Supreme Court Hears Oral Argument in ACA Subsidies Challenge

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Yesterday morning, the U.S. Supreme Court heard oral arguments in King v. Burwell, the second challenge to the Affordable Care Act (ACA) to reach the Court.  This challenge targets the availability of subsidies on the Exchanges that were established by the Department of Health and Human Services (HHS) for the 34 states with HHS-established Exchanges.

The challengers contend that the tax code restricts subsidies to individuals who enroll in coverage through a state run Exchange when it provides that the amount of the subsidy is based on premiums on an Exchange “established by the State.”  26 U.S.C. § 36B(b)(2)(A).  The Administration, however, defends an Internal Revenue Service (IRS) rule that makes subsidies available on state-run and HHS-established Exchanges alike, contending that section 1321 of the ACA makes HHS-established Exchanges equivalent to state-run Exchanges.

It is notoriously difficult to ascertain the likely outcome of a case based on oral arguments.  Rather, oral arguments merely suggest at the leanings of particular Justices as they prepare to discuss the case and to assign drafting of the opinion(s) in private conference.  Nonetheless, oral arguments provide the only public hints of the Justices’ views before the Court issues its decision this summer.

The Likely Swing Votes.  As many expected, the tenor of oral arguments suggested that Chief Justice Roberts and Justice Kennedy are the likely swing votes in this case.  It appeared that the so-called liberal block of the Court—Justices Ginsburg, Breyer, Kagan, and Sotomayor—are critical of the challengers’ interpretation of the statute.  Rather, they seem inclined to conclude that the IRS rule is a permissible interpretation of the statute or that the rule reflects the only viable interpretation of the statute.  On the other hand, Justices Scalia and Alito appeared to be highly critical of the Administration’s position.  As is his typical practice, Justice Thomas did not ask any questions during oral argument, but most Court watchers expect that his views likely align with those of Justice Scalia and Alito. Some Court watchers had suggested that Justice Scalia might look to context to conclude that the subsidy provision is ambiguous, but his questions appeared to reflect a view that Congress enacted a statute that clearly restricts the availability of subsidies, despite the potential practical consequences of such an enactment.

Federalism and Constitutional Avoidance. One surprise yesterday was Justice Kennedy’s expression of constitutional concerns and potential inclination to avoid a constitutional problem by considering the Administration’s interpretation of the statute.  In short, his questions echoed federalism concerns raised in an amicus brief drafted by a number of states.  While Justice Kennedy aligned with the conservative block of the Court in NFIB v. Sebelius, he may be amenable to upholding the IRS rule here to the extent that the Administration’s interpretation is viable.

Justice Kennedy’s concerns regarding federalism do not flow from the impact that an adverse decision against the government will have on the newly insured public in states without state operated Exchanges.  Rather, his concerns stem from his deeply held belief that the Court owes the utmost respect under the structure of the Constitution to the semi-sovereign states.  In his view, Congress is not allowed to coerce states into doing something it wants.  Those federalism concerns came to the fore when Justice Kennedy asked challenger’s counsel:  “If your argument is accepted, the states were told to establish exchanges in order to receive money [for their citizens] or send the insurance market into a death spiral; isn’t that coercion?   Under your argument, there would be a serious constitutional problem.” While the government had not raised the federalism argument, it had been raised by state amici.  Citing South Dakota v. Dole, he noted that Congress is required to advise states about the conditions attached to the acceptance of federal grants.  Here, clearly, Kennedy views the loss of subsidies for a state’s residents as such an unknown condition.  The thinking seems to be that when interpreting a statute, given the warning by the Court about such coercion, Congress could not have intended such result.  He hinted as much when later he suggested to government’s counsel that he should argue for the government’s view of the statute to avoid the constitutional concern. If Justice Kennedy is the swing-vote here, it is because he does not believe that Congress intended a reading of the statute that creates an unconstitutional coercion, similar to the Court’s reasoning in striking down the Medicaid provision in NFIB v. Sebelius.

Chevron Deference.  Although the decisions of the lower courts in this and similar challenges have focused onChevron v. National Resources Defense Council, the Supreme Court spent little time discussing the potential application of Chevron deference in this case.  Instead, it appeared that some members of the Court were more inclined to conclude that there is only one permissible interpretation of the statute—whether that interpretation is the one advanced by the challengers or the Administration.

