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King v. Burwell: Last Piece of Obamacare Puzzle?

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With the resolution of King v. Burwell, the major constitutional questions regarding the Affordable Care Act appear to be settled. But the law remains in need of numerous fixes—most of which face dim political prospects.

Okay. We’re done—maybe—with serious judicial challenges to the Affordable Care Act (ACA), also known as Obamacare.1 The Supreme Court issued its opinion in King v. Burwell2 in late June, giving those of us in the employee benefits and health care world yet another chance to crowd in front of the SCOTUS Blog and hit refresh as we wait for an opinion.3

Passed by Congress and signed by President Obama on March 23, 2010, the ACA is a stunningly broad set of statutory changes whose provisions reach individuals, employers, insurance companies, and the medical industry. Though tasked with a seemingly narrow question—whether the ACA’s premium tax credits are available to individuals in states that have a federal exchange—the impact of the King v. Burwell decision is broad.

As explained by Justice Roberts in the majority opinion, the ACA has three major interlocking policy reforms. First, there is insurance reform—limits on preexisting condition exclusions, no annual or lifetime coverage limits for essential health benefits, first dollar coverage for preventive care, and a host of other rules intended to change the nature of the insurance markets. The health insurance exchanges are a part of these reforms. Next is the individual mandate. Every individual must either obtain insurance coverage (through employer-sponsored coverage, purchased on an exchange or from an insurance company, etc.)  or pay a tax.4 Finally, the ACA provides for financial subsidies to make insurance affordable for certain individuals.5

ACA on Trial

Opposition to the ACA has been fierce in both the judicial and political spheres. In 2012, the Supreme Court’s first foray into the ACA addressed constitutional issues surrounding the individual mandate, the requirement that most Americans obtain health insurance or pay a penalty. The Court rejected those challenges in National Federation of Independent Business v. Sebelius, and ruled that the individual mandate is constitutional as part of the federal government’s taxing power.6 Sadly, the partisan rancor around this legislation has slowed down progress and muted the truth at times.7

Things were not quite as interesting in King v. Burwell, which was largely about statutory interpretation. To summarize:8

  • The statute contains rules about how the individual tax credits are calculated.9
  • Those calculation rules refer to subsidies.
  • The reference to subsidies describes them as something provided to individuals in “an Exchange established by the State.”10
  • Administrative rules promulgated by the Internal Revenue Service (IRS) assume that subsidies would go to all individuals enrolled in an exchange—state or federal.11

The plaintiffs argued that the IRS exceeded its authority to interpret the statute by writing regulations awarding subsidies to individuals enrolled in the federal exchange, i.e., one not “established by the State.”12 The 4th Circuit disagreed, citing Chevron U.S.A. v. Natural Resources Defense Council, Inc., which says reasonable agency interpretations of statutes should be upheld.13

At stake: 6.4 million individuals under the age of 65 could have lost their subsidies in 34 states that have been relying on the federal exchange.14 This would have made the individual mandate unaffordable for many individuals and left certain states scrambling to establish exchanges to preserve the subsidies for their residents. Moreover, the employer mandate—requiring employers with 50 or more full-time employees (“applicable large employers”) to offer health insurance to full-time employees or pay a penalty—would have been undercut in those states. The mandate’s “play or pay” penalty is triggered when an applicable large employer’s full-time employee does not receive an affordable, minimum value offer of health coverage and enrolls on the Exchange and receives a subsidy.15 Large employers in all states would have been left with uncertainty about the application of the “play or pay” penalty and how to structure health plan coverage going forward.

Justice Roberts, writing for a 6-3 majority, rejected the plaintiffs’ argument and affirmed the 4th Circuit’s holding. However, rather than relying on the 4th Circuit’s Chevron rationale, Justice Roberts concluded, as a matter of law, that the statutory language in dispute should be read to allow subsidies to individuals enrolled on either a state or federal exchange.16 In so reasoning, Justice Roberts cuts off the possibility of an IRS under a different administration writing rules differently—that is, to only allow subsidies to individuals enrolled on state exchanges. This is a very significant step in cementing ACA into our legislative landscape.

