Monday, July 28, 2014

Pro-ACA decision splits circuits: is another Supreme Court review inevitable?

Last week, the Fourth Circuit Court of Appeals in King v. Burwell unanimously upheld the validity of an IRS final rule interpreting the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) as authorizing the IRS to grant tax credits to individuals who purchase health insurance on both state-run insurance Exchanges and federally-facilitated Exchanges created and operated by HHS. The plaintiffs contended that the IRS’s interpretation was contrary to the language of the statute, which expressly authorized tax credits only for individuals who purchase insurance on state-run Exchanges. The Fourth Circuit deferred to the IRS’s determination as a permissible exercise of IRS discretion, finding that the applicable statutory language was ambiguous and subject to multiple interpretations.

As we discussed, on that same day last week, the U.S. Court of Appeals for the District of Columbia Circuit reached the opposite conclusion, ruling 2-1in Halbig v Burwell  that the IRS did not have the right to rewrite the wording of the law to suit its intent to allow federal Exchange subsidies. So, what happens now?

Supreme Court review?

The White House has vowed to appeal the Halbig  ruling before a full panel of the D.C. Circuit, which has seven judges appointed by Democratic presidents and four appointed by Republicans. If the full panel of the D.C. Circuit reaches the same conclusion as the panel that voted against the Administration, then the split in the two Circuits will set the stage for the U.S. Supreme Court to hear the case.

But, full panel (or en banc) review in both Halbig and King will likely be favorable to the government. While a decision to grant en banc review would vacate the panel decision, thereby eliminating the existing Circuit split, if the en banc D.C. Circuit in Halbig were to rule differently from the three-judge panel, then there would not be a Circuit split. In addition, because an en banc Fourth Circuit decision is likely to be favorable for the government, the plaintiffs are likely to bypass en banc review and head straight to the Supreme Court. Remember that even without a Circuit split, the Supreme Court has discretion to grant certiorari.
Fourth Circuit opinion
We'll wait to see what happens with the en banc appeal of Halbig in the D.C. Circuit. In the meantime, here's the background on the Fourth Circuit decision.

Friday, July 25, 2014

ACA will lead to continued decline in VEBAs

In recent years, employers have been using voluntary employee beneficiary associations (VEBAs) to provide retiree health coverage. However, due to retiree coverage provisions available through the Patient Protection and Affordable Care Act (ACA), the number of VEBAs is likely to decline as employers shift pre-65 retirees to coverage through the Health Insurance Exchanges. This is the contention of the Pension Research Council (PRC) in the recent report, “What’s Next for VEBAs? The Impact of Declining Employer-Provided Health Care Coverage and the Affordable Care Act” (The Pension Research Council, Working Paper 2014-18, Erin Leighty).

Background. VEBAs are tax-exempt organizations set up to pay for employee health and welfare benefits. To set up a qualified VEBA, four requirements must be met: (1) the organization must be an employees’ association; (2) membership in the association is voluntary; (3) the organization provides for the payment of life, sickness, accident, or other benefits to its members or to their dependents or designated beneficiaries, and substantially all of its operations are in furtherance of providing such benefits; and (4) no part of the net earnings of the organization may inure, other than by the payment of benefits, directly or indirectly to any shareholder or private individual. According to the PRC, in 2013, 6,884 organizations filed tax returns as VEBAs with the IRS. This has declined from more than 15,000 in 1993.

Stand-alone VEBAs have become an attractive option for companies to provide retiree health benefits in recent years. It is a way for companies to shed their retiree health liability, but still safeguard retiree benefits for employees, the PRC noted. Employers who set up VEBAs to fund retiree health benefits are able to contribute tax-deductible funds to the account, earn tax-free interest, and maintain control of funding and administration of the VEBA.

ACA reduces need for VEBAs. According to the PRC, the ACA (P.L. 111-148) is expected to accelerate the decline of all employer-provided retiree health benefits, including those provided through a VEBA. With retirees able to receive medical coverage through the ACA’s Exchanges, the number of VEBA plans has already begun to decline. However, the PRC is unclear whether the drop in VEBA plans should be attributed to employers shifting their health care funding to defined contribution-style health care accounts or whether they are moving away from coverage for retirees altogether.

The ACA includes several provisions which impact pre-65 retirees, such as the Exchanges, the early retiree reinsurance program, and the excise tax on high-cost plans. However, the PRC contends that “the ACA’s greatest blow to the VEBA plan structure may be the restrictions placed on VEBA trust payments.” Because the ACA prohibits VEBAs from paying all or part of a beneficiary’s exchange premiums, employers will be unable to use VEBAs to provide retirees with financial assistance when buying coverage through the Exchange.

While the ACA should lead to improved medical benefits for retirees, the overall need for retiree VEBA plans will continue to decline, according to the PRC. However, “VEBAs will continue to play a useful, albeit reduced, role in providing employee and retiree health benefits,” the report concluded.


