Tuesday, July 22, 2014

Legal Alert: D.C. Appellate Court Rules Obamacare Insurance Subsidies, Employer and Individual Mandates Effectively Illegal In 36 States

Hours Later, Another Federal Appellate Court Rules Opposite Way

For approximately two years we have covered a massive legal problem embedded deep within the text of PPACA itself. The subsidies individuals use to buy Obamacare policies and the resulting fines against employers who provide inadequate or unaffordable coverage are illegal in the 36 states that opted not to set up their own health exchanges.  I spoke specifically about the legality of these subsidies on the Armstrong and Getty Radio program on December 13, 2013.  

Today the federal appellate court in the District of Columbia ruled that the subsidies are, in fact, illegal.  Despite the ruling, the subsidies will continue to flow while this case is appealed, again, to the full D.C. Appellate Court or to the U.S. Supreme Court.  On this site, you can navigate to all of our past coverage on this issue at the Oklahoma v. ObamaCare tab on the right as the case initiated in Oklahoma was one of the first fleshing out this matter.  Today's D.C. Circuit decision is Halbig vs. Burwell

Only hours after the D.C. Circuit's ruling in Halbig, a different appellate court, the 4th Circuit Court of Appeals in Richmond upheld the IRS rule permitting subsidies for the millions of Americans who receive them through a federal exchange.  In direct opposition to the D.C. Circuit, the subsequent 4th Circuit ruling says that the rule issued by the Internal Revenue Service was “a permissible exercise of the agency’s discretion.” The conflicting rulings greatly increase the possibility that the dispute will ultimately be resolved by the Supreme Court in the spring to summer of 2015.

The D.C. Circuit is widely viewed as the second-most powerful court in the land, and their edict will likely overshadow the Fourth Circuit for now.  Obama administration lawyers will appeal the D.C. panel’s decision to the full D.C. Circuit. There, seven of the 11 judges are Democratic appointees. Because of the politics behind this law, that full-panel review will likely result in a decision aligned with with 4th Circuit and deem the subsidies legitimate.  We've had enough ambiguity and uncertainty on this already, though, that I suspect we are looking at a 60% to 75% chance the Supreme Court will take this case and we'll have a final decision on the matter by June of 2015.

If It Stands, the Halbig Decision Will Have Huge Impact on Obamacare and Employers

The D.C. Circuit ruling guts the employer mandate, in those same 36 states, because the $3,000 per employee fines only kick in if one of such an employers' workers buy subsidized covered on HealthCare.gov.  With no available subsidies, there will be no corresponding employer fines. 

The D.C. Circuit ruling also renders the individual mandate all but useless in the 36 states. If the amount a person is asked to pay for his insurance in an Exchange exceeds 8% of his income, he is exempted from the fines associated with the individual mandate.  Without these federal handouts to buy insurance, virtually nobody will fall under that 8% threshold, thereby freeing them from the federal rule compelling them to purchase a policy.  According to one analysis by the Constitutional Accountability Center, a think tank and law firm, without the subsidies, insurance would no longer be considered affordable by this standard for 99% of people who receive them.

California is one of the 14 states that set up its own Exchange. So while the ultimate meaning of the rulings does not impact the Golden State, on its face, it will practically impact all 50 states eventually if the subsidies are stricken.  The economy, employer costs, recruiting efforts, and competitive balance could not withstand a system whereby 14 states have to comply with all of the stringent requirements of PPACA while 36 of them, by in large, receive a pass.  I've already received a call from a senior health insurance consultant at one of the largest brokerages in the world who is looking at how an employer can take advantage of this ruling and create a significant advantage over competitors by bolstering hiring and operations in the 36 states. 
    1. a victory for the Halbig plaintiffs would increase no one’s premiums, 
    2. if federal-Exchange enrollees lose subsidies, it is because those subsidies are, and always were, illegal, and  
    3. the winners under such a ruling would outnumber the losers by more than ten to one.  

Last week, a study issued by the consultancy Avalere Health, provided that if those subsidies were removed this year from the 4.7 million people who received them in HealthCare.gov states, their premiums would have been an average of 76% higher than what they actually paid.  With that kind of a cost increase, only the very sickest in that pool of 4.7 million would find a way to purchase coverage, further speeding the Exchanges into an unsuitable spiral of aging and ill participants with skyrocketing premiums.