Far-Reaching Consequences

Setting aside some of Justice Scalia’s histrionics,17 the case itself isn’t all that interesting for its legal reasoning and conclusions. But its consequences are far-reaching.

Let’s start with politics. There are more than likely a few Republicans who breathed a quiet sigh of relief upon hearing the outcome. Had the plaintiffs succeeded, approximately 6.4 million Americans would have lost their subsidies. And many of those individuals live in states with Republican senators or governors up for election in 2016. That would have forced the Republicans to come up with a solution for the short and long term. Now, rather than reacting with policy proposals that would have to withstand scrutiny in the legislative process, they can continue to hammer away at ACA’s faults (and there are many) leading into 2016. This served them well in the last elections and it may bring similar results in 2016. This may be the best result possible for them.

There are signs that the business sector is becoming skeptical about the replace-and-repeal campaign speeches and is ready to get to work.18 And there is plenty of work ahead. The American Association of Medical Colleges estimates that the United States faces a shortage of 46,000 to 90,000 doctors by 2025, driven in part by increased access to health care as well as increasing numbers of individuals becoming Medicare-eligible.19 Not surprisingly, health care company stocks and merger discussions have seen a spike in the days following the Supreme Court’s decision.20

Some less-discussed provisions of ACA are designed to foster innovation in the medical-technology space, and there are signs this is happening.
While the ERISA lawyer in Florida was busy looking for language to bring the Act down, a Harvard Medical student came across a provision in ACA related to diabetes prevention that prompted him to quit medical school and create a medical device company that attracted $23 million in Silicon Valley funding.21 Oscar, New York State’s first new commercial health insurance company in 15 years, had 40,000 insureds in April 2015, three times its customer base one year earlier, and is currently valued at about $1.5 billion.22 The look of Oscar’s website looks makes clear that it is made for the digital era.

Needed Fixes Going Forward

And then there are some of those fixes needed by the ACA.23 Bipartisan cooperation is needed to address a number of concerns. Here’s a sampling.

Employer Mandate. There’s a pretty good argument that the employer mandate isn’t necessary to make this work. Obamacare requires that any employer with 50 or more full-time employees offer coverage to those employees. Sounds simple on its face, but it is enormously complicated. And maybe not necessary. In calling for elimination of the employer mandate last year, the Urban Institute cited research showing two things: (i) elimination of the employer mandate won’t reduce insurance coverage significantly and (ii) elimination of the mandate would likely remove risk of labor market distortions that harm workers and put costly burdens on employers.

That’s probably wishful thinking. Repeal of the employer mandate would force members of both parties to take some votes they may have trouble explaining at home. I talked about this topic with a highly respected and retired member of Congress recently. He told me chances of the employer mandate going away without eliminating the individual mandate are very low. According to him, members of Congress on both sides of the aisle couldn’t sell this story because it would be viewed as protecting business while imposing burdens on individuals.

Employer Reporting. So let’s assume the employer mandate stays. Obamacare as it exists today imposes a dizzying array of rules on employers and union health care plans to decipher, distribute, and file various forms with the IRS in
January 2016 and every year after that. This is expensive and complicated. A bipartisan bill to simplify the reporting system was introduced recently by respected Sens. Mark Warner (Democrat/Virginia) and Rob Portman (Republican/Ohio).24 I had the opportunity to talk with staffers for both senators in Washington D.C. a few weeks ago. The political climate is so toxic right now that they have concerns that something as mundane as this legislation might generate toxic political fallout. The leaders in both parties should do away with such behavior and act on this one as quickly as possible. By the way, none of this would be necessary if Republicans and Democrats could make the employer mandate go away.

