Significant Supreme Court Decision on Health Care Reform

November.12.2014

Background

As its name implies, one goal of the Affordable Care Act (ACA) is to make health coverage more affordable by offering federal tax subsidies to those who cannot afford it. The ACA encouraged states to establish state exchanges (or marketplaces) but 36 states decided not to do so. In those states, the federal government established federal marketplaces. 

On November 7, 2014, the Supreme Court agreed to hear a case relating to the provision of federal tax subsidies to individuals who purchase health coverage through a federal exchange. The legal issue relates to the interpretation of four words in the ACA that permit the payment of federal tax subsidies for health insurance purchased through an exchange “established by the State.” The statutory argument is over whether an exchange “established by the State” includes an exchange established by the federal government when a state refused to do so.

The procedural history here is interesting because although there is no current conflict among the circuit courts, the Supreme Court agreed to hear this issue now because there is confusion in the lower courts on a matter of national importance.

Relevance to Employer–Provided Health Plans

If the Supreme Court rules that the ACA does not authorize the federal government to provide subsidies to individuals in states with federal health exchanges, it will clearly impact the affordability of health coverage for millions of Americans. 

It also will significantly impact employers with employees in states with federal exchanges. If no tax subsidies are available in states with federal exchanges, employers may offer their employees non-compliant health coverage, or no coverage at all, without being threatened by the ACA’s employer mandate penalty. The employer mandate penalty is triggered when one of the employer’s employees receives a federal tax subsidy. Without federal tax subsidies, employers have no incentive to comply with the employer mandate and the IRS has no enforcement mechanism against employers under the ACA. There still will be an individual mandate for most Americans but if no federal tax subsidies are available, they may elect to pay the individual tax penalty rather than pay for unsubsidized coverage.

The bigger issue is that without federal tax subsidies, fewer individuals will purchase health coverage and that will likely impact the cost of coverage for all Americans, including the cost of health coverage under employer-provided plans. 

Finally, the provision of federal tax subsidies is one of the main economic components of the ACA and it is unclear whether any of the goals of the ACA can be achieved without it.