Wednesday, July 23, 2014

Employers are limited in financially assisting employees who purchase Exchange coverage

Under the Patient Protection and Affordable Care Act (ACA), employers have fewer benefit options to financially assist their employees in offsetting health care costs with pre-tax funds, according to Ben Bosher, group benefits broker with Benefit Design & Strategies. This is especially true for employers who choose not to sponsor a group medical plan, but instead wish to assist employees obtain Exchange coverage, he noted.

Background. DOL Technical Release 2013-03 imposes a dollar limit on employers wanting to make pre-tax contributions to employees’ medical flexible spending accounts (FSA), where the employee does not offer coverage and instead wishes employees to obtain his or her own coverage through an Exchange. According to Bosher in a recent article, “Essentially, unless an employer is sponsoring one or more group health plans, the employer is limited in the dollar amount of flex credits it is able to offer its employees under a flexible benefit plan. Put another way, if a company’s employees are purchasing individual health insurance such as through an ACA Exchange, the employer’s tax-exempt contributions (i.e. flex credits) designed to help offset employee’s out-of-pocket costs are severely limited.”

Options limited. For employers wanting to drop health coverage to allow employees to enroll in individual health insurance through the state or federal Exchanges, their options for providing financial assistance to these employees has been limited by the ACA (P.L. 111-148), contends Bosher. “First, health reimbursement arrangements paired with an individual (non-group) plan are barred because the ACA requires HRAs must be integrated with employer-sponsored health plans,” he noted. Additionally, “a more recent Internal Revenue Service guidance prohibited employers from reimbursing any portion of an employee’s health insurance premium for non-group coverage in pre-tax funds through what was often referred to as premium reimbursement plan.”

Combined with the ACA’s $2,500 FSA contribution limit, “employers are bound by this new set of complex rules involving situations where an employer is looking to offer financial assistance to its employees (and their family members) exposed to potentially high medical out-of-pocket expenses under non-group health coverage,” he concluded.


Tuesday, July 22, 2014

Federal appeals court axes federally-run health insurance Exchange subsidies

Internal Revenue Code Sec. 36B limits the availability of premium tax credit subsidies only to insurance purchased under state-established Exchanges and not to insurance purchased under Exchanges established by the federal government on behalf of the states, according to a three judge panel of the federal appeals court for the District of Columbia circuit. Thus, the appeals court, in a 2 to 1 decision in Halbig v. Burwell, reversed the district court’s ruling that the subsidies apply to both state-operated and federally-established Exchanges and remanded the case with instructions to vacate the IRS regulation that allows for the subsidies to apply to individuals purchasing coverage under both state-established Exchanges and federally-run Exchanges. 