A brief exchange between Solicitor General Verilli, Justice Kennedy, and Chief Justice Roberts, however, suggests that some members of the Court may be skeptical of the applicability of Chevron deference to tax credits.  During this exchange, Justice Kennedy expressed skepticism that a question of this economic magnitude could be left to the Internal Revenue Service.  He said, “It seems to me a drastic step for us to say that the [Internal Revenue Service] can make this call one way or the other when there are . . . billions of dollars of subsidies involved . . . .  It seems to me our cases say that if the Internal Revenue Service is going to allow deductions using these, that it has to be very, very clear.”  Solicitor General Verrilli responded citing to the Court’s 2011 decision in Mayo Foundation for Medical Education & Research v. United States for the notion that “Chevron [deference] applies to the tax code like anything else.”  Chief Justice Roberts, however, appeared concerned that, under this approach “a subsequent administration could change” course and adopt a contrary interpretation concerning the availability of tax credits.  The Chief Justice asked very few questions during oral argument, but this exchange suggests he may be inclined to interpret the statute as unambiguous and not implicating Chevron deference, whether in favor of the Administration or the challengers.

Standing.  The U.S. Constitution establishes that federal court jurisdiction extends only to cases involving an actual injury, economic or otherwise.  While media coverage in recent weeks has focused on the standing of the four individual plaintiffs challenging the individual mandate, it does not appear that the Court will avoid reaching the merits of the case based on standing concerns.  No fact-finding has taken place in this case because the appeal stems from a motion to dismiss filed by the Government.  Therefore, Solicitor General Verrilli indicated that he believes it’s appropriate to take the plaintiffs’ attorney’s word that one or more of the plaintiffs has standing and that the dispute is not moot.  While Justice Ginsburg asked early questions indicating a concern with standing, it did not appear that other members of the Court were inclined to take up the issue.

Practical Consequences.  Over 85 percent of individuals who enroll in coverage on an Exchange receive subsidies to help pay for the cost of premiums and/or to reduce cost-sharing on the Exchange plan.  Most of these individuals reside in the 34 states that have HHS-established Exchanges.  Absent these subsidies, some individuals would be unable to afford coverage and would therefore be exempt from the individual mandate.  Others may have affordable coverage options but may decline to purchase coverage given the cost.  The resulting reduced enrollment would both increase the number of uninsured in states without state-run Exchanges and constrict the risk pool on those Exchanges.  As the risk pool trends toward a smaller group of less healthy individuals, premiums would increase, which some believe would threaten a death spiral on the individual market.

In addition, the employer mandate’s operation depends on whether employees can purchase subsidized Exchange coverage absent affordable and sufficient employer coverage.  Without subsidies, employers in states with HHS-established Exchanges would not be subject to the employer mandate unless 30 or more of its employees actually reside in a neighboring state with a state-run Exchange.  While many observers believe that large employers would continue to offer coverage without the employer mandate, there is some concern that such employer-sponsored coverage might not be affordable among lower income workers, resulting in greater numbers of uninsured individuals.

During oral argument, the challenger’s counsel, Mr. Carvin, contended that there was no evidence that limitations on the subsidies would produce such disastrous consequences.  But, it appeared that most of the Justices were concerned about the market consequences if subsidies were eliminated in some markets.  Justice Alito, acknowledging these concerns, suggested that the Court might stay the mandate to provide states with an opportunity to establish state-run Exchanges before subsidies on HHS-established Exchanges are eliminated.  On the other hand, Justice Scalia expressed confidence that Congress would act to address and mitigate destabilization of the individual market.  Thus, at this stage, it is unclear how a reversal of the IRS rule might be implemented and what, if anything, the Court might do to mitigate the impact of the judgment. But certainly the potential market consequences of the elimination of subsidies on HHS-established Exchanges would be significant for plans, providers, and patients alike.  Last Tuesday, HHS Secretary Burwell stated in aletter to Congress that the Administration “know[s] of no administrative actions that could . . . undo the massive damage to our health care system that would be caused by an adverse decision.”

Furthermore, if the Court concludes that the challengers’ interpretation is the only viable interpretation of the statute, the decision may prompt further litigation concerning the constitutionality of linking the availability of subsidies to a state’s establishment of a state-run Exchange.  Justice Kennedy’s comments and questions during oral argument focused largely on the 10th Amendment and the concern that restricting subsidies to state-run Exchanges may constitute impermissible coercion of the states by the federal government.  Judicial resolution of these issues may require a new case challenging to the statute’s constitutionality and addressing the severability of the various subsidy and market reform provisions of the ACA.

But, if the Court upholds the IRS rule and concludes that the Administration’s interpretation is the only viable interpretation of the statute—whether based on the plain text and context of the provision or because of the doctrine of constitutional avoidance—the implementation of the ACA will continue without significant change and stakeholders would have the security of knowing that a future administration would be unable to reverse the IRS rule and restrict subsidies to state-run Exchanges.  On the other hand, if the Court upholds the IRS rule based on Chevron deference, a future administration could reverse course and eliminate subsidies on HHS-established Exchanges.

