I've reported before about the three cases working through the courts that contend that a subsidy is only available for individuals who are enrolled in a state-established exchange. ACA "required" states to establish exchanges but provided that, if a state didn't do so, the federal government would. At last count, 15 (counting D.C.) "state" exchanges exist and the other 36 states have exchanges that were established by the federal government or a state-federal government partnership. If the principle being tested in the cases prevails, then the individual mandate will work very differently in these two groups of states and, in more than 70% of the states, there won't be an employer mandate.
Last week, two federal appellate courts (that's the level below the Supreme Court) ruled on the question. And, they reached opposite conclusions. These courts were considering a challenge to the IRS rules on the individual mandate and they found:
- By a 2-1 vote, the court in the District of Columbia concluded that the relevant ACA provision clearly provided for the subsidy only in the case of an "exchange established by the state." Because the IRS attempted to include federal and federal-state-partnership exchanges, the rules were invalid.
- Roughly 30 minutes later, the court in the Fourth Circuit concluded unanimously that, in the context of the rest of the statute, the language quoted above was unclear. As a result, the court deferred to the IRS's interpretation and found that subsidies were available in all exchanges.
Now what? Well, penalties won't be assessed for the individual mandate until 2015 and the first employer mandate penalties won't be assessed until a year later (by the way, for procedural reasons, the ruling here wasn't actually dealing with the employer mandate challenges, although the ruling on the subsidy resolves the only question relevant to the imposition of employer penalties). So, one answer to the "now what?" question is that the Supreme Court will need to weigh in. While it's up to the Court to decide whether to weigh in or not, it would be surprising if it didn't (as these cases create a conflict between two Circuit Courts of Appeals on a very significant question of federal law).
I have been predicting for some time that the Court will take the case and will blow up the mandates by reading the "by the state" language narrowly. At this point, though, I'm tempering my earlier prediction, partly because the well-reasoned legal analysis appears to favor those who would uphold the IRS rules (both of the trial court judges and four of the six appellate court judges ruled that way and commentators received the trial court analysis very favorably). I am also recognizing that the deference-to-agency analysis that is being employed applies any time that a regulation is challenged and the Court is extremely unlikely to change that analysis just to make it easier to bring down the ACA. To be clear, I'm still betting that the Court will follow the D.C. Circuit and rule against the IRS, but I'll follow the debate as it develops before I figure out how much I'm betting.
Which leaves us with the traditional last question--what does it mean for employers? For most employers, not much, as they offer coverage irrespective of the mandate. But, for those industries (restaurant, retail, etc.) that previously haven't covered broad groups, I think the same kind of strategy that was developed in the contraceptive mandate cases to be considered. As a result, I would expect additional lawsuits by employers and groups in those industries. If I'm correct in that prediction, I'll have a lot of debate to follow while figuring out my bet.