Wednesday, July 23, 2014
This has been cross-posted for a more general audience at ACSblog. Though it contains more background than most healthlawprof readers will need, analysis comes after the jump.
The D.C. Circuit held in Halbig v. Burwell that the IRS cannot provide tax credits to individuals who purchase private health insurance in states with federally-run insurance exchanges, potentially depriving millions of middle and low income Americans access to affordable health insurance. Improbably, while the blogosphere lit up, the Fourth Circuit held in King v. Burwell that the IRS properly interpreted the Affordable Care Act (ACA) to provide tax credits in all exchanges whether run by a state or the federal government. Members of the Obama Administration immediately declared they will seek rehearing by the D.C. Circuit en banc. The standard of review for petitions for rehearing is rigorous, but given the importance of the case, and the new circuit split, rehearing is conceivable. Further, it is not unreasonable to anticipate that the Supreme Court ultimately will grant a petition for certiorari in either or both of these cases. If it is upheld, Halbig could be the most damaging decision in the ACA litigation wars yet. For those not mired in the details of the ACA and its ongoing legal challenges, here’s why.
The ACA attempts to create near-universal insurance coverage by making Americans insurable and by commanding insurers to play by uniform rules. The ACA was created because, in 2008, one in five Americans did not have health insurance coverage. To make this number tangible, imagine everyone you know with blue eyes… and now imagine they do not have health insurance. That’s how many were uncovered, and the lack of coverage was just about that random too. In the United States, if you don’t have health insurance, you don’t have access to consistent healthcare. The ACA has clear goals, but it is a muddy scrum of legislative drafting that never underwent a conference committee process, and that imprecision has facilitated the litigation in these cases.
To avoid adverse selection (the problem of free riding), the ACA requires Americans to carry minimum essential coverage or face a tax penalty (upheld in NFIB v. Sebelius); however, if insurance premiums would cost more than 8% of an individual’s income, then no tax penalty will be assessed. To facilitate health insurance coverage, the ACA created health insurance exchanges, also called marketplaces, where individuals and small groups can purchase health insurance that provides standardized benefits without exclusions for preexisting conditions and other disequalizing prohibitions. People who earn 100-400% of the federal poverty level are eligible for federal tax credits that assist in paying premiums for private insurance on the exchanges (“premium assistance tax credits,” codified at 26 U.S.C. 36B), increasing substantially the number of people who can afford to purchase private health insurance.
States were given a choice to create exchanges with federal funding under ACA section 1311, and if they opted not to, then the federal government would create “such” exchange in the state under ACA section 1321. Sixteen states and D.C. created their own exchanges before January 1, 2014, so currently two-thirds of states have federally-run exchanges. This landscape is shifting slightly as some states’ exchanges fail and they move to federal mechanisms, while other states are still eyeballing the federal money available until 2015. What matters here is that the majority of exchanges were federally-run on the day that Halbig was decided.
The IRS wrote implementing regulations that interpreted section 36B to mean that premium assistance is available in any exchange, whether created by a state or the federal government standing in the shoes of the state. But, 36B does not specifically mention federally-run exchanges, instead referring to “an Exchange established by the State under 1311.” This is the crux of Halbig, King, and similar cases still pending. The challengers’ basic contention is that 36B makes premium assistance available for insurance purchased in state exchanges, but it does not make that assistance available in federally-run exchanges. They argue that the language in section 36B is clear, and therefore the IRS rulemaking was unlawful, despite the statutory language in sections 1311 and 1321 that creates both state and federally-facilitated exchanges as necessary. The challengers also argue that Congress intended to force states to create exchanges by denying premium assistance in federally-run exchanges. They assert that the federal government created this condition so that states would have no choice but to create exchanges and to assume leadership in health reform.
The majority in Halbig subscribed to the challengers’ arguments “with reluctance,” striking down the IRS regulations that apply tax credits to federally-run exchanges. The majority read sections 36B, 1311, and 1321 in a vacuum, ignoring the legion of absurdities that arise from limiting premium tax credits to state exchanges. For just one example, consider the Medicaid Maintenance of Effort (MOE) provision, section 2001(b), which would continue indefinitely under this ruling. The MOE was included in the ACA to keep Medicaid eligibility stable until the Medicaid expansion and the exchanges went into effect. States are no longer subject to the MOE requirement when their exchange is in place. If, as the Halbig majority reasoned, the federally-run exchanges cannot qualify for any use of the word exchange in the ACA, then the MOE requirement never ends in states with federally-run exchanges. The Halbig majority ascribed bizarre intention to this reading of the MOE, arguing that states opting out of running their own exchanges would be forced to cover every Medicaid beneficiary that was covered on the date the ACA was signed. This punitive interpretation is nonsensical in light of the ACA as signed, which contained mandatory Medicaid expansion for all states. There would have been no need to require MOE in perpetuity in states with federally-run exchanges, because the states would have expanded Medicaid to everyone up to 133% of the federal poverty level as of January 1, 2014. NFIB changed that scenario by making the Medicaid expansion optional, which the Halbig majority appears to have forgotten; quite simply, the MOE provision had nothing to do with states’ exchange choices. In short, as Judge Edwards pointedly discussed in his dissent, such irrational conclusions make it hard to take the majority seriously.
The opinion in King, which upheld the IRS’s regulations and rejected the crabbed read of the ACA offered by the plaintiffs in Virginia, paralleled Judge Edwards’ dissent. The Fourth Circuit found that 36B is not clear enough to stop at the first Chevron question (which asks whether the statute has a plain meaning to which the regulation in question is responsive). But, the court found that the IRS’s interpretation was a permissible construction of the ACA that warranted deference to the agency’s expertise. Until these cases are resolved, the Department of Health and Human Services has stated it will continue to pay tax credits in all exchanges.
Eradicating premium assistance has a domino effect that involves more than the 4.7 million Americans who rely on tax credits to pay for health insurance in the federally-run exchanges. It also “frees” large employers (50 employees and greater) from the “employer mandate.” The ACA penalizes large employers that do not provide health insurance, but only if any employees purchase insurance on an exchange and use a federal tax credit to do so. If the federal tax credit does not exist in states with federal exchanges, then the employer mandate cannot be triggered in those states. Thus, employers could avoid providing health insurance in those states, and millions more would find themselves in the position of being unable to afford insurance coverage (though they would not be subject to the tax penalty because premiums would exceed 8% of their income).
Ironically, if Congress had enacted single-payor insurance through its spending power, though it would have been more controversial than the ACA, the act indubitably would be constitutional. Instead, while the ACA signifies a tipping point between federal and state control over health care in the United States, Congress deliberately included states in the ACA’s hybrid, public-private, architecture. Even though Congress took control, it offered power back to the states. Thus, the (largely Republican) states that rejected the chance to create exchanges aggrandized federal power at their own expense, and now they may be jeopardizing their citizens’ ability to purchase much-needed and wanted health insurance.