Automatic Enrollment. And then there’s the automatic enrollment rule, where employers with more than 200 full-time employees would be required to automatically enroll all new full-time employees in the employer’s health plan. This rule is so complex that the Department of Labor has indefinitely delayed its effective date. This is another rule that would simply go away if the employer mandate is repealed.

Tax on Rich Plans. Obamacare also includes a 40 percent tax on the so-called “rich health plans”—also known as the Cadillac Plan Tax. This tax, originally thought by some to hit mostly the very favorable plans offered by the likes of Goldman Sachs and other affluent employers, has great potential to hit plans sponsored by well-intentioned main-street employers and plans benefiting many union employees as well.25 It will hamstring employers looking for creative ways to provide health care to employees. It should be modified or repealed.

Defined Contribution Health Plans. Here’s another one. (And if you are still reading, you get high marks for patience.) There are provisions in ACA that make it difficult or impossible for many employers to move to true defined contribution-style health care plans, something like a 401(k) plan where you would use your account balance to buy health insurance on an exchange.26 Many employers would jump at this opportunity if the law allowed it. And many employees would likely be pleased with the experience. But we need some minor surgery to Obamacare for this to be possible.

These suggestions are all about provisions impacting employers. That’s no small matter, given that approximately 48 percent of all Americans obtain their health care from an employer. There are, no doubt, plenty more provisions in ACA requiring careful oversight and some regulatory tinkering. Let’s hope that Congress can pay some attention to the details.

In the meantime, the King v. Burwell decision this June means that large employers will need to prepare their reports for offers of coverage, subsidies will still be available to certain individuals on state and federal exchanges, and the ACA will continue to keep employee benefits folks busy for the foreseeable future.


In a perfect world BOB SENG likes to think of himself as an ERISA lawyer who speaks in short sentences. He has boomeranged back to his roots at Dorsey & Whitney after 13 years as assistant general counsel for pay & benefits at Target. Bob is a member of the American Benefits Council Policy Board. He has been active in benefits policy development at the national level and benefits lawyering at the local level.

HOLLY FISTLER is an associate in the Benefits and Compensation group at Dorsey & Whitney.  A 2008 graduate of the University of St. Thomas School of Law, her practice focuses on both health and welfare benefits and qualified retirement plans.  


 

Notes

1 The Affordable Care Act consists of two statutes, the Patient Protection and Affordable Care Act, Pub. L. No. 111-148 (3/23/2010) and the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152 (3/30/2010).

2 King v. Burwell, 576 U.S. _____ (2015).

3 The site had more than 1 million hits during the week of the first ACA Supreme Court ruling in 2012. See http://www.niemanlab.org/2012/06/anatomy-of-a-spike-how-scotus-blog-dealt-with-its-biggest-traffic-day-ever/.

4 The individual mandate was the subject of the first Supreme Court ruling on ACA. National Federation of Independent Business v. Sebelius, 567 U.S. ___, 132 S. Ct. 2566 (2012).

5 Internal Revenue Code (I.R.C.) §36B; Treas. Reg. §1.36B-2.

6 National Federation of Independent Business v. Sebelius.

7 For a fascinating discussion around Republican plans discussed shortly after inauguration to initially support health care reform and then peel away and claim it was forced upon them, listen to Steven Brill’s story told to an Aspen Ideas panel in June 2015. A recording of the panel discussion can be found at:  http://www.mprnews.org/story/2015/06/29/mpr_news_presents

8 Look to places like SCOTUS Blog for more legal analysis. See, for example, http://www.scotusblog.com/case-files/cases/king-v-burwell/

9 Specifically, individuals with household incomes between 100-400% of the federal poverty line may receive premium tax subsidies. See Internal Revenue Code §36B; Treas. Reg. §1.36B-2.

10 I.R.C. §36B(b)(2), for example, refers to the premiums of qualified health plans covering the taxpayer and which were obtained through “an Exchange established by the State….”