This is from Joe Carlson writing at Modern Healthcare about the earlier Halbig decision:
A federal appeals court has ruled the Obama administration cannot subsidize insurance premiums for nearly 7 million Americans, dealing a serious blow to the Patient Protection and Affordable Care Act.The ruling sets up an almost-certain appeal to the U.S. Supreme Court. 
Two judges with the D.C. Circuit Court of Appeals in Washington ruled Tuesday that the text of the reform law clearly forbids income-tax subsidies to go to low- and middle-income Americans who use one of the 34 federally run insurance exchanges.  [Note: Though initially intending to set up state Exchanges, Idaho and New Mexico defaulted to the federal government and Healthcare.gov bringing the total number of federally-facilitated Exchanges to 36, not 34.]  The tax subsidies have been flowing since the beginning of the year, based on a 2012 interpretation of the law by the IRS. 
The actual text of the law says the sliding-scale tax credits are only available for coverage purchased “though an exchange established by the state,” which only 16 states did. IRS officials had claimed the imprecise wording of the law contradicted Congress' overall intent to expand insurance coverage as widely as possible. But that argument did not win the day Tuesday. 
“Because we conclude that the ACA unambiguously restricts the section 36B subsidy to insurance purchased on Exchanges 'established by the State,' we reverse the district court and vacate the IRS's regulation,” the two-member majority wrote. ... 
The ruling does not automatically doom the subsidies. It's virtually certain that the administration will appeal Tuesday's ruling, either to a full panel of the D.C. Circuit Court or directly to the Supreme Court. Legal experts say the earliest the high court would rule is in the matter as soon as spring 2015 — setting up a period of national uncertainty, since the final word on the subsidies' legality would likely come after the re-enrollment period for next year. 
Economists have estimated that a ruling like Tuesday's, in favor of the plaintiffs in Halbig v. Burwell, would eventually cause 6.5 million people nationally to forgo insurance purchased with now-illegal tax credits. 
Nearly 7 million people used the exchanges to buy coverage in 2014, and more than 80% of them qualified for a tax credit that averaged about $2,900 per enrollee. Most of them are likely to forgo the coverage rather than pay the full price themselves, legal experts on both sides of the issue say. That would set up a situation where only people with immediate plans to use the insurance — that is, the sick or chronically ill — would be likely to find a way to pay for it. Skewing insurers' risk pools would most likely cause prices to rise, perhaps dramatically. 
The ruling could also destabilize non-group insurance markets outside the exchanges.
That's because the reform law required insurance companies to put individuals in the same risk pools for coverage, regardless of whether they use an exchange or not. In other words, the grouping of disproportionately sick individuals in the exchanges could cause non-group premiums to rise outside the exchanges as well, because individuals in each state are in the same risk pool. 
The Halbig case is not the only such lawsuit based on the legal theory that the reform law was only supposed to offer subsidies through federal exchanges. 
The Competitive Enterprise Institute, which coordinated Halbig v. Burwell, also has a case called King v. Burwell awaiting a decision before judges of the 4th U.S. Circuit Court of Appeals in Richmond, Virginia. In addition, federal lawsuits filed by state officials, Pruitt v. Sebelius in Oklahoma and Indiana v. IRS, are pending in U.S. District Courts in Oklahoma City and Indianapolis. 
Traditionally, the Supreme Court waits for two circuit courts to issue split rulings on the same question before taking up a case, though the court is free to accept cases involving urgent national questions if it chooses.

This is from the 4th Circuit's conflicting decision in King v. Burwell on pages 42-42:
In fact, Appellants’ [challengers to the subsidies] reading is not literal; it’s cramped. No case stands for the proposition that literal readings should take place in a vacuum, acontextually, and untethered from other parts of the operative text; indeed, the case law indicates the opposite. National Association of Home Builders v. Defenders of Wildlife, 551 U.S. 644, 666 (2007). So does common sense: If I ask for pizza from Pizza Hut for lunch but clarify that I would be fine with a pizza from Domino’s, and I then specify that I want ham and pepperoni on my pizza from Pizza Hut, my friend who returns from Domino’s with a ham and pepperoni pizza has still complied with a literal construction of my lunch order. That is this case: Congress specified that Exchanges should be established and run by the states, but the contingency provision permits federal officials to act in place of the state when it fails to establish an Exchange. The premium tax credit calculation subprovision later specifies certain conditions regarding state-run Exchanges, but that does not mean that a literal reading of that provision somehow precludes its applicability to substitute federally-run Exchanges or erases the contingency provision out of the statute.  

