No Subsidies, No Employer Mandate

These days, the only thing the Obama administration can be thankful for is that it is December 2013 and not November 2014. 

Angry citizens stymied in their efforts to purchase insurance coverage they are forced to buy (or attempt to buy) on a non-operational Internet marketplace are probably not voters whose support can be counted on.

The administration is betting that getting the exchanges up and running will be a balm for those who previously have been unable to afford healthcare. It also hopes getting the new system at least partially in place well in advance of the next election will make efforts to dismantle Obamacare much more difficult, regardless of the election results. They are probably not wrong.

But the administration may be wrong to assert that the Affordable Care Act authorizes it to provide subsidies to low-income families for the purchase of insurance on all ACA marketplaces—both state and federal exchanges. The legislation appears to be relatively clear on this point:

• Section 1311—Directs states to establish their own exchanges.
• Section 1321—Because the federal government cannot constitutionally require a state to act, Section 1321 directs the Department of Health and Human Services to establish an exchange in any state that refuses to do so.
• Section 1401—This section then authorizes eligible low-income individuals and families to receive federal subsidies for any month during which they were covered by a qualified health plan that they “enrolled in through an Exchange established by the State under section 1311.”

Lawsuits challenging the administration’s purported expansion of subsidy support to Section 1321 federal exchanges are pending. To date, the government has fought those cases solely on procedural grounds. But federal judge Paul Friedman said in October he will rule on the merits and promised a decision by mid-February.

The government is expected to argue that Section 1401’s reference to Section 1311—and not to 1321—was a simple oversight and that other ACA provisions make sense only if the subsidies are provided to participants in both state and federal exchanges.

Those challenging this interpretation argue the language of the Section 1401 subsidy provision clearly limits the subsidies to state exchange participants. A statute’s plain language generally is controlling. Restricting the subsidies only to state exchanges, they claim, was part of the package of incentives designed to entice states to establish their own exchanges.

At the end of the day, I think it’s likely the government will prevail. The law contains enough mistakes and ambiguities for a court to find the administration’s interpretation to be permissible. If the statute is not clear, general statutory interpretation principles dictate the administration’s interpretation is entitled to great deference.

But what if Judge Friedman relies on the apparent clear import of Section 1401 itself? Then no subsidies would be available on the 27 state exchanges run solely by the federal government. States that have federal exchanges but want to provide subsidies could simply convert to a partnership exchange that the federal government would still run at the invitation of the states. Yet so far, 23 states have rejected similar enticements to expand their Medicaid programs.

States considering this type of conversion will need to weigh the business community impact. If the 1401 challengers win, businesses with employees exclusively in federal exchange states would be exempt from the employer mandate requirements. Why? Because the mandate penalty applies only if at least one employee receives a subsidy for having enrolled in exchange-provided coverage. No subsidies means no employer mandate.

Regardless of how Judge Friedman rules, there will be an appeal. If he rules in favor of the challengers, though, it likely would further disrupt efforts to implement the exchanges at least in the near term. In that case, the president would have to at least consider further delaying the individual mandate compliance date beyond the March 31, 2014, deadline.

In a normal political environment, these developments would open the door to a productive dialogue regarding possible ACA modifications that could address some of the core Republican concerns. Such a conversation also would help Democrats overcome some of the more visible implementation problems, including the massive affordability and coverage gaps created by the failed Medicaid expansion efforts and the lost subsidies on more than half the exchanges. Under the “new normal,” though, nothing is normal, and what should be usually isn’t.