Rocky road ahead for employers, politicians in ACA subsidy rulings

The White House this week breathed a sigh of relief – and conservatives simply sighed – when hours after a D.C. federal appeals court ruled that the Internal Revenue Service exceeded its authority in providing tax credit subsidies in 34 states, another federal appellate court ruled the opposite. Within the next 18 months, both sides may have reason to rethink their initial instinct.

The Affordable Care Act grants subsidies to eligible individuals in “states that establish” a health exchange. It follows, both courts agreed, that without individuals eligible for subsidies in a state, employer penalties would effectively disappear, and the vast majority of individuals in a state would have no mandate to purchase coverage.

Clearly, those items would gut key features of the ACA. As heated as is the political discussion over the ACA, however, the legal issue is simple almost to the point of being pedestrian: is the statutory language ambiguous? If no, apply it. If yes, defer to the federal agency that interprets it (here, the IRS).

Also See: Subsidy ruling could further delay employer mandate

Both courts agreed the plain language of the operative section limited subsidies to “states” that “establish” an exchange, but the D.C. circuit concluded any remaining internal language arguably inconsistent with that admonition was not significant enough to create ambiguity. The U.S. Court of Appeals sitting in Richmond concluded it was.

While the availability of subsidies are not currently in jeopardy and likely will not be until a final resolution of these and two other cases making their way through the system, both sides have reason to see danger over the horizon.

First, the logic of the D.C. appellate court will be seen by other courts as strong. Even if an en banc review by the full D.C. circuit overrules the panel decision, the Fourth Circuit could similarly reverse course (typically, recognition of a split in the appellate circuits creates an opportunity for en banc review, which is otherwise rare). Further, with two other cases (both at motions for summary judgment), one in Oklahoma that will head to the 10th Circuit and one in Indiana that will head to the Seventh Circuit, are likely to give additional importance to the issue. It would take a clean sweep of victories for the White House (which is unlikely) to avoid review by the U.S. Supreme Court, which might take the case even in that event.

If it does, the administration is likely to find that the friend it thought it had in a court that in 2012 upheld the “taxing power” of Congress to impose mandates on individuals might not be so friendly on this issue, one of purely statutory construction. It is the same court that, in that same opinion, decided by 7-2 that Congress wrongly leveraged the states on Medicaid and, unanimously, made Medicaid expansion optional for the states. In Justice John Roberts, the cement in all three of those holdings, they are likely to find a stickler for “plain language.”

Also See: Employers won't feel immediate sting from federal court ACA subsidy ruling

Most important, in Justice Roberts they will find a justice who believes in the political process. No less than four times in the text and footnotes of his opinion upholding the ACA, the Chief Justice emphasized that the political process is the answer to difficulties with the ACA. Rarely would that admonition be truer than here, where the simplest fix possible for this issue is readily available: Congress can fix the troubling language through amendment.

For those who believe this is unrealistic, consider three facts.

First, even now, a possible political compromise exists that could get an amendment enacted even in a bitterly split Washington. Republicans might set aside their distaste of “Obamacare” spending on subsidies for a deal to get rid of the employer mandate (as recommended by Obama administration think tank allies) and even the individual mandates (which the IRS can't aggressively enforce, anyway).

Second, assume one side or the other does not have the foresight to strike a deal now. This issue will, from a timing perspective, become more acute right in the middle of the 2016 election cycle, when the Supreme Court might strike down the subsidies, putting pressure on all sides: Democrats because their law has failed, Republicans because their constituents in more than 30 (important electoral) states will be losing subsidies, making insurance unaffordable.

Third, failure to find a "fix" would make one thing crystal clear: whether the health system works better in the 14 states that established exchanges and receive subsidies (and penalize employers) or the remaining states where they don't will be the best concrete experiment in the success of one key aspect of the ACA. The question is: who is more excited to make that examination?

In the end, we will have to wait between at least 12 and 24 months for these issues to work out, but the road is likely to be rocky until then. For employers -- surprise! -- uncertainty on the future will continue.

Mark Rust is managing partner of the Chicago office of Barnes & Thornburg, LLP, and chair of the firm’s national health care department.

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