The IRS Tax Credit Revisited -A Quick Rundown of the Circuit Court Split and What to Know Moving Forward

By Hillary Cook, DePaul University College of Law

In July 2014, two United States Circuit Court of Appeals ruled on the issue of whether the tax credit promulgated by the Internal Revenue Service (“IRS”) within the Patient Protection and Affordable Care Act (“ACA”) is applicable to health insurance purchased by individuals on federally-facilitated health insurance exchanges established in the absence of state run health insurance exchanges. The United States Court of Appeals for the District of Columbia held health insurance purchased on a federally-facilitated exchange established in the absence of a state run exchange is ineligible for the IRS tax credits pursuant to ACA. Hours after the decision from the D.C. Circuit Court of Appeals, the Fourth Circuit Court of Appeals ruled in the reverse, affirming the lower court’s decision to uphold the IRS rule authorizing tax credits to individuals who enroll in health insurance programs on both state-run and federally-facilitated health benefit exchanges valid.

The petitioners from the Fourth Circuit decision filed a petition for a writ of certiorari in the United States Supreme Court urging the Court to immediately hear the issue because of the Circuit Court split. On September 4, 2014 the D.C. Circuit Court granted a petition for the case to be heard en banc with oral arguments beginning December 17, 2014 and vacated the July 2014 decision invalidating the tax credit.

In addition to the circuit court decisions regarding the IRS tax credit two Federal district courts have ruled on the issue. In Oklahoma ex. rel. Pruitt v. Burwell, the State of Oklahoma alleged that the IRS tax credit is contrary to the express statutory language of PPACA. The Court held the IRS tax credit rule invalid upholding a strict interpretation of ACA as it was written. In Indiana v. IRS, the Court dismissed and granted certain motions in the case on August 12, 2014, and scheduled oral arguments October 9, 2014 as to the merits of the case.

The issue at hand arises from the IRS rule promulgated to extend the PPACA tax subsidy to enrollees in both state run and federally-facilitated health benefit exchanges. To increase the number of Americans covered by health insurance PPACA regulated for the creation of health benefit exchanges. The purpose of health benefit exchanges was to organize a marketplace for individuals to shop for affordable coverage. PPACA legislates in the absence of a state establishing a Health Benefit Exchange by January 1, 2014, the Secretary of Health and Human Services shall establish and operate a federally-facilitated health benefit exchange in the state; however, Section 1311 only allows for an available tax credit to enrollees in an exchange established by one of the fifty states or the District of Columbia. In contrast, the IRS permitted individuals who purchase insurance on state-run or federally-facilitated exchanges to be eligible for tax credits for enrolling in, “one or more qualified health plans through an Exchange,” regardless of how the exchange is operated. With a split on how to apply the tax credits, it is not far fetched for the Supreme Court to intervene.

A United States Supreme Court ruling could have a mild or a detrimental effect on enrollees in federally-facilitated exchanges receiving a tax subsidy because those individuals will be ineligible for the tax subsidy. Without the tax credit permitted by the IRS, individuals will lose the federal subsidy, and will most likely forfeit enrollment in a health insurance exchange at the risk of not being able to afford health insurance.

The King Court reasoned the tax credit promulgated by the IRS was a reasonable interpretation of ACA, and further advanced one of the main purposes of ACA in providing more affordable healthcare to Americans. The Court concluded even though the IRS regulation deviated from a literal interpretation of PPACA the tax credit was providing an economic framework to provide tax credits to insurance purchased on a federally-facilitated exchange in the absence of a state-run exchange. Lastly, the Court concluded the IRS regulation must stand to prevent Congress from enforcing a tax penalty on Americans it never envisioned imposing.

Distinguishably, the IRS tax credit can be invalidated because the language of Section 1311 in ACA does not expressly allow for the IRS tax credit to apply to insurance purchased on federally-facilitated exchanges. The D.C. Circuit Court and the District Court in Oklahoma both articulated their reluctance to attempt to rewrite legislation to expand rule-making authority to agencies where the statute has remained silent.   Both Courts concluded PPACA is not to mean anything other than what the statute expresses and upheld a strict interpretation of ACA regarding agency rule-making.