Copyright © 2015 Hooper Lundy & Bookman PC |

FAQs about Affordable Care Act Implementation Part XI


Set out below are additional Frequently Asked Questions (FAQs) regarding implementation of various provisions of the Affordable Care Act. These FAQs have been prepared by the Departments of Labor, Health and Human Services (HHS), and the Treasury (collectively, the Departments). Like previously issued FAQs (available at, these FAQs answer questions from stakeholders to help people understand the new law and benefit from it, as intended.

The Departments anticipate issuing further responses to questions and issuing other guidance in the future. We hope these publications will provide additional clarity and assistance.

Notice of Coverage Options Available Through the Exchanges

Section 18B of the Fair Labor Standards Act (FLSA), as added by section 1512 of the Affordable Care Act, generally provides that, in accordance with regulations promulgated by the Secretary of Labor, an applicable employer must provide each employee at the time of hiring (or with respect to current employees, not later than March 1, 2013), a written notice:

  1. Informing the employee of the existence of Exchanges including a description of the services provided by the Exchanges, and the manner in which the employee may contact Exchanges to request assistance;
  2. If the employer plan's share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, that the employee may be eligible for a premium tax credit under section 36B of the Internal Revenue Code (the Code) if the employee purchases a qualified health plan through an Exchange; and
  3. If the employee purchases a qualified health plan through an Exchange, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.


Q1: When do employers have to comply with the new notice requirements in section 18B of the FLSA?

Section 18B of the FLSA provides that employer compliance with the notice requirements of that section must be carried out "[i]n accordance with regulations promulgated by the Secretary [of Labor]." Accordingly, it is the view of the Department of Labor that, until such regulations are issued and become applicable, employers are not required to comply with FLSA section 18B.

The Department of Labor has concluded that the notice requirement under FLSA section 18B will not take effect on March 1, 2013 for several reasons. First, this notice should be coordinated with HHS's educational efforts and Internal Revenue Service (IRS) guidance on minimum value. Second, we are committed to a smooth implementation process including providing employers with sufficient time to comply and selecting an applicability date that ensures that employees receive the information at a meaningful time. The Department of Labor expects that the timing for distribution of notices will be the late summer or fall of 2013, which will coordinate with the open enrollment period for Exchanges.

The Department of Labor is considering providing model, generic language that could be used to satisfy the notice requirement. As a compliance alternative, the Department of Labor is also considering allowing employers to satisfy the notice requirement by providing employees with information using the employer coverage template as discussed in the preamble to the Proposed Rule on Medicaid, Children's Health Insurance Programs, and Exchanges: Essential Health Benefits in Alternative Benefit Plans, Eligibility Notices, Fair Hearing and Appeal Processes for Medicaid and Exchange Eligibility Appeals and Other Provisions Related to Eligibility and Enrollment for Exchanges, Medicaid and CHIP, and Medicaid Premiums and Cost Sharing (78 FR 4594, at 4641), which will be available for download at the Exchange web site as part of the streamlined application that will be used by the Exchange, Medicaid, and CHIP. Future guidance on complying with the notice requirement under FLSA section 18B is expected to provide flexibility and adequate time to comply.

Compliance of Health Reimbursement Arrangements with Public Health Service Act (PHS Act) section 2711

Section 2711 of the PHS Act, as added by the Affordable Care Act, generally prohibits plans and issuers from imposing lifetime or annual limits on the dollar value of essential health benefits. The preamble to the interim final regulations implementing PHS Act section 2711 (75 FR 37188) addressed the application of section 2711 to health reimbursement arrangements (HRAs) and certain other account-based arrangements. HRAs are group health plans that typically consist of a promise by an employer(1) to reimburse medical expenses (as defined in Code section 213(d)) for a year up to a certain amount, with unused amounts available to reimburse medical expenses in future years. The preamble distinguished between HRAs that are "integrated" with other coverage as part of a group health plan and HRAs that are not so integrated ("stand-alone" HRAs). The preamble stated that "[w]hen HRAs are integrated with other coverage as part of a group health plan and the other coverage alone would comply with the requirements of PHS Act section 2711, the fact that benefits under the HRA by itself are limited does not violate PHS Act section 2711 because the combined benefit satisfies the requirements." (75 FR 37188, at 37190-37191). The corollary to this statement is that an HRA is not considered integrated with primary health coverage offered by the employer unless, under the terms of the HRA, the HRA is available only to employees who are covered by primary group health plan coverage provided by the employer and meeting the requirements of PHS Act section 2711.

Questions 2 through 4 below address certain issues relating to HRAs. The Departments anticipate issuing future guidance addressing HRAs.(2)

Q2: May an HRA used to purchase coverage on the individual market be considered integrated with that individual market coverage and therefore satisfy the requirements of PHS Act section 2711?

No. The Departments intend to issue guidance providing that for purposes of PHS Act section 2711, an employer-sponsored HRA cannot be integrated with individual market coverage or with an employer plan that provides coverage through individual policies and therefore will violate PHS Act section 2711.

