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Politicians weigh options in case Supreme Court strikes down health insurance subsidies

With the Supreme Court’s King v. Burwell decision expected in the coming weeks, politicians on both sides of the aisle are considering how to deal with the aftermath of a potential ruling striking down premium tax credits under Code Sec. 36B, also known as health insurance subsidies.Although the Affordable Care Act (ACA) is still an unpopular law among many voters and politicians, its implementation has nonetheless supplied millions of individuals with health insurance coverage, and such a decision would effectively render many of them uninsured unless a backup plan is in place.

RIA observation: The Senate Committee on Small Business & Entrepreneurship held a hearing, with a particular focus on small businesses and their employees, about consequences of theKing v. Burwell decision and possible actions that Congress could take in response.See Weekly Alert ¶  1  05/07/2015 for more details.

Background on ACA provisions. The ACA’s “individual mandate” under Code Sec. 5000A requires non-exempt U.S. citizens and legal residents for tax years ending after Dec. 31, 2013 to maintain minimum essential health insurance coverage (e.g., government-sponsored programs, eligible employer-sponsored plans, and plans purchased in the Exchange—see below) or pay a penalty. However, there are a number of situations in which individuals are exempt from the penalty, including where there is no affordable health insurance coverage option available.

The Code Sec. 36B credit is designed to make health insurance affordable for taxpayers who meet certain qualifying requirements.It is available for individuals who purchase affordable coverage through Exchanges.

States may establish and operate Exchanges pursuant to 42 U.S.C. § 18031 (ACA §1311), or the federal government may establish and operate an Exchange in place of the state where a state has chosen not to do so consistent with federal standards pursuant to 42 U.S.C. § 18041 (ACA § 1321).

Exchanges make premium assistance payments (also called “subsidy” or “advance” payments) on the individual’s behalf to health plans, based on information available at the time of enrollment; then, at return time, the individual reconciles the actual credit that he is due with the amount of the subsidy payments that were made.(Code Sec. 36B(b)) (See Weekly Alert ¶  18  05/24/2012 for more details on Code Sec. 36B and its regs.)

In describing the premium assistance amount, Code Sec. 36B(b)(2)(A) refers to “the monthly premiums for…qualified health plans offered in the individual market…which were enrolled in through an Exchange establishedby the State” (emphasis added) under §1311.

The issue. In May of 2012, IRS issued regs that interpreted Code Sec. 36B to allow credits for insurance purchased on either a State or federally-established Exchange.Specifically, the regs provide that a taxpayer may receive a tax credit if he is enrolled in one or more qualified health plans through an Exchange, which IRS defined as an Exchange serving the individual market for qualified individuals, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by Health and Human Services (HHS). (Reg. § 1.36B-1(k))

By making credits more widely available, the reg 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.In fact, only 13 states and the District of Columbia have created exchanges.However, earlier this week, the Obama administration approved plans by Arkansas, Delaware, and Pennsylvania to create their own state-based exchanges which would take effect in 2016 and 2017.

Court challenge. Taxpayers brought suit against IRS and HHS (Health and Human Services), arguing that Reg. § 1.36B-1(k) invalidly interpreted Code Sec. 36B(b)(2)(A). On Nov. 7, 2014, the Supreme Court agreed to resolve a Circuit split between the Fourth Circuit upholding the reg, and the DC Circuit invalidating the reg, by reviewing the Fourth Circuit case, King v.Burwell, (CA 4 7/22/2014) 114 AFTR 2d 2014-5259.

The Supreme Court held oral arguments on March 4. (For more details, see Weekly Alert ¶  20  03/12/2015.) A decision is expected later this month.

Politicians working on an alternative. There have been a number of proposals for how to deal with a Supreme Court decision striking down the subsidies.A number of the more prominent and/or recent proposals are outlined below.

On June 17, the House GOP caucus convened to discuss their contingency plan.According to Reuters, the basic elements of the plan, which is said to be a work in progress, are:

i. Continue the subsidies for the rest of 2015.
ii. In 2016, allow states to opt out of the ACA entirely. Those that do so would receive a block grant from the federal government that would allow them to set up whatever system they deem best. Those that don’t opt out could continue offering subsidies to their residents for insurance purchased on the federal exchange or elsewhere.
iii. After 2017, a replacement to Obamacare (yet to be determined) takes effect.

Another plan, advanced earlier this year in a newspaper op-ed by key Republican House leaders Paul Ryan (R-WI), John Kline (R-MN), and Fred Upton (R-MI), was described as providing an “off-ramp from Obamacare.”Among other things, the plan called for repealing the individual and employer mandates, establishing an advanceable refundable tax credit under which people can buy insurance approved by a state insurance commissioner, and allowing people to apply the credit toward a wider range of plans than are offered on the federal exchange.(See Weekly Alert ¶  18  03/19/2015 for more details.)

H.R.1234, the “Medical Freedom Act of 2015,” introduced earlier this year by Rep. Tom Price (R-GA), is readily distinguishable from the above Republican plans based on the fact that, while it would repeal many of the protections afforded by the ACA (e.g., restrictions on pre-existing conditions), it would retain tax credits for the purchase of health coverage.

Meanwhile, in the Senate, 31 senators have agreed to S.1016, the “Preserving Freedom and Choice in Health Care Act.”This bill, written by Sen. Ron Johnson (R-WI) and co-sponsored by Majority Leader Mitch McConnell (R-KY), would extend the subsidies for a longer period—through September of 2017—but would also repeal the individual and employer mandates.

Similar to the Ryan-Kline-Upton “off-ramp,” three Republican Senators (Lamar Alexander (R-LA), Orrin Hatch (R-UT), and John Barrasso (R-WY)) outlined in a newspaper op-ed a proposal titled “A Bridge Away From Obamacare.”This proposal, while lacking in specifics, would continue the subsidies for an unspecified “transition period” and “give states the freedom and flexibility to create better, more competitive health insurance markets offering more options and different choices.”

Extending the subsidies, however, would present a political problem—even for a Republican-backed plan—among those who oppose anything short of full repeal.

Politicians are generally indicating, however, that they are aware of the stakes here—both in terms of the health and welfare of the millions of lower-income individuals whose coverage is subsidized by the Code Sec. 36B premium tax credits, and the potential political fallout from stripping them of their coverage without offering some kind of alternative.Said Rep. Phil Roe (R-TN), “I’ve been saying for years that the president’s health-care bill is so deeply flawed it cannot be fixed, but we aren’t going to let people suffer or have their coverage disrupted through no fault of their own.”

The White House has insisted that it has no backup plan in place and that devising one would be a matter for Congress and the states. The President has said, however, that Congress could resolve the disputed language “with a one-sentence provision.” It is widely expected that this single-sentence bill would be the Democratic response if the Supreme Court decides to strike down the subsidies, although Democrats have been fairly quiet about the existence of or details concerning any contingency plan.

References: For the premium tax credit, see FTC 2d/FIN ¶  A-4241; United States Tax Reporter ¶  36B4; TaxDesk ¶  138,700; TG ¶  1381.