The Latest Court Challenge to the Affordable Care Act

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Last month, the District of Columbia Court of Appeals heard arguments in a case that strikes at the very heart of the Affordable Care Act’s ability to make insurance coverage affordable nationally. Along with three other cases filed in Virginia, Oklahoma, and Indiana, Halbig v. Sebelius asks whether the Affordable Care Act (ACA) permits the federal government to pay premium tax credits for health plans sold through the federally facilitated marketplace.

Thirty-six states rely on the federal marketplace for individual coverage; the rest operate their own marketplaces. More than 7 million people have enrolled in marketplace health plans during the initial open enrollment period that closed March 31. According to the U.S. Department of Health and Human Services’ March 2014 enrollment report, 83 percent of enrollees to date have received subsidies, with the number of subsidized enrollments in the federal marketplace (85%) surpassing those in the state-based marketplaces (81%).

Understanding the Challenge
Halbig challenges the legality of an IRS rule permitting payment of federal premium tax credits to eligible individuals regardless of whether they buy coverage through a state-based or federally facilitated marketplace.

The plaintiffs in these cases are individuals and employers opposed to the law. The employers do not offer affordable insurance and thus would be required to pay a tax for employees who gain subsidized insurance. The individuals reside in states using the federal marketplace, who have access to affordable insurance as a result of the subsidy and thus would be subject to the tax penalty if they do not buy coverage.

The roots of Halbig are found in a Cato Institute blog post by Case Western Reserve University law school professor Jonathan Adler, published after the IRS issued its proposed rule. His argument turns on seven words in a 1,000-page statute. The ACA provides that tax credits are to be valued in relation to the cost of health plans offered “through an Exchange established by the state.” Adler argues that this language bars the IRS from allowing subsidies in both state and federal marketplaces; while Congress may have intended to cover both marketplaces, Adler argues that it is not a federal agency’s job to correct drafting errors.

The ACA’s legislative history suggests no such restriction. To bolster their argument, plaintiffs instead point to Senate committee deliberations that, they claim, show that Congress intended to allow premium credits in state marketplaces in order to incentivize their participation.

Lower Court Upholds Government’s Rule
In his opinion in Halbig issued in January, federal district Judge Paul Friedman sided with the federal government and concluded that the regulation was consistent with the statute. (In March, a separate federal district court also found for the government in King v. Sebelius.) In so ruling, Judge Friedman noted that in cases involving the legality of agency rules, a court must look at the law as a whole. He pointed to the many provisions—most notably Congress’s directive to the HHS Secretary to establish a marketplace in any state that did not do so—that clarified the national reach of the Affordable Care Act.

Judge Friedman also cited the absence of any provision putting states on notice that forgoing marketplace establishment would cost their residents premium credits. As the United States Supreme Court ruled in barring federal enforcement of the Medicaid adult expansion mandate in NFIB v. Sebelius, basic concepts of federalism mean that states must be given clear notice of important conditions in federal laws that would affect how programs operate.

Judge Friedman also pointed out striking anomalies from reading “established by the state” so literally. For example, the ACA requires that states maintain their pre-ACA Medicaid eligibility standards until the HHS Secretary determines that “an Exchange established by the State . . . is fully operational.” If “established by the state” were read literally, states using the federal marketplace would be required to maintain their pre-ACA Medicaid eligibility levels in perpetuity.

Court of Appeals and What’s Next
Now we await a decision as the Halbig plaintiffs’ appeal is considered. The three-judge panel that heard the Halbig appeal displayed a significant level of disagreement over the fate of the rule. Even as one judge pointed to the absurd results of reading seven words so literally and accused plaintiffs of trying to “gut the statute,” another judge focused on the words themselves and raised concerns about equating the federal and state marketplaces given the highly federal nature of the ACA.

In the meantime, the Fourth Circuit Court of Appeals will hear arguments in King; the Indiana and Oklahoma cases remain in the trial court stage. Whether the full D.C. Court of Appeals would agree to rehear the case en banc (when all of the judges on an appeals court agree to review a decision previously issued by a smaller group of judges) cannot be known at this point. The matter is expected to move along relatively quickly given the enormous importance of the case to the future of the ACA, with decisions later this year. If the case is appealed to the Supreme Court, it surely would be on the Court’s 2015 docket, when a second round of open enrollment would be under way.

What’s at Stake
Were the Halbig plaintiffs to prevail, the impact would be “breathtaking,” Tim Jost writes in the Health Affairs blog: the disappearance of premium tax credits from 36 states, including those that partner with the federal government; the loss of affordable coverage for millions of people; and an end of the employer mandate in these states, which is tied to the use of premium tax credits by employees. Ultimately, since the insurance market reforms would remain in effect, marketplace premiums would double, according to estimates contained in an amicus brief filed on behalf of the government.

Some states might establish their own marketplaces; presumably those philosophically opposed to the ACA would not. Those most likely to switch might be the 14 states that already have some form of partnership with the federal marketplace. In this regard, it is worth noting how blurry the lines between state and federal marketplaces really are. In a Halbig loss, would residents of partnership states be considered residents of states that have intentionally stayed out of the marketplace business altogether?

The public health impact also would be profound, especially since states that rely on the federal marketplace are home to 84 percent of all lower-income uninsured African Americans. Furthermore, because the federal marketplace states are also more likely not to have expanded Medicaid, the size of the affected population is even greater, since in non–Medicaid expansion states, eligibility for premium tax credits begins at 100 percent of the federal poverty level.

For now, implementation proceeds, and the nation once again waits for the courts to act.

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Publication Details

Publication Date:
April 9, 2014
Authors:
Sara Rosenbaum
Citation:
S. Rosenbaum, The Next Court Challenge to the Affordable Care Act's Future, The Commonwealth Fund Blog, April 2014.

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