Healthcare Tax Credits and the Federal Courts

Okay, most of us slept through high school civics class. Who knew that one-day all that dusty stuff would have such a huge impact on our healthcare and our relationships with our doctors? Then along came the Affordable Care Act, arguably one of the wordiest, messiest pieces of federal legislation ever enacted. Also known as Obamacare, the thing remains wildly unpopular with the American public (59% disapproval rate, according to a CNN July 2014 poll, a number unchanged since last March). This may explain why the bill in whole and parts keeps ending up in the court system.  In case you missed the news, here’s an update on the latest (as of this writing, anyway) example. Think of it as a remedial civics lesson.

Halbig v. Burwell

A group of small business owners claimed that the Affordable Care Act (ACA), “authorizes subsidies only for people who buy insurance through markets [healthcare exchanges] established by the states — not by the federal government.” They based their case around four little words in the ACA, which clearly state that tax credits are available to people who enroll through an exchange “established by the state.”

Toward the end of last month (July 2014), the U.S. Court of Appeals for the D.C. Circuit (one of 13 intermediate appellate courts in the U.S. federal judicial system), “dealt a potentially major blow to President Obama’s health care law…ruling that participants in health exchanges run by the federal government in 34 states are not eligible for tax subsidies.” The 2-1 ruling by the D.C. Circuit’s panel of judges is a big deal because it threatens to upend one of the more appealing (but ultimate expensive to taxpayers) features of ObamaCare. Ultimately, it could mean premium increases for more than half of the purported 8 million Americans who have purchased the taxpayer-subsidized coverage through the federal insurance exchange. The only states, along with the District of Columbia, not affected by the ruling are the ones that created their own health care exchanges: California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, New York, Oregon, Rhode Island, Vermont and Washington.

Essentially, the panel’s ruling found that as written, the ACA allows those subsidies to be offered to qualified enrollees only via state-run exchanges. (Tax credits and subsidies have never been available if you purchase your healthcare insurance in the private marketplace.) The problem is, less than one-third of the states opted to create and operate their own exchanges, and Oregon’s has since closed. To pick up the slack for the poor state participation numbers, the federal government created HealthCare.gov, the federal exchange. As of this coming November’s open enrollment period, KaiserHealthNews.org reported last April that, “Counting Oregon, 35 states will rely on the federal website this fall — far more than envisioned when the law was approved in 2010.”

Now, the IRS has held all along that the law meant the subsidies were available to qualifying middle- and low-income consumers whether they bought coverage on a state exchange or one run by the federal government. But, according to the U.S. Constitution, the IRS is in no ways charged with writing or interpreting U.S. law. Those functions are reserved for Congress and the judicial branch, respectively.

If the D.C. ruling stands, all those subsidies could be invalidated, and anyone who took advantage of them could have to pay back the discount received. According to a June report from the Department of Health and Human Services, that could affect the majority of the 5 million Americans who bought their private health insurance through a federally-run exchange, paying on average $82 a month in premiums, or 76% less than the full cost.  But the larger impact of the ruling, as reported in the Wall Street Journal on July 22, 2014, is this:

“Tuesday’s ruling also could hobble the functioning of a health-law provision that can require larger employers to pay penalties if they don’t offer affordable health coverage to full-time workers. The penalties are triggered when a worker receives federal subsidies for purchasing insurance on an exchange….[Additionally] Insurers had warned a win for the challengers could destabilize insurance markets and lead to far higher premiums, even for those that didn’t receive subsidies.”

Stay tuned, though, because this dogfight is nowhere near over. Within a couple of hours of the D.C. court ruling, a different three-judge federal appeals court panel in Virginia unanimously upheld healthcare law’s system of subsidies and tax credits. And the federal government has already made the decision to appeal by requesting that the D.C. court rehear the case, en banc, which means with all the active judges participating, not just the three-judge panel. Whatever the outcome of that, most legal experts agree that this key provision of the ACA is headed to the Supreme Court. In the meantime, you can always skip the drama and forego open enrollment and special-enrollment periods and get your personal healthcare insurance through the private market.