Moving forward, the decision for the Supreme Court to reconsider taking the case will be a waiting game; the Supreme Court initially denied review of the case on November 3, 2014. Specifically, the en banc hearing in the D.C. Circuit Court will determine if the IRS tax issue has been resolved at the Circuit Court level. The increased need for a high court ruling has become more pressing with the Circuit Court split, the vacated D.C. Circuit Court decision, the District Court decisions, and the awaited en banc hearing in the D.C. Circuit Court.*

*Wolters Kluwer Editorial Note: at the time of publishing, the Supreme Court had granted cert in King v Burwell and the D.C. Circuit has held the Halbig case in abeyance pending the Supreme Court’s ruling in King.

Hillary Cook is a second year law student at DePaul University College of Law. She graduated magna cum laude from the University of Dayton in 2013. She is a member of DePaul’s Health Law Institute.

Medicaid Expansion has Positive Effect on Health Care for the Homeless

The Medicaid expansion option has not only increased access to health care for the homeless, but has had a positive impact on their health outcomes, and has given providers who treat homeless patients wider treatment options and increased revenue streams leading to operational improvements and additional staffing. These findings were part of a Kaiser Family Foundation (KFF) web briefing on December 15, 2014, which examined the early impacts of the Patient Protection and Affordable Care Act’s (ACA) (P.L. 111-148) Medicaid expansion on the homeless population, as well as opportunities and challenges looking forward.

The briefing, offered by KFF’s Commission on Medicaid and the Uninsured, highlighted key findings obtained from focus groups conducted with administrators, providers, and enrollment workers at four sites serving homeless individuals in states that have expanded Medicaid (Albuquerque, New Mexico; Baltimore, Maryland; Chicago, Illinois; and Portland, Oregon) and one site in a state that has not expanded (Jacksonville, Florida).

The KFF briefing draws upon the recent paper, Early Impacts of the Medicaid Expansion for the Homeless Population, co-authored by Barbara DiPietro, Director of Policy for the National Health Care for the Homeless Council; Samantha Artiga, Associate Director of the Kaiser Commission on Medicaid and the Uninsured; and Alexandra Gates, a Policy Analyst at the Commission. The paper provides an early look at the impact of the expansion for homeless providers and the patients they serve, building on an earlier KFF brief examining the potential role of Medicaid expansion for the homeless population.

Prior to Medicaid Expansion

According to Early Impacts of the Medicaid Expansion for the Homeless Population, prior to Medicaid expansion, homeless individuals were uninsured at high rates even when compared to other low-income groups. For example, of the 851,641 patients served by Health Care for the Homeless grantees in 2013, 57 percent were uninsured, compared to 35 percent uninsured patients served at all health centers and over four times the rate of the general population. In addition, the paper contends that people who are homeless have high rates of both chronic disease and acute illnesses, with many of these conditions associated with or exacerbated by their living situations.

Homeless Enrollment Levels

The Early Impacts paper indicates that Medicaid enrollment of the homeless has increased in all five of the study sites from January 2012 through July 2014:

  • Albuquerque, New Mexico increased from 5 percent to 31 percent.
  • Baltimore, Maryland increased from 51 percent to 87 percent.
  • Chicago, Illinois increased from 36 percent to 47 percent.
  • Portland, Oregon increased from 60 percent to 84 percent.
  • Jacksonville, Florida (despite no Medicaid expansion) increased from 0 percent to 3 percent.

Program Manager Viewpoint

During the briefing, Kascadare Causeya, a Program Manager at Central City Concern in Portland, Oregon, indicated that Medicare expansion resulted in the following challenges at his facility: (1) new Medicaid enrollment systems and requirements created confusion for frontline workers; (2) the lack of telephone numbers and email addresses for the homeless made follow-up contacts difficult; (3) the loss of year two funding created shortages in the enrollment workforce; and (4) the potential for Medicaid coverage loss upon annual renewal. From an enrollment worker’s perspective, however, Causeya found that their homeless clients were happy to enroll in Medicaid, willing to spread the word to other homeless persons, and their outward appearance was visibly improved after initial care.

