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Conflicting rulings on Obamacare-related subsidies raise new questions

At issue is some wording in the law related to the marketplaces, or exchanges, which let Americans purchase health insurance

Conflicting rulings related to the Affordable Care Act from two neighboring federal appeals courts may put Obamacare at further risk.

The two decisions were both released this week, and the conflict may eventually make its way to the Supreme Court. The high court recently decided in Hobby Lobbythat many closely held corporations do not have to pay for birth control of employees if offering it violates the owners’ religious beliefs.

At issue now in the new decisions is some wording in the law related to the marketplaces, or exchanges, which let Americans purchase health insurance. The language being reviewed is “exchange established by the state.” Those states which chose not to run their own exchanges directed residents to the exchange run by the federal government, commonly known as HealthCare.gov.

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Does that mean only state-run exchanges can be used for subsidies or tax credits, which are a key way that Obamacare is afforded by those with lower or moderate incomes? Or was the intent of Congress to include any exchange, including the one run by the federal government, with “state” here being a synonym for government?

On its part, the Internal Revenue Service says the law means tax credits are available for health insurance purchased via any exchange.

But in Halbig v. Burwell (which was previously known as Halbig v. Sebelius), the IRS rule was rejected by the U.S. Court of Appeals for the D.C. Circuit in a decision released on July 22. That means, if it becomes the law of the land, the 36 states which use the federal exchange likely cannot have their residents receive tax credits.

When asked about the decision, Steve Friedman, a healthcare attorney and co-chair of the Employee Benefits Practice Group at Littler Mendelson, said, “Wait and see is probably what the best advice … right now.” Other rulings may be forthcoming, he said in an interview with InsideCounsel.

It now appears that employers may be less likely to send their employees to exchanges for health insurance, if the exchange will not let an employee receive a government subsidy, he speculated.

“It remains to be seen what types of rulings we’re going to see down the road,” Friedman added. “A large part of the Affordable Care Act becomes inoperative if other circuits [or the Supreme Court] rule this way.”

For instance, it was striking that just a few hours after Halbig was released, the Fourth Circuit Court of Appeals, located in Richmond, Va., upheld the IRS rule in King v. Burwell.

Meanwhile, it was reported that Obama administration lawyers will appeal the decision in Halbig v. Burwell to the full D.C. Circuit Court of Appeals, according to The Los Angeles Times.(It was decided by a panel of three judges who sit on the appellate court.)

“It’s important for people all across the country to understand that this ruling does not have any practical impact on their ability to continue to receive tax credits right now,” White House Press Secretary Josh Earnest said shortly after the decision was released during a press briefing. “This will work its way through the legal process.”

But Conservatives have argued the language used does not include the federal exchange, which provides insurance options for residents of the three-dozen states that do not operate their own exchanges.

Conservatives found a common voice in Judge Thomas Griffith, whose opinion in Halbig v. Burwell says “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.”

“We reach this conclusion, frankly, with reluctance,” Griffith added in the ruling, which was backed by two out of the three judges on the panel. “At least until states that wish to can set up Exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly. But, high as those stakes are, the principle of legislative supremacy that guides us is higher still. Within constitutional limits, Congress is supreme in matters of policy, and the consequence of that supremacy is that our duty when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process.”

When it comes to advice to general counsel, Larry Vernaglia, a health care lawyer with Foley & Lardner, in a statement to InsideCounsel said, they should be “following these cases – at least for their broad impact.  If the DC Court of Appeals decision ultimately stands, it could mean, at least, that there will be an increase in the number of uninsured, low-income patients in markets where the states have not implemented an exchange.  Of course, this outcome could be some time in the future.  Until that time, health care organizations should also be prepared to submit friend of the court (“amicus”) briefs detailing both the legal and practical impact of these decisions.”

In addition, Paul Hamburger, co-chair of Proskauer’s Employee Benefits, Executive Compensation & ERISA Litigation Practice Center, said in a statement, “This case also impacts employers in that if no credits are available, then individuals dropping employer coverage for exchange coverage cannot trigger ‘pay-or-play’ penalties.”

The Washington Post reported that “Legal experts said that under the D.C. ruling, companies in those states would no longer be penalized for not offering their workers health insurance under the employer mandate, which will take effect next year. This is because under the law, employer penalties for not providing health coverage are triggered only when a worker receives a subsidy.”

Health-care subsidies are used by more than 5 million Americans so they can afford insurance payments they signed up for under Obamacare, InsideCounselreported. Subsidies in the form of tax credits are available only to those Americans whose family income is less than four times the federal poverty level, InsideCounsel further reported.

So there is a more fundamental challenge for Obamacare under the D.C. ruling.

“The lack of subsidies would likely cause the program to completely crash and burn for a large number Americans,” argued Rick Ungar writing in Forbes.

“So much of the remaining law collapses when the subsidies are removed from all state exchanges, it becomes more than rational for a court to decide that the intent of Congress was to provide the subsidies on all state exchanges, no matter who was responsible to create and operate that exchange,” he added.

He predicts the entire D.C. Court of Appeals will reverse the ruling coming from the three-judge panel. “This, in my opinion, would meet the actual intent of the Congress who I believe did intend the subsidies to be available on all exchanges,” Ungar said. “But that doesn’t mean that the majority of the Supreme Court will not go with the more limited approach and construe the statute in the same way the two judges did so today.”

Contributing Author

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Ed Silverstein

Ed Silverstein is a veteran writer and editor for magazines, websites and newspapers. A graduate of Harvard's Kennedy School of Government, he has won several...

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