Any CFOs who were hoping the Supreme Court would gut the Affordable Care Act in the King v. Burwell case saw that hope vanish Thursday morning.
The court ruled 6-3 that residents of states where the federal government operates a public health insurance exchange who meet certain income requirements are indeed entitled to federal tax credits to help them buy insurance.
If the court had ruled otherwise, companies would not have been subject to hefty penalties under the ACA for failure to provide the vast majority of their employees with “affordable” health insurance. On the other hand, as such a decision almost surely would have destabilized the insurance markets in the 34 states that opted not to create an exchange under the ACA, insurers likely would have stemmed their losses in part by raising premium pricing for those employers that do provide group health plans.
“Today’s decision will have little impact for employers that provide adequate and affordable coverage to their full-time employees in compliance with the ACA shared responsibility mandate,” says Lorie Maring, an attorney with labor and employment law firm Fisher & Phillips. “But for employers that were hoping for a last-minute reprieve from the ACA penalties, the Supreme Court’s decision means they will need to reevaluate whether to offer coverage.”
The court’s decision also may push companies that have been slow to address the implications of the ACA’s so-called “Cadillac tax” to stop procrastinating. Some companies have been waiting for years to get clarity on the future of the law, as various challenges have come and gone, before making long-range benefits decisions.
“The ruling today really puts into focus that the ACA, and the Cadillac tax under the act, are not going anywhere anytime soon,” says James Napoli, a partner in the employee benefits practice at law firm Seyfarth Shaw. “So employers really have to start focusing on their strategy as 2018 approaches.”
That year is when companies will first owe a 40% excise tax on health benefits whose value exceeds thresholds specified in the ACA. Few plans are above those thresholds today, but most experts believe that medical-cost inflation will push many companies over the limit by 2018. In a survey of 317 large and midsized employers by human-capital consulting firm Aon Hewitt, 68% of responding employers said they expected the excise tax to affect at least one of their current health plans by 2023.
“A number of unions’ health plans would, even if measured today, trigger the Cadillac tax,” Napoli says. “On Capitol Hill there is discussion of repealing or modifying it, but a repeal would create something like a $30 billion revenue hole, so as a practical matter they would have to find that $30 billion somewhere else.”
But Tracy Watts, national leader of health-care reform for Mercer, said that despite the looming 2016 elections, Congress and President Obama could agree to make targeted changes to the law this year, and that a repeal or revision of the Cadillac tax “stands a chance of becoming law.”
The ruling also removes any doubt as to whether companies were going to have to comply with ACA-mandated reporting requirements for 2015, with reports required to be filed by early next year. “Today’s decision is consistent with prior messages from the IRS, in that reporting for 2015 will proceed as scheduled,” says Amy Bergner, a managing director in the human resource services practice at PricewaterhouseCoopers. “We anticipate that many employers will move forward with their ACA reporting activities very quickly now.”
Retailers took the opportunity, immediately after the Supreme Court ruling, to beseech Congress for relief under the reporting requirements. The Retail Industry Leaders Association also called for a restoration of the 40-hour workweek standard as the definition of a “full-time” employee for purposes of the ACA’s employer mandate.
The National Business Group on Health, a coalition of 350 large employers, also called for improvements to Obamacare. “Now that the legal questions have been answered, the [Obama] Administration and Congress need to focus on real health reform — rationalizing the way we pay for and deliver health care in this country. Let’s finish the job.”
Semantics Rule the Day
Both the plaintiffs’ claim in the case and the court’s resolution of it relied in large part on parsing the meaning of very specific short phrases in the ACA.
At issue was language in the law stating that the federal government would provide tax credits to individuals and families under certain income thresholds in states where a public insurance exchange was “established by the state.”
The plaintiffs in the case were four individuals in Virginia who didn’t want to buy health insurance, as required by the ACA’s individual mandate provision for everyone whose cost of buying insurance is 8% or less of their income.
Without the federal tax credits they qualified for under IRS regulations interpreting the ACA, their insurance costs would have exceeded 8% of their income, relieving them of the requirement to buy insurance. Since Virginia did not establish an exchange, the IRS regulations violated the law and the plaintiffs shouldn’t have been eligible for the credits, they claimed.
But Chief Justice John Roberts, writing for the majority in the ruling, opined that the full context of the law did not support the plaintiffs’ claims. In particular, he pointed to language providing that each state “shall establish an exchange,” but that if a state chooses not to do so, the federal government “shall establish and operate such Exchange within the State” (emphasis added by Roberts).
Use of the phrase “such exchange,” Roberts wrote, instructs the federal government “to establish and operate the same Exchange that the State was directed to establish…. In other words, State Exchanges and Federal Exchanges are equivalent — they must meet the same requirements, perform the same functions, and serve the same purposes.”
Roberts also pointed to language stating that all exchanges “shall make available qualified health plans to qualified individuals” and defining “qualified individual” in part as an individual who “resides in the State that established the Exchange.” And that’s a problem, Roberts wrote: “If we give the phrase ‘the State that established the Exchange’ its most natural meaning, there would be no ‘qualified individuals’ on Federal Exchanges. But the Act clearly contemplates that there will be qualified individuals on every Exchange.”
On behalf of the dissenting justices, Antonin Scalia took the majority to task for characterizing “Exchange established by the State” as meaning “Exchange established by the State or Federal Government.”
“That is of course quite absurd,” Scalia wrote, adding later in his opinion, “Words no longer have meaning if an Exchange that is not established by a State is ‘established by the State.’ ” He charged that “under all the usual rules of interpretation … the Government should lose this case. But normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved.”