Can Obamacare Function Without Subsidized Health Coverage?

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What is the Affordable Care Act without the healthcare subsidies designed to make insurance coverage accessible?

The law, known colloquially as Obamacare, encompasses a number of healthcare reforms ranging from how hospitals are reimbursed for care to the regulation that chain restaurants post calorie counts on their menus to requirements that large employers provide workers with affordable insurance coverage.

But the most essential and most controversial provision is the one that changed U.S. tax code to create subsidies (in the form of tax credits) that have enabled millions of uninsured Americans to purchase coverage. The goal of the Affordable Care Act was to make healthcare in the United States more accessible and more streamlined, and without the insurance subsidies that mission is unreachable.

A federal appeals court on Tuesday invalidated a key pillar of that very provision, and if the ruling is not further appealed, President Barack Obama’s healthcare reform will be derailed, because no longer will low-income earners have access to subsidized health insurance in a large number of states. Without subsidized premiums, it is impossible for the government to mandate insurance coverage.

Why has a federal appeals court thrown out the federal regulation that implements those subsidies?

It is by no means unusual for government regulatory laws and accompanying paperwork to run many thousands of pages, and given Obamacare’s complexities, it is not surprising that the Affordable Care Act is slightly  longer than other pieces of recent legislation.

The complexities of the law provided critics of Obamacare additional ammunition while giving the administration more leeway in the implementation process, including last year’s delay of the employer mandate. Both the complexities of the law as well as the intense political debate surrounding it gave Obamacare critics the opportunity to attack the manner in which subsidies are awarded to qualifying Americans, meaning the reform is once again in the midst of a legal battle.

The text of the 2010 law states that the Internal Revenue Service can authorize subsidies in the form of tax credits to qualifying insurance customers with annual incomes of up to 400 percent of the federal poverty level who purchase policies through an “exchanged established by the state.” Seemingly, especially to critics, those four words in the 900-page law exclude the 36 states in which the federal government, rather than the state, operates the online insurance marketplaces from providing subsidies.

Opponents of the Affordable Care Act say that Congress never authorized the distribution of tax credits through the federally facilitated marketplaces because lawmakers wanted to incentivize states to build their own marketplaces, rather than default to those operated by the federal government, an option only 14 states plus the District of Columbia chose.

It may seem odd that lawmakers left such an important pillar of Obamacare to chance, but it is likely that the reform’s authors did not expect the Affordable Care Act to become as controversial as it did soon after its passage. Nor did the administration expect so many states to decline to create and operate their own exchanges.

In 2012, the Internal Revenue Service adopted a regulation that allowed individuals who qualify for the subsidies but live in states that defaulted to the federally facilitated exchanges to receive the tax credit “regardless of whether the exchanges is established and operated by the state.”

What exactly did the District of Columbia Appeals Court decide?

The case — Halbig v. Burwell, filed against Secretary of Health and Human Services Sylvia Burwell by the libertarian Competitive Enterprise Institute on behalf of several plaintiffs — was decided by the Washington, D.C., District Court of Appeals by a vote of 2-1. The administration argued that while the language of that Affordable Care Act regulation was imprecise, one line of text did not forbid federally facilitated exchanges from distributing the subsidies.

But Judge Thomas Griffith and Judge Raymond Randolph, both Republican appointees, ruled just the opposite.

“We concluded that the ACA unambiguously restricts the [authorized] subsidy to insurance purchased on exchanges ‘established by the state,’” read the majority opinion. “We reach this conclusion, frankly, with reluctance. At least until states that wish to can set up Exchanges, our ruling will likely have a significant consequence for millions of individuals receiving tax credits through federal exchanges and for health insurance markets more broadly.” Essentially, this ruling invalidates the 2012 IRS regulation.

By comparison, Judge Harry Edwards, the lone Democrat on the panel and only dissenter, wrote in his minority opinion that the case was about the “Appellant’s’ not-so-veiled attempt to gut” the healthcare reform law.

What does this decision mean for the future of Obamacare?

A possible ramification of the court’s decision is the loss of subsidized healthcare for a large majority of Obamacare enrollees. If subsidized health insurance is restricted to the state-operated exchanges, the healthcare reform will no longer function as intended. But this ruling is not by no means the final decision.

The Obama administration will likely appeal the decision to the full 11-member D.C. circuit court, where Democrats have a majority thanks to Obama’s addition of four judges. That process will put off the enforcement of Tuesday’s decision for some time. And because a second district court came to opposite conclusion regarding the issue of whether the IRS has the authority to extend subsidies to those who purchased insurance policies through the federal exchanges, creating a circuit-court split, a Supreme Court review is a likely possibility.

Less than one hour after the D.C. court ruled that federally facilitated exchanges could not distribute insurance subsidies, an appeals court in Virginia ruled that the key line in the healthcare reform law does not mean exchange enrollees in states that chose not to create their own exchanges would be excluded from subsidized coverage. The three-judge Fourth U.S. Circuit Court of Appeals panel was unanimous in its decision to uphold the subsidies, noting that the IRS did a reasonable job of interpreting legal language that is “ambiguous and subject to multiple interpretations.”

Already the Supreme Court has made several key decision regarding the future of the Affordable Care Act. In 2012, the nine-justice panel decided that Obamacare’s individual mandate was a valid exercise of Congress’s power to tax, meaning the tax penalty designed to ensure that most Americans purchase insurance is constitutionally sound.

And earlier this month, the court decided that closely-held for-profit companies can claim an exemption to the Affordable Care Act’s contraceptive coverage requirement — a ruling that provides a precedent for other for-profit companies to challenge a number of laws that may be said to violate their religious freedoms.

What are Republicans saying?

For Speaker of the House John Boehner, the court’s decision validates a number of the Republican Party’s arguments against the healthcare reform.

“For the second time in a month, the courts have ruled against the president’s unilateral actions regarding ObamaCare. The president has demonstrated he believers he has the power to make his own laws. That’s not the way our system of government was designed to work. That’s why the House will act next week to authorize a lawsuit to uphold the rule of law and protect our Constitution,” he said in a Tuesday press release. “This isn’t about Republicans versus Democrats; it’s about the Constitution versus unconstitutional and unilateral actions by the Executive Branch, and protecting our democracy. Today’s ruling is also further proof that President Obama’s healthcare law is completely unworkable. It cannot be fixed.”

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