Halbig v. Burwell Case May Bring Down the ACA

Today, the second most important federal court in the United States released a decision that may practically dismantle several essential parts of the Affordable Care Act (ACA). If it is not reversed or modified, the decision will eliminate individual health insurance subsidies and employer “pay or play” penalties in more than two thirds of the states.

What the case is about
The Halbig v. Burwell case in the District of Columbia Circuit Court of Appeals concerns the Internal Revenue Service’s interpretive expansion of the ACA’s subsidies and penalties.

The ACA law says that qualified individuals may receive federal health insurance subsidies only if they purchase coverage “through an Exchange established by the State [where they live].” Similarly, the employer penalties for not offering coverage to all full-timers (the “A” penalty) or for offering coverage that is inadequate or too expensive for eligible employees (the “B” penalty) are both triggered only when at least one of a large employer’s full-time employees obtains an ACA coverage subsidy from a state exchange.

The ACA instructs the states to establish health insurance exchanges, but when states don’t do that, the law empowers the federal government to establish exchanges in those states. Contrary to the expectations of ACA supporters, more than two-thirds of the states have failed to establish and maintain exchanges, and the federal government is powerless to make them do it. In those states, ACA exchanges are now federally-established, not state-established.

Soon after passage of the ACA, legal analysts observed that an exchange established by the federal government in a state is not “an Exchange established by the State,” thus liberating any non-exchange-establishing states from the entire ACA subsidy and employer “play or pay” penalty scheme.

Dismayed by this analysis and by the unexpected refusal of many states to establish exchanges, the IRS issued regulations declaring its intention to grant subsidies through all ACA exchanges, both state and federal, and to impose the employer penalties that such subsidies trigger in all states. Several lawsuits have challenged this regulation as an illegal expansion of the ACA. The Halbig case — brought against several federal agencies — progressed faster than the others.

PREMIUM CONTENT: Summary of ACA Final Regulations

The arguments
The Halbig plaintiffs argue that ACA’s limitation of subsidies and penalties to state-established exchange states is unambiguous and that, without Congressional appropriation or legislation, the IRS has no authority to spend public funds on subsidies or to penalize employers in federally established exchange states. They also cite legislative history showing that Congress intended the subsidies to be a “carrot” to induce the states to establish exchanges, while withholding federal subsidies would be the “stick” to deter states from refusing to establish exchanges. The IRS regulation frustrates Congress’s plan.

The Obama administration argues that, regardless of the legislative history and the actual words of the statute that Congress enacted (“Pay no attention to that law behind the curtain”), Congress “must” have intended subsidies and penalties to be nationwide, regardless of the level of government that establishes the exchanges. Following this theory, the administration has decided to do by IRS regulation what it thinks Congress should have done — instead of what Congress actually did.

The court’s decision
The Halbig appeals court disagreed with the administration, embraced the plain meaning of the law’s words, and instructed the district court to vacate the IRS rule. This ruling confirms that the IRS has no authority to grant individual subsidies in any state that has not itself established an ACA exchange and no authority to assess the employer “pay or play” penalties that would spring from such subsidies. This decision, if upheld, will immobilize these key provisions of the ACA in most states. Although the individual mandate does not directly affect employers, its penalties would also be reduced by this decision in federally-established exchange states.

What happens next
The administration will try procedural tactics to undo or delay the effect of this decision, possibly including a motion for rehearing by the original 3-judge panel, a motion for an en banc hearing by 13 judges of the D.C. Circuit Court, or a petition for review by the United States Supreme Court, which will probably provide the ultimate answer, regardless of the case’s intermediate history. The future path of this case may also be affected by the result in an almost identical case that is close to decision at the Fourth Circuit Court of Appeals in Virginia.

Significance for single-state staffing firms if decision stands
Staffing firms operating only in a single state would be subject to the exchange situation in that state. If the state established its own exchange, the subsidies would be active, and the staffing firm would be subject to “play or pay” penalties. If the state has a federally established exchange, no subsidies would be active, and the staffing firm would not be subject to “play or pay” penalties.

Significance for multi-state staffing firms if decision stands
Multi-state staffing firms would face a more complicated situation that may incentivize them to segment their geographic market areas and corporate entity structures according to the “two worlds” effect of this decision.

The “B” penalty is imposed on an employee-by-employee basis — triggered by subsidized employees in state-established exchange states but, according to this court ruling, not by those in federally-established exchange states. The “A” penalty, however, is triggered company-wide when at least one employee anywhere obtains a subsidy. A subsidy granted to one employee in a state-established exchange state could trigger a heavy “A” penalty calculated on the total of the firm’s full-time employees in all of the states, regardless of their exchange sponsorship.

The ACA combines all commonly-controlled business entities to determine whether an organization is an “applicable large employer” subject to the penalties. However, the “play or pay” penalties apply separately to entities with different Employer Identification Numbers (EINs), even when they are commonly owned or controlled. This creates a cost-saving opportunity for multi-state firms.

Multi-state staffing firms that do not offer coverage to substantially all of their full-timers (meaning at least 70 percent in 2015 and at least 95 percent in later years) may want to use one corporate entity and EIN to employ people in state-established exchange states and another entity and EIN to employ people in federally-established exchange states. This structure would remove all of the full-timers in the federally-established exchange states from the “A” penalty calculation for the other states. That exclusion would be worth about $3,000 of before-tax penalty savings per year per full-timer.

What will states do now?
Some states may decide to belatedly qualify for subsidies by replacing their federal exchanges with state-established exchanges or go in the opposite direction to avoid employer penalties by dismantling their state exchanges in favor of a federal exchange. With exchange enrollment levels so low, potential subsidies for a few state residents may be greatly outweighed by the relief from job-killing penalties that a federal exchange strategy provides to a state’s employers. Staffing firms should watch for such proposed changes and be active in supporting or opposing them.

Will this part of ACA be changed by Congress?
With large portions of the ACA already in ruins and other features facing likely collapse, it is hard to predict that remedial action, in any direction, will be taken by our sharply-divided federal government. At this point, legislative efforts would be more in the nature of recovery than rescue.

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