Clinical Perspective

Nilesh Kalyanaraman, M.D., Chief Medical Officer for Health Care for the Homeless in Baltimore, Maryland, described the following clinical challenges in caring for the homeless: (1) the continued lack of reimbursement for key services (i.e., case management, outreach, and dental); (2) changing drug formularies and the need for prior authorization in managed care plans created delays in access; (3) the lack of housing; and (4) providers learning how to navigate the insurance landscape. Kalyanaraman, however, noted numerous improvements, including:

  • better access to comprehensive care (prevention services and specialty care);
  • increased availability and wider choices of medications (asthma, Hepatitis C, and arthritis drugs);
  • patients having greater control over their health (i.e., able to schedule appointments and obtain refills of medications on their own); and
  • the potential for improved health outcomes over the long term.

Administrator Viewpoint

Karen Batia, Executive Director of the Heartland Health Outreach in Chicago, Illinois, described the following challenges from the perspective of a program administrator:

  • the ongoing need for grant-based funding;
  • managed care plans require multiple provider contracts and significant increases in staff and infrastructure to fulfill compliance requirements;
  • homeless client data is fragmented and remains in silos;
  • increased demand for services stretches provider capacity and creates recruitment and retention issues; and
  • the cost of care for the homeless is initially high as clients access long-needed care.

Batia sees the following administrative opportunities: (1) increased revenue from Medicaid expansion will allow growth in staffing and infrastructure; (2) by treating the homeless, they will obtain better data on the population, which should result in a better understanding of their health needs and the associated costs; (3) the potential to establish risk stratified reimbursements based on the homeless population and appropriate outcomes; and (4) building a system of integrated services.

To Expand or Not to Expand: Medicaid Under the Affordable Care Act

By Jaime Whitt, University of Kansas School of Law-

Famed US Supreme Court Justice Louis Brandeis wrote, in his dissent to the majority opinion in New State Ice Co v. Liebmann, 285 U.S. 262 (1932), that “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” With these words Justice Brandeis generated one of the most prominent analogies of US Federalism—one that still holds true today: the States as the “laboratories of democracy.” This concept has seemingly come to life with the implementation of the ACA (P.L. 111-148) and its provisions. Though it is federal health care reform, there is considerable leeway for each State to individualize the legislation’s impact. From the choice between utilizing www.HealthCare.gov or creating its own state-based health insurance Exchange, to regulation of the health care Navigators and other ACA outreach programs, to whether or not to expand Medicaid and how, each State has several opportunities to either fully roll out the ACA and its initiatives or stifle the bill’s impact.

One of the mostly hotly debated issues of the ACA has been Medicaid Expansion. With 2012’s National Federation of Independent Business v. Sebelius, 132 S.Ct. 2566, the Supreme Court invalidated the federal Medicaid Expansion mandate as unlawfully coercive and left the Medicaid decision to the states. Since then, contentious arguments in favor of and against expansion abound. To exhaust the minutia surrounding this hotbed topic would arguably be fruitless in this context, but even a cursory review of the myriad issues involved reveals that the expansion decision is a complicated one.

To Expand

On the side in favor of Medicaid Expansion, the arguments typically stem from the vantage point of viewing expansion as a moral and fiscal imperative. States who choose to expand Medicaid get considerable financial support from the federal government in the form of 100% funding for the cost of newly enrolled Medicaid beneficiaries. In a December 2013 study of how states stand to gain or lose under Medicaid Expansion, the Commonwealth Fund found that expansion dollars would represent a major source of federal revenue to state enterprises—nearly 2.5 times the value of highly sought-after federal highway funds in some cases. These dollars are necessary, the argument often goes, to strengthen and protect state health care providers against uncompensated care and to expand health coverage and financial protection to a state’s neediest constituents. The Oregon Health Insurance Experiment (OHIE), which conducted a randomized clinical trial of the effects of expanded Medicaid coverage, found that expansion resulted in improvements in mental and physical well-being as well as protection from catastrophic medical expenses for those who previously had no such resources.

Not to Expand

On the other hand, many states have been leery that the federal government, whose ACA expansion funds match the states at 100% until 2019 when the rate levels out at 90%, will take back that funding, leaving state budgets strapped and on-the-hook to find a way to continue coverage. Recently, this argument has come under fire, as more states consider expansion and research into the history of federal Medicaid funding has revealed that once such funds become entrenched, they are rarely reversed. To that same point, however, many economic and health policy analysts have expressed concern that this massive expansion of public funds will further contribute to the already currently unsustainable growth of national health care expenditures. In support of this argument, results from the aforementioned Oregon study, as well as trends seen in Massachusetts after its 2006 health care reform, indicate that an (expensive) increase in ER utilization is a likely consequence of status-quo Medicaid expansion.

