Yesterday two federal courts of appeal reached opposite conclusions on the question whether individuals in 34 states are eligible for federal subsidies when they purchase health insurance coverage.  Depending on how this issue is resolved, it could have a significant impact on the future of the Affordable Care Act, including the employer mandate scheduled to take effect in 2015.

At the center of the controversy is the premium tax credit, which subsidizes the cost of health insurance for lower-income individuals.  The statute says that the subsidy is available for coverage purchased on a health insurance exchange established by a state; but the statute is silent (at least in the view of some who seek to construe it) with respect to coverage purchased on an exchange established by the federal government.  In 2012 the IRS issued a regulation confirming that the subsidy would be available for health coverage purchased on any exchange, state or federal.

The federal court of appeals for the District of Columbia Circuit decided in Halbig v. Burwell that the IRS regulation was invalid.  The court concluded that the statute clearly restricted the premium tax credit to health coverage purchased on a state exchange.  Accordingly, the court held that the IRS had overstepped its authority when it extended the subsidy to coverage purchased on a federal exchange.

A few hours later the federal court of appeals for the Fourth Circuit addressed the same issue in King v. Burwell.  The Fourth Circuit decided that the statute was ambiguous.  The court deferred to the IRS’s conclusion that Congress had intended to make the subsidy available to all lower-income individuals regardless of whether they purchased health insurance on a state exchange or a federal exchange.

What’s At Stake?

Only 16 states and the District of Columbia established their own health insurance exchanges for 2014.  The remaining states have not established exchanges, either because their governors oppose the Affordable Care Act in principle or because the states have not been able to overcome the administrative, technological, and financial hurdles that make it difficult to establish a functioning exchange.  ACA directs the federal government to establish and operate a federally-facilitated exchange for individuals in any state that does not establish its own exchange.

The Affordable Care Act requires individuals to purchase individual health coverage if they do not receive coverage from another source, such as an employer group health plan or a government program like Medicare.  To ensure that lower-income individuals are able to afford coverage, ACA provides a refundable premium tax credit for individuals whose household income is between 100% and 400% of the federal poverty line.  A recent study published by Avalere Health estimates that nearly five million Americans will see their health insurance premiums increase by an average of 76 percent if the premium tax credit is not available for coverage purchased on a federally-facilitated exchange.  It is unlikely that the individual mandate will operate effectively under these circumstances; and without the individual mandate, the future of the Affordable Care Act—at least in states relying on the federal exchange—is in doubt.

The availability of premium tax credits also affects the employer mandate.  Under ACA, large employers must pay a $3,000 “shared responsibility” excise tax for each full-time employee who is not eligible for affordable health coverage from the employer and who receives a premium tax credit for coverage purchased on an exchange.  If the premium tax credit is not available in the majority of states, employers’ potential exposure to the shared responsibility excise tax will be greatly reduced.

In contrast, however, some employers have considered discontinuing group health coverage for employees who are not subject to the employer mandate (for example, part-time employees and early retirees) and who are eligible to purchase affordable individual coverage on an exchange.  If the coverage offered in a majority of states becomes unaffordable to lower-income individuals because no federal subsidy is available, this option will become significantly less attractive.

What Happens Next?

The D.C. Circuit case was decided by a three-judge panel, and one judge filed a lengthy opinion dissenting from the decision of the majority.  A Justice Department spokesperson has already said that the Justice Department will petition the court for rehearing with a suggestion that the case be heard en banc (that is, by the court’s full complement of active judges and the two senior judges who were on the original panel).  In light of the exceptional importance of the issue and the split decision of the original panel, it is likely that the court will vote to hear the case en banc.

The D.C. Circuit issued an order delaying the effect of its decision until seven days after the disposition of a timely petition for rehearing.  Accordingly, for the time being, the disputed IRS regulation remains in force and individuals who purchase health coverage on a federal exchange remain eligible for the premium tax credit.

If the D.C. Circuit grants the petition to hear the case en banc, it might be some time before the court issues a final decision.  The appellants in the Fourth Circuit case might also petition for rehearing.  Regardless of the outcome in either court of appeals, the unsuccessful party is likely to petition the United States Supreme Court to review the case.  Meanwhile, ACA supporters have seized on the Fourth Circuit’s decision, and ACA opponents have seized on the D.C. Circuit’s decision, as ammunition in the ongoing political struggle over the Affordable Care Act.

The only thing that seems clear in this murky picture is that the availability of premium tax credits for participants who purchase insurance on a federal exchange will not be resolved in time for open enrollment this fall, or before the employer mandate is scheduled to become effective in 2015.  It remains to be seen whether this uncertain state of affairs will lead to any further postponement of ACA’s mandates.