11 26 CFR §1.36B-2(a)(1) provides that subsidies are provided to a taxpayer “enrolled in one or more qualified health plans through an Exchange.” An “Exchange” is defined in the regulations as “a governmental agency or non-profit entity that meets the applicable standards of this part and makes QHPs available to qualified individuals and/or qualified employers. Unless otherwise identified, this term includes an Exchange serving the individual market for qualified individuals and a SHOP serving the small group market for qualified employers, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by HHS.” See 26 CFR §1.36B-1(k) and 45 CFR §155.20.

12 “Obamacare case began when conservative lawyer saw possible flaw in law,” LA Times, http://www.latimes.com/business/la-fi-court-case-origins-20150304-story.html

13 Chevron U.S.A. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

14 New York Times. http://www.nytimes.com/interactive/2015/03/03/us/potential-impact-of-the-supreme-courts-decision-on-health-care-subsidies.html

15 I.R.C. §4980H(a) and (b).

16 “Congress passed the Affordable Care Act to improve health insurance markets, not destroy them. […] Section 36B can be fairly read consistent with what we see as Congress’ plan, and that is the reading that we adopt.” King v. Burwell, at p. 21 (2015).

17 E.g., “SCOTUScare,” “interpretive jiggery-pokery.”

18 PWC’s website contains the following advice: “The Supreme Court’s ruling allowing health insurance subsidies on the federally-run HealthCare.gov exchange solidifies the new individual insurance market. The Court’s decision in King v. Burwell removes uncertainty for some 8 million Americans who were at risk of losing coverage and preserves significant new revenue for industry. The decision positions the $2.9 trillion health sector to stay the course toward the New Health Economy which the Affordable Care Act helped to usher in.” http://www.pwc.com/us/en/health-industries/health-research-institute/aca-health-reform.jhtml

19 AAMC website: https://www.aamc.org/newsroom/newsreleases/435250/20150622_kingvburwellrelease.html

20 US News & World Report: “Health Stocks Soar After Obamacare Ruling, Reports of Aetna Merger” http://www.usnews.com/news/articles/2015/06/25/health-stocks-soar-after-obamacare-ruling-reports-of-aetna-merger

21 Financial Times: http://www.ft.com/intl/cms/s/2/709aa784-efd4-11e4-ab73-00144feab7de.html#axzz3gMB6iwTj

22 New York Times: http://www.nytimes.com/2015/04/21/business/dealbook/oscar-a-health-insurance-start-up-valued-at-1-5-billion.html?_r=0

23 As a recent White Paper issued by the Clayton Christensen Institute of Harvard explains, “A complicated policy with over 955 pages and countless congressional revisions, it is naïve to claim that the ACA is a wholly good or bad policy. With such complexity and nuance, sweeping statements of political or economic ideology do little to address the reality at hand. Provisions of the law are now being implemented, and it is essential that policymakers, medical practitioners, and innovators alike consider where opportunities for disruptive innovation reside. It is also essential to consider which provisions of the law might inhibit disruptive innovation and focus reform efforts on those provisions.” http://www.christenseninstitute.org/publications/aca/

24 See http://www.warner.senate.gov/public/index.cfm/2015/6/warner-portman-collins-introduce-bill-to-require-cost-analysis-of-agency-regulations; or see http://www.portman.senate.gov/public/index.cfm/2013/6/portman-warner-introduce-legislation-to-provide-regulatory-relief

25 According to Mercer, potentially one-third of employers will be faced with the tax in 2018, if the health care and insurance costs keep rising at their current pace. Forbes. See http://www.forbes.com/sites/robertwood/2015/04/07/obamacare-40-cadillac-tax-hits-no-frills-plans-too-like-your-plan-keep-your-plan/

26 For example, IRS Notice 2013-54 specifically calls out “Employer Payment Plans” – plans that reimburse on a pre-tax basis an employee’s substantiated premiums for non-employer sponsored health insurance – as failing to be compliant with the ACA by their design.

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