6–3 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. Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan joined in the majority opinion. Justices Antonin Scalia, Clarence Thomas and Samuel Alito dissented.
The court first held that the phrase “an Exchange established by the State” is ambiguous, observing 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. The court concluded that it was compelled to reject the plaintiffs’ 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 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
A different outcome in King would have presented enormous implications for employers. The applicability of the ACA’s penalty provisions for large employers depends on the availability of subsidies. Those penalties are triggered if a full-time 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 subsidies were not available in states with federally established exchanges, then an employer with employees residing in that state will not owe a penalty even if it failed to offer affordable, minimum value coverage to one or more full-time employees.
However, the 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.•
Tara Schulstad Sciscoe and Christopher S. Sears are partners with Ice Miller LLP and members of the Employee Benefits Group.