Federal Courts Issue Inconsistent Rulings on Subsidies in States with Federal Exchanges

Federal Courts Issue Inconsistent Rulings on Subsidies in States with Federal Exchanges

by Posted on: July 28, 2014Categories: HR & Compliance   

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The Affordable Care Act (ACA) created subsidies in order to help eligible individuals and families purchase insurance through an exchange by reducing their out-of-pocket premium. There are two federal health insurance subsidies available when accessing coverage through an exchange. First, there are premium tax credits which reduce out-of-pocket premiums costs for the tax payer. These are typically available to people with higher incomes. The other type of subsidy is cost-sharing reduction which allows eligible individuals, typically those with lower incomes, to enroll in plans with higher actuarial values. So therefore there are lower out-of-pocket costs at the point of service.

The ACA requires each state to now have their own Exchange for individuals and small businesses. This became effective as of 2014. The ACA left the responsibility of creating these Exchanges up to the individual states. However, since the U.S. Congress cannot require states to implement federal laws, if the states do not create their own Exchange then Federally-Facilitated Exchanges (FFEs) will remain in place. So far though only 16 states have set up an Exchange and the other 34 states are operating on FFEs.

While the ACA is requesting states to set up Exchanges, it also states that subsidies will be restricted and applied only to those individuals and small businesses that reside in states with their own Exchange only. This conflicts with a rule established by the Internal Revenue Service (IRS) though. The IRS rule states that subsidies will be authorized in all states, those with their own Exchanges and those with FFEs. These contracting texts have caused some issued in federal court.

Several lawsuits have been filed by individuals and small business employers challenging the Federal Government for providing subsidies under the ACA to people in states that did not set up their own Exchange and are still under FFEs. The lawsuits have been filed in response to the IRS rule that states subsidies can be given in all states. On July 22, 2014 two federal courts issued contradicting rulings on the availability of subsidies. The District of Columbia Circuit Court over the Halbig v. Burwell case ruled that the IRS rule was invalid. They based their decision on the ACA text and restricted subsidies to individuals and businesses in states with Exchanges. However, the 4th Circuit Court over the King v. Burwell case unanimously upheld the IRS rule allowing subsidies to all states. Both lawsuits were filed by individuals and employers in states that have FFEs instead of a state Exchange.

The Obama administration has stepped in stating they disagree with the ruling of the D.C. Circuit Court and will be requesting further review on the lawsuit. In the meantime, subsidies will continue to remain available in all states.  Other lawsuits challenging the subsidies in states with FFEs are still pending in federal courts.

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