Q3: If an employee is offered coverage that satisfies PHS Act section 2711 but does not enroll in that coverage, may an HRA provided to that employee be considered integrated with the coverage and therefore satisfy the requirements of PHS Act section 2711?

No. The Departments intend to issue guidance under PHS Act section 2711 providing that an employer-sponsored HRA may be treated as integrated with other coverage only if the employee receiving the HRA is actually enrolled in that coverage. Any HRA that credits additional amounts to an individual when the individual is not enrolled in primary coverage meeting the requirements of PHS Act section 2711 provided by the employer will fail to comply with PHS Act section 2711.

Q4: How will amounts that are credited or made available under HRAs under terms that were in effect prior to January 1, 2014, be treated?

The Departments anticipate that future guidance will provide that, whether or not an HRA is integrated with other group health plan coverage, unused amounts credited before January 1, 2014, consisting of amounts credited before January 1, 2013 and amounts that are credited in 2013 under the terms of an HRA as in effect on January 1, 2013 may be used after December 31, 2013 to reimburse medical expenses in accordance with those terms without causing the HRA to fail to comply with PHS Act section 2711. If the HRA terms in effect on January 1, 2013, did not prescribe a set amount or amounts to be credited during 2013 or the timing for crediting such amounts, then the amounts credited may not exceed those credited for 2012 and may not be credited at a faster rate than the rate that applied during 2012.

Disclosure of Information Related to Firearms

Q5: Does PHS Act section 2717(c) restrict communications between health care professionals and their patients concerning firearms or ammunition?

No. While we have yet to issue guidance on this provision, the statute prohibits an organization operating a wellness or health promotion program from requiring the disclosure of information relating to certain information concerning firearms. However, nothing in this section prohibits or otherwise limits communication between health care professionals and their patients, including communications about firearms. Health care providers can play an important role in promoting gun safety.

Self-Insured Employer Prescription Drug Coverage Supplementing Medicare Part D Coverage Provided through Employer Group Waiver Plans

Medicare Part D is an optional prescription drug benefit provided by prescription drug plans. Employers sometimes provide Medicare Part D coverage through Employer Group Waiver Plans (EGWPs) under title XVIII of the Social Security Act and often supplement the coverage with additional non-Medicare drug benefits. For EGWPs that provide coverage only to retirees, the non-Medicare supplemental drug benefits are exempt from the health coverage requirements of title XXVII of the PHS Act, Part 7 of the Employee Retirement Income Security Act (ERISA), and Chapter 100 of the Code. (For ease of reference, the relevant provisions of the three statutes are referred to here as "the health coverage requirements.") Moreover, for EGWPs that are insured under a separate policy, certificate, or contract of insurance, the non-Medicare supplemental drug benefits qualify as excepted benefits under PHS Act section 2791(c)(4), ERISA section 733(c)(4), and Code section 9832(c)(4) and are, therefore, similarly exempt from the health coverage requirements.

Q6: Must self-insured prescription drug coverage that supplements the standard Medicare Part D coverage through EGWPs comply with the health coverage requirements?

Pending further guidance, the Departments will not take any enforcement action against a group health plan that is an EGWP because the non-Medicare supplemental drug benefit does not comply with the health coverage requirements of title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code. This enforcement policy does not affect other requirements administered by the Centers for Medicare & Medicaid Services that apply to providers of such coverage. The Centers for Medicare & Medicaid Services intends to issue related guidance concerning insured coverage that provides non-Medicare supplemental drug benefits shortly.

Fixed Indemnity Insurance

Fixed indemnity coverage under a group health plan meeting the conditions outlined in the Departments' regulations(3) is an excepted benefit under PHS Act section 2791(c)(3)(B), ERISA section 733(c)(3)(B), and Code section 9832(c)(3)(B). As such, it is exempt from the health coverage requirements of title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code. The Departments have noticed a significant increase in the number of health insurance policies labeled as fixed indemnity coverage.

Q7: What are the circumstances under which fixed indemnity coverage constitutes excepted benefits?

The Departments' regulations provide that a hospital indemnity or other fixed indemnity insurance policy under a group health plan provides excepted benefits only if:

  • The benefits are provided under a separate policy, certificate, or contract of insurance;
  • There is no coordination between the provision of the benefits and an exclusion of benefits under any group health plan maintained by the same plan sponsor; and
  • The benefits are paid with respect to an event without regard to whether benefits are provided with respect to the event under any group health plan maintained by the same plan sponsor.

The regulations further provide that to be hospital indemnity or other fixed indemnity insurance, the insurance must pay a fixed dollar amount per day (or per other period) of hospitalization or illness (for example, $100/day) regardless of the amount of expenses incurred.

Various situations have come to the attention of the Departments where a health insurance policy is advertised as fixed indemnity coverage, but then covers doctors' visits at $50 per visit, hospitalization at $