Why Obamacare Ruling Means More Than It Seems

Tuesday's decision by the U.S. Court of Appeals for the D.C. Circuit has the potential to eviscerate the Affordable Care Act by barring premium subsidies for those enrolled in the 36 federal health-care exchanges. In a 2-1 opinion in Halbig v. Burwell, the court ruled that those insured in state exchanges can get the subsidies, but those in federal exchanges can't and must pay full price.

A few hours later, the Fourth Circuit came to the opposite conclusion in a similar case , King v. Burwell, ruling 4-0 that subsidies are legal on federal exchanges. The case may well be headed to the Supreme Court.

If Halbig v. Burwell is upheld by the Supreme Court, plans on federal exchanges will be unaffordable for many Americans. Eighty-seven percent of those who signed up for Obamacare on the federal marketplace chose plans with tax credits. Their plans are, on average, 76% less than the full premium , according to the Department of Health and Human Services.

People enrolled in health-insurance plans on the exchanges can get subsidies if their income is between 133% and 400% of the poverty line. With the annual average cost of a so-called silver plan on the exchange approaching $15,400 in 2016 , according to the Congressional Budget Office, subsidies are crucial to enrollment. Few people will sign up for the plans if they cannot get help to pay for their premiums.

Judge Thomas B. Griffith said in his opinion: “Section 36B plainly makes subsidies available only on Exchanges established by states. And in the absence of any contrary indications, that text is conclusive evidence of Congress's intent. … To hold otherwise would be to say that enacted legislation, on its own, does not command our respect — an utterly untenable proposition.”

Despite the text of the Affordable Care Act, the Internal Revenue Service in May 2012 extended the subsidies to those getting health insurance on any exchange, not only a state exchange. It did this by defining an exchange as a “State Exchange, regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.”

Virginia and District of Columbia residents sued the government, arguing that extending the subsidies to federal exchanges puts them at a disadvantage. Attorneys for West Virginia resident David Klemencic, mentioned in the decision, said he was harmed by the IRS regulation because, without the subsidy, his cost of health insurance would be greater than 8% of his income, meeting the definition of unaffordable coverage.

That would enable him to be exempt from the individual mandate, and would allow him to buy catastrophic health insurance, which is low-cost insurance against major illnesses. Otherwise, lower-cost catastrophic health insurance is only available to those under 30 years of age.

The court wrote: “By making credits more widely available, the IRS Rule gives the individual and employer mandates — key provisions of the ACA — broader effect than they would have if credits were limited to state-established Exchanges. The individual mandate requires individuals to maintain “minimum essential coverage” and, in general, enforces that requirement with a penalty. … The penalty does not apply, however, to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed 8% of their projected household income.”

Without subsidies, the law would have to allow insurance companies to offer cheaper plans. Alternatively, Congress could give everyone a refundable tax credit, say $10,000, and allow them to buy their own plans. This could be paid for out of the tax exclusion for employer-provided insurance, which is estimated to cost $143 billion in 2014 and $760 billion over 2013 to 2017, according to the Joint Committee on Taxation.

Judge Harry T. Edwards dissented, saying the Internal Revenue Service and the Department of Health and Human Services have been delegated to write the rules for the ACA: “The Government's permissible interpretation of the statute easily survives review. … The Act contemplates that an Exchange created by the federal government on a State's behalf will have equivalent legal standing with State-created Exchanges.”

What is the next step?

With the court's verdict in Halbig v. Burwell, the government has about 45 days to seek a so-called en banc ruling, where all the judges in the court hear the case. After the en banc process is completed, the government has 90 days to appeal to the Supreme Court.

The importance of the Halbig case and the possibility of an en banc hearing led President Obama to appoint additional judges to the D.C. Circuit last summer. In November, Senate Majority Leader Harry Reid and Senate Democrats eliminated filibusters for most judges and political appointees, allowing confirmation by a simple majority of 51 rather than 60 votes.

That allowed the Senate to confirm three new Obama appointees: Judges Patricia Millett and Cornelia Pillard were confirmed in December 2014, and Robert Wilkins was confirmed in January.

There are now 11 active judges on the Court of Appeals for the D.C. Circuit, seven Democrats and four Republicans. Before the new judges were confirmed, there were eight in all, four appointed by each party. By packing the D.C. Circuit Court, Obama prepared his signature piece of legislation for the en banc ruling.

The case is crucial because health-insurance plans under the Affordable Care Act are more generous than prior plans, therefore more expensive. Coverage must include a broad range of services that many do not think that they need, such as free preventive care, maternity care, contraceptives, drug-abuse coverage and mental-health coverage. Even a single man without children must have a plan that includes pediatric dental care and maternity care.

Further, after enrollment, deductibles are high. For a bronze plan (a basic plan), deductibles can top $6,000 a year for singles and $12,700 for families. That means that to access the plan’s benefits, after preventive care, families must spend $12,700.

With the increase in the price, the subsidies become a vital component of the Act. If the individual mandate were to require purchase only of insurance for major medical events, such as falling off a bicycle in traffic, having a heart attack or getting cancer, with routine care payable by the individual out of pocket, the price would be lower and there would be fewer complaints. It is the expensive insurance that necessitates complex premiums.

What Judge Griffith is saying is that words have meanings. He wrote: “Within constitutional limits, Congress is supreme in matters of policy, and the consequence of that supremacy is that our duty when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process.”

In contrast, Judge Edwards and the U.S. Court of Appeals for the Fourth Circuit are saying that words are whatever the government wants them to mean. If Judge Edwards is correct, and the law means whatever the government says it means, then some future administration has broad leeway to interpret the ACA and any other laws in its own way. Because of this fundamental difference, the case has ramifications far beyond the Affordable Care Act.

This piece originally appeared in WSJ's Marketwatch

This piece originally appeared in WSJ's MarketWatch