Conclusion

It seems clear, even after just a merely skin-deep examination of this issue and its many interrelated and dependent corollaries, that this debate may indeed be appropriate. Our federal government has the right and responsibility, many argue, to ensure health coverage and financial protection for its citizens to the extent that it can. Likewise, the States each have the right and responsibility to be concerned about their financial welfare when state budgets directly impact state citizens. This is US Federalism at its core.

And the debate is far from over. Certainly, the Republican routing in the November mid-term elections, given that party’s distaste for all things Obamacare, does not forecast a favorable future for the initiative. Having said that, it is no secret that Medicaid funds are generated by and distributed from general federal tax revenues. This means that even states that choose not to expand Medicaid are paying for it. How long will citizens in states that choose not to expand, such as Texas, be complacent with the denial of additional federal revenue, all the while knowing that their federal tax dollars are paying for benefits enjoyed by other states? Only time will tell.

Which brings me back to Justice Brandeis’ historic dissenting admonition. The States are the laboratories of democracy. No one would or could legitimately argue that either the Federal or State governments do not want to provide for and protect their citizens. The question comes down to who should do it and how. Overall, whether states choose new innovations designed to privatize and control Medicaid Expansion funds or choose to use increased funding to focus locally on educating beneficiaries on what resources are available and how to more efficiently use the system, choosing not to participate at all seems like a loser here. The States know their citizens and circumstances better than the Federal government and changes need to be made to the status-quo. The fallout is certainly not clear, but the “courageous” state that Brandeis highlighted will take the money and see what positive progress it can make.

Jaime Whitt is her fourth and final year of a joint-degree program at KU.  She will graduate in May 2015 with a Masters in Health Services Administration from the University of Kansas School of Medicine and a J.D. from the University of Kansas School of Law, with a focus in Healthcare and Health Law.  When she is not in school, Jaime is a Law Clerk at Simpson Logback Lynch Norris, P.A. in Overland Park, KS and is a Graduate Research Assistant in the Department of Health Policy & Management at the University of Kansas School of Medicine studying health policy and health reform.

Highlight on Arizona: In Seeking Cost-Savings, Employers Largely Choosing High-Deductible, Low-Premium Employee Plans

Approximately two-thirds of large employers in Arizona offered their employees “consumer-directed plans” requiring a deductible of at least $1,500 paid before coverage began, according to Mercer’s National Survey of Employer Sponsored Health Plans 2014. Such plans often were combined with health savings accounts to which employees could contribute pre-tax portions of their salaries.

Despite the large number of employers offering consumer-directed, high-deductible health plans, however, only about 26 percent of Arizonians chose to enroll in them.

Employers Choosing Cost-Saving Options

Employers in Arizona are also increasingly choosing plans limiting the doctors and hospitals employees may choose to utilize for lower in-network rates. Denise Jewell, a mercer principal based in Phoenix, Arizona, told AZ Central that employers may limit physician and hospital networks based on quality as well as cost.

We are increasingly talking with our clients about this strategy,” she said. “The cost savings can be significant.” Employees can share in their employers’ savings, as well, since high-deductible plans that are cheaper for employers also carry lower premiums–about $75 rather than $106 per month for the average plan.

Employers Embracing Private Exchanges

The survey also noted that Arizona employers have largely not chosen to eliminate coverage for their employees in favor of the Health Insurance Exchanges. “We have seen a decrease in employers that have indicated any likelihood of terminating a plan,” Jewell told AZ Central. “The reality is the [Patient Protection and Affordable Care Act (P.L. 111-148)] made it clear that employers have a role in providing benefits to consumers.”

Rather than eliminating coverage, the survey found that employers have actually shifted to the private exchanges, with 28 percent of employers nationwide responding that they are likely to do so in the next five years. Mercer President and CEO Julio A. Portalatin noted, “The strong interest [employers are] showing in private exchanges suggests that this new benefit delivery system is the innovation they have been waiting for.”

ACA Requirements for Employers

Under the ACA, employers with 100 or more full-time equivalent employees (FTEs), i.e. who work 30 or more hours per week, are required to provide affordable health insurance coverage with minimum value to employees and their dependents up to age 26. Employers who do not comply are subject to tax penalties.