King v. Burwell: The U.S. Supreme Court Saves the ACA’s Employer Mandate

In June 2015, the U.S. Supreme Court, in King v. Burwell, upheld the lawfulness of the way the Affordable Care Act works in North Carolina and the 33 other states where the federal government, rather than the state, runs the health insurance exchanges. As a result, the ACA’s employer mandate is still effective. That means that employers must continue to keep track of those employees who qualified for and were offered health insurance, and those who did not, in order to comply with the ACA’s stringent reporting requirements -- which will be due next winter for the 2015 calendar year. For those of you interested in the way in which the Court reached its decision, read on. For those who are more concerned with the bottom line of the decision – keep on counting! That’s the lesson of the decision.

Under the Affordable Care Act, employers above a certain size are required to offer health insurance coverage to their employees or pay a substantial penalty. This requirement is commonly known as the “employer mandate.” For an employer covered by the mandate, the penalty is triggered when one of its employees receives a premium tax credit to assist in the purchase of individual insurance on a health insurance exchange. In King v. Burwell, four Virginia plaintiffs challenged the ACA provision authorizing the payment of a tax credit to individuals purchasing health insurance on a federally-run exchange. They argued that the ACA authorized payment of premium tax credits for purchase of health insurance only from state-run exchanges. Virginia, like North Carolina, uses a federally-run exchange, not a state-run exchange. Had the plaintiffs prevailed before the Supreme Court, no one in North Carolina would have been eligible for a premium tax credit and no North Carolina employer would have ever had to pay a penalty for failing to offer affordable health insurance coverage to its employees. The employer mandate would have been dead. The plaintiffs did not prevail, however, and the employer mandate is alive and well in all states, regardless of whether a state’s exchange is run by the state itself or by the federal government. The Employer Mandate The ACA requires employers with 100 or more full-time equivalent employees (50 or more beginning in 2016) to offer health insurance coverage to full-time employees and dependents. Employers who do not offer qualifying coverage are liable for a financial penalty if (and this is an important ‘if”) they have at least one employee who receives a subsidy from the federal government to purchase an individual health insurance policy on an exchange. If no employees receive a subsidy to purchase an individual policy, the employer faces no penalty. The Health Insurance Exchanges The ACA allows the individual states to set up online marketplaces, or “exchanges,” for individuals to use to compare and buy individual health insurance policies. It also directs the federal government to organize and run exchanges in states that decline to set up an exchange themselves. The North Carolina General Assembly declined to set up a state-run exchange, so North Carolina is one of 34 states in which the federal government runs the health insurance exchange. In order to make the goal of universal coverage more attainable, the law provides for tax subsidies for lower-income Americans who buy individual policies on an exchange. King v. Burwell The text of the ACA says that qualifying individuals may receive subsidies when they buy health insurance policies on an exchange run by a state. The Internal Revenue Service issued an interpretation of that language that extended the subsidies to people buying insurance in a state where the exchange run is by the federal government. The plaintiffs in King v. Burwell argued that the plain language in Section 36B of the statute meant that the ACA authorizes the federal government to subsidize the purchase of health insurance only on state-run exchanges, and not on federally-run exchanges in states that declined to run the exchanges themselves. The U.S. Supreme Court disagreed. In a 6-3 decision, the Court held that premium tax credits are available to taxpayers in states that have a federally-run exchange. The Supreme Court’s Reasoning The Court reached its conclusion by giving great weight to the interdependent market reforms that the ACA incorporates. The decision acknowledged that the plaintiffs had strong arguments about the plain meaning of Section 36B, where Congress said that the amount of a person’s premium tax credit would depend on whether the taxpayer was enrolled in an insurance plan through “an Exchange established by the State.” The Court went on to say, however, that the meaning was only “plain” when viewed in isolation from the rest of the statute. When viewed as part of the ACA as a whole, the Court concluded, the argument that premium tax credits were limited to those purchasing insurance on a state-run exchange and not on a federally-run exchange, was “untenable.” In interpreting the phrase “an Exchange established by the State,” the Court noted that the ACA was based on three major reforms. First, the statute requires health insurers to issue policies without regard to an individual’s health status and to base premiums on a community rating – in other words, it prohibits insurers from charging sicker participants higher premiums. Second, it requires each individual in the country to enroll in health insurance or pay a penalty to the IRS, unless the cost of buying insurance is more than eight percent of an individual’s income. Finally, to ensure that the cost of buying insurance is affordable for even the poorest of Americans – that is, to ensure that the cost of insurance is less than eight percent of an individual’s income – it provides for tax credits for persons with household incomes between 100 and 400 percent of the federal poverty line. The Court recognized the need for all three parts of the ACA’s reform package to be in place for the statute to achieve Congress’ goals. By requiring insurers to offer insurance to everyone based on a community health-based premium, the ACA makes sure that no one can be denied health insurance. By requiring everyone to enroll in health insurance coverage or pay a penalty-tax, the ACA creates an incentive for people to obtain health insurance before they get sick, making the pool of insured individuals more balanced and less costly for the insurers to serve and thus, keeping premiums lower. By providing tax credits, the ACA ensures that insurance is affordable for those earning less. Concluding that each part of the statutory scheme was necessary if all of Congress’s stated goals were to be met, the Supreme Court found that limiting premium tax credits to state-run exchanges would render the statute unworkable. If the requirement that premium tax credits must be available to those meeting the ACA’s needs test did not apply to more than half of the states, then the number of people for whom the cost of insurance would be greater than eight percent of income would be significant. The Court noted that in 2014 approximately 87 percent of those who bought insurance on a federally-run exchange did so with premium tax credits. Without the tax credits, they would be exempt from the requirement that they buy insurance because it would cost more than eight percent of their income. Citing various studies tracking insurance reform, the Court found that the effect of the loss of tax credits would likely make premiums become more expensive. This would lead to increasingly fewer people subject to the individual mandate, which would in turn lead to fewer individuals with health insurance coverage in those states with federally-run exchanges. In practical effect, states with state-run exchanges would be subject to all three of the ACA’s interlocking requirements – guaranteed insurance and community rating, the individual mandate and the availability of premium tax credits – while states with federally-run exchanges would be subject to only the guaranteed insurance and community rating requirements. The Court took note throughout its opinion of numerous studies showing that the health insurance market in states that had in the past only required guaranteed insurance and community rating usually ended up in a “death spiral” – a situation in which a majority of insurers leave a state’s health insurance market. Because of the conclusions reached by these studies, the Court found that it was “implausible that Congress meant the [Affordable Care] Act to operate in this manner.” “Congress,” the Court concluded, “passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter. Section 36B can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt.” Conclusion For North Carolina local governments, everything is as it was. Individuals who purchase insurance on the exchange will still be eligible for a tax credit for the cost of their premiums if they meet the ACA’s income guidelines. Employers with more than 100 employees (50 in 2016) continue to be subject to the requirement that they offer affordable health insurance that provides minimum value or pay a substantial penalty to the federal government if one of their employees purchases insurance on the North Carolina exchange and receives a premium tax credit. For readers interested in a comprehensive presentation of the ACA’s employer mandate and who did not participate in our live webinar in November 2014, I invite you to sign up for the on-demand webinar, The Affordable Care Act: What Employers Need to Know for 2015, here.