Other Coverage on Today's Decisions:

Federal Courts Zig and Zag on Obamacare Tax Credits
July 22, 2014 - National Center for Policy Analysis
Excerpt: "Both these rulings expose yet more flaws in Obamacare that need to be addressed. Many exchange enrollees will undoubtedly be angered by the uncertainty, but many others would be relieved to be able to dump health plans they didn’t want in the first place. States need to act fast to allow individuals the opportunity to enroll in health plans previously outlawed under Obamacare. While Democrats will undoubtedly blame Republicans for ‘dragging their feet’ in the creation of state exchanges, the truth is that the federal government discouraged states from operating their own exchanges with onerous regulations, inflexible deadlines, and the promise that states that could merely opt out and allow the federal government to do the job for them.”

D.C. Appeals court strikes Obamacare subsidies
July 22, 2014 – Politico
Excerpt: “Now that the court has sided with the plaintiffs, Obama administration can ask the full appeals panel to reconsider the case in an en banc hearing or appeal directly to the Supreme Court. The decision doesn’t immediately block the subsidies from the federal-run exchanges. If the subsidies are ultimately blocked, an estimated 7.3 million people — about 62 percent of those expected to enroll in federal-run exchanges by 2016 — could lose out on $36.1 billion, according to a report from the Robert Wood Johnson Foundation.”

Court Rules Against Obamacare Subsidies for Federal Exchange Insureds
July 22, 2014 – Insurance Journal
Excerpt: “President Barack Obama’s healthcare overhaul suffered a potentially crippling blow as a U.S. appeals court ruled the government can’t give financial assistance to anyone buying coverage on the insurance marketplace run by federal authorities. The decision, if it withstands appeals, may deprive more than half the people who signed up for Obamacare the tax credits they need to buy a health plan.”

BREAKING — D.C. Circuit strikes down tax credits in federal exchanges
July 22, 2014 – The Washington Post
Excerpt: “What comes next? The Administration will have to decide whether to seek en banc review of this decision or file a petition for certiorari. If I had to guess, I would say the former is more likely. Supreme Court review will likely wait until there are more decisions on this question. A decision remains pending in King v. Sebelius before the U.S. Court of Appeals for the Fourth Circuit and there are two pending cases in district courts. If this decision is upheld, it will present some three-dozen states with a choice: Establish exchanges so as to authorize tax credits for state citizens while also triggering penalties on employers and individuals who do not wish to purchase qualifying health insurance. As my co-author Michael Cannon notes, the implications of this decision go beyond its effect on tax credits.”

July 22, 2014 – The U.S. Court of Appeals for the District of Columbia
Excerpt: “On its face, this provision authorizes tax credits for insurance purchased on an Exchange established by one of the fifty states or the District of Columbia. See 42 U.S.C. § 18024(d). But the Internal Revenue Service has interpreted section 36B broadly to authorize the subsidy also for insurance purchased on an Exchange established by the federal government under section 1321 of the Act. See 26 C.F.R. § 1.36B-2(a)(1) (hereinafter “IRS Rule”).”

Courts Issue Conflicting Rulings on Health Care Law
July 22, 2014 - The New York Times
Excerpt: "The law 'does not authorize the Internal Revenue Service to provide tax credits for insurance purchased on federal exchanges,' said the ruling, by a three-judge panel in Washington. The law, it said, 'plainly makes subsidies available only on exchanges established by states.'  Under this ruling, many people could see their share of premiums increase sharply, making insurance unaffordable for them.  If it stands, the ruling by the District of Columbia court could undercut enforcement of the requirement for most Americans to have insurance."

Halbig v. Burwell, Edited
July 23, 2014 - Craig Gottwals
To see the full 72 pages of the case edited down to less than 6 you may read my posting here.

You can read the Fourth Circuit's King v. Burwell decision here.