In breaking ACA news, The D.C. Circuit Court of Appeals ruled that IRS, in issuing regulations on individuals’ eligibility for premium tax credit subsidies to buy health insurance on government exchanges, misinterpreted the statutory language of the ACA.

In a further extraordinary development, a few hours later another federal appeals court, this time in Richmond, Virginia, reached the opposite conclusion in King v. Burwell, holding that the Affordable Care Act as a whole gives IRS and HHS broad authority to interpret the statutory language.  

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Halbig v. Burwell: Defining Moment for the Affordable Care Act…And For Employers?

Tue Jul 22, 2014

A 3-judge federal appeals court panel today sent a lightning bolt through the Affordable Care Act, potentially crippling a central part of the healthcare reform law.

The D.C. Circuit Court of Appeals ruled that IRS, in issuing regulations on individuals’ eligibility for premium tax credit subsidies to buy health insurance on government exchanges, misinterpreted the statutory language of the ACA.

Specifically, the court held that the statute makes tax credits available only to individuals who purchase insurance through exchanges that “are established by the State under section 1311 of the Act.” (Italics added).

At issue was IRS’s interpretation of that language to authorize subsidies also for insurance purchased on an exchange established by the federal government. (Italics added).

In an extraordinary development, a few hours later another federal appeals court, this time in Richmond, Virginia, reached the opposite conclusion in King v. Burwell, holding that the Affordable Care Act as a whole gives IRS and HHS broad authority to interpret the statutory language.

What makes this seemingly semantic question so critical is that 36 states decided not to set up their own exchanges, leaving it to the federal government to roll out Healthcare.gov, a federal exchange.

It turned out to be an important step for ACA coverage expansion: 5.4 million people enrolled through the federal exchange during open enrollment and 87% of those received premium tax credit subsidies, reducing their costs on average by 76%.

Put simply, premium tax credit subsidies are essential for health insurance purchased through the federal exchange.

In today’s D.C. Circuit ruling the Appeals Court panel said “this case requires us to determine whether the ACA permits the IRS to provide tax credits for insurance purchased through federal Exchanges.” Its conclusion was crystal clear: “a federal Exchange is not an Exchange established by the State, and section 36B does not authorize the IRS to provide tax credits for insurance purchased on federal Exchanges.”

What’s Next and What Does It Mean for Employers?

Buttressed by the Virginia court decision the Obama Administration is likely to seek “en banc” review of the panel’s decision by the full Court of Appeals for the D.C. Circuit. It’s quite possible that the full court will agree with the Virginia court decision and uphold IRS’s interpretation of the law. But that will not be the last word.

In the meantime, the government will continue to provide subsidies for insurance bought through the federal government exchange. Without these subsidies, of course, premiums would skyrocket for millions.

Like the Hobby Lobby and individual mandate constitutionality cases before them, Halbig v. Burwell and King v. Burwell ultimately will be decided by the Supreme Court of the United States.

In any event, the implications for employers could not be greater. The so-called employer “Play or Pay” mandate provides for penalties when employers fail to offer coverage or offer unaffordable coverage. But those penalties are triggered only when full-time employees receive subsidies for coverage purchased through exchanges. No subsidy; no employer penalty.

If the Supreme Court in the end nullifies premium tax credits in the 36 states where the federal exchange operates, employers in those states would not be liable for penalties, regardless of the coverage they do or do not offer.

At the end of the day, the D.C. Court of Appeals ruling and the conflicting Virginia decision serve as a reminder that the Affordable Care Act, like most new statutes, contains drafting mistakes and unworkable provisions. Legislative amendments are necessary to correct these errors and fix other provisions of the law such as the 30-hour definition of full-time employee.

Today’s ruling confirms that the “Affordable Care Act Amendments Act of 2015” should be the next Congress’s first priority.