Background. Internal Revenue Code Sec. 36B, enacted as part of the Patient Protection and Affordable Care Act (ACA), makes tax credits available as a subsidy to individuals who purchase health insurance through the Exchanges. However, the IRS broadly interpreted Internal Revenue Code Sec. 36B to authorize the subsidy to include insurance coverage purchased on an Exchange established by the federal government under ACA Sec. 1321, as well as to coverage purchased via a state-operated Exchange under ACA Sec. 1311.
The parties challenging the IRS’s interpretation of Internal Revenue Code Sec. 36B are a group of individuals and employers residing in states that did not establish Exchanges. The IRS’s broad interpretation of the subsidies, they claimed, made these individuals subject to penalties under the ACA’s individual and employer mandates.
The district court rejected the challenge to the IRS’s interpretation of the Exchange subsidies, ruling that the ACA’s text, structure, purpose, and legislative history made it clear that Congress intended to make the premium tax credits available on both state-run and federally-facilitated Exchanges. The appellants appealed the district court’s ruling.
State vs. federally-established Exchanges. ACA Sec. 1311 delegates primary responsibility for establishing Exchanges to the states. However, where a state refuses, or is otherwise unable to establish an Exchange, ACA Sec. 1321 provides that the federal government, through the Secretary of Health and Human Services (HHS) may establish and operate such Exchanges within the state. Currently, only 14 states and the District of Columbia have established Exchanges and the federal government has established Exchanges in the remaining 36 states, in most cases without state assistance.
Under Internal Revenue Code Sec. 36B, tax credit subsidies are available to insurance purchased on an Exchange established by the state under ACA Sec. 1311. However, in May of 2012, the IRS issued a rule broadly interpreting Internal Revenue Code Sec. 36B to allow tax credit subsidies for insurance purchased on either a state or federally-established Exchange. 
Impact on individual and employer mandates. According to the appellate court, by making credits more widely available, the IRS rule gives the individual and employer mandates broader effect than they would have if the credits were limited to state-established Exchanges. Under the individual mandate, for example, individuals must maintain minimum essential coverage or face a penalty, but this penalty does not apply to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed 8 percent of their projected household income. By making tax credits available in the 36 states with federal Exchanges, the court stressed, the IRS rule significantly increases the number of individuals who must purchase health insurance or face a penalty.
A similar result applies as to the employer mandate, said the court, where large employers are induced to purchase health insurance for their full-time employees through the threat of penalties. Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees enroll in a qualified health plan for which an applicable tax credit is allowed or paid with regard to the employee. Thus, even more than with the individual mandate, said the court, the employer mandate’s penalties “hinge on the availability of credits.” If credits were unavailable in states with federal Exchanges, employers in those states would not face penalties for failing to offer coverage. According to the court, by allowing credits in such states, employers in those states are exposed to penalties, thereby giving the employer mandate broader reach.
Plain language of Internal Revenue Code Sec. 36B. The appellate court concluded that a federal Exchange is not an Exchange established by the state and Internal Revenue Code Sec. 36B does not authorize the IRS to provide tax credit subsidies for insurance purchased on federally-established Exchanges. The court reached this conclusion by examining Internal Revenue Code Sec. 36B, in light of ACA sections 1311 and 1321, which authorizes the state and federal Exchanges. Internal Revenue Code Sec. 36B plainly distinguishes Exchanges operated by states from those established by the federal government. 
Nothing in ACA sec. 1321 deems federally-established Exchanges to be Exchanges established by the state, said the court, which stressed that this omission is particularly significant since Congress knew how to provide that a non-state entity should be treated as if it were a state when it sets up an Exchange. In fact, Congress did so in “nearby sections” of the ACA. The absence of such language in ACA sec. 1321 suggests that, even though the federal government may establish an Exchange within the state, it does not stand in the state’s shoes when doing so. The court also rejected the dissent’s argument that, because federal Exchanges are established under ACA sec. 1311, they are by definition established by a state.
Dissent. In a lengthy dissent, Judge Harry T. Edwards strongly suggested that this case is about a “not-so-veiled attempt to gut” the ACA, calling the appellants’ claims that Congress intended to condition subsidies on whether a state, as opposed to the federal government, established the Exchange, “nonsense” and “made up out of whole cloth.” Judge Edwards further indicated that there is no credible evidence that any state even considered the possibility that its taxpayers would be denied subsidies if the state opted to allow the HHS to establish an Exchange on its behalf. The majority opinion, he says, “ignores the obvious ambiguity in the statute and claims to rest on plain meaning where there is none to be found.” In doing so, he emphasizes, the court issues a judgment that “portends disastrous consequences.” The court’s decision, he concludes, “defies the will of Congress.”
Expert insight. In response to the appellate court's decision in Halbig v. Burwell, Thomas M. Christina, Shareholder, Ogletree Deakins, stressed that nothing is final and might not be final until after January 1, 2015. As a result, he suggested that he “would expect that prudent employers in states that have not established an Exchange will continue following their compliance strategies until the ruling in Halbig is final.” He noted, too, that there are three other cases in different federal courts raising the same issue. 

Monday, July 21, 2014

Unified Agenda sets forth proposed rules for upcoming 12 months

The Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) has promulgated 14 proposed rules and 17 final rules expected to be issued within the next 12 months, according to a Congressional Research Service (CRS) report detailing the contents of the most recent Unified Agenda of Federal Regulatory and Deregulatory Actions (Unified Agenda), published on May 23, 2014. The most economically significant proposed rules expected would make adjustments to the payment of premium tax credits, update the requirements for long-term care facilities, and apply mental health parity to Medicaid.

Unified Agenda. The Unified Agenda helps Congress to get “a sense of what rules agencies are going to issue and when they are going to issue those rules,” which gives Congress the ability to effectively oversee the process. The Unified Agenda lists upcoming activities according to agency and based on three categories—active actions (expected to be issued in the next 12 months), completed actions (have been withdrawn since the last Unified Agenda), and long-term actions (for which agencies do not expect to take action in the next 12 months).

Upcoming proposed rules under ACA. “Economically significant” and/or “major” proposed rules expected to be issued in the next 12 months are:

·        “Reform of Requirements for Long-Term Care Facilities and Quality Assurance and Performance Improvement (QAPI) Program,” expected in May 2014, which would remove obsolete or unnecessary provisions and, under the ACA, would propose to expand the level and scope of QAPI activities to allow the continuous identification and correction of deficiencies and the promotion of performance improvement;

·        “CY 2016 Notice of Benefit and Payment Parameters,” expected in November 2014, which would make changes to the advance payment of premium tax credits, as well as for reinsurance and risk adjustment programs under the ACA; and

·        “Application of the Mental Health Parity and Addiction Equity Act to Medicaid Programs,” expected in December 2014, which would implement Mental Health Parity in Medicaid, managed care, the Children’s Health Insurance Program (CHIP), and alternative benefit plans.

Other significant topics of proposed rules include the revision of civil money penalties for Medicare fraud, revisions of the Office of the Inspector General’s exclusionary authority, and nondiscrimination under the ACA.

Employers. The Unified Agenda contains a number of new regulations that would make changes for employers. One such regulation would amend the regulation regarding whether and to what extent employers may (under the Americans with Disabilities Act’s nondiscrimination provisions) offer financial inducements or impose penalties as part of wellness programs. Another proposed regulation would set forth the requirements for small employers to claim a tax credit for providing their employees with insurance coverage through a Health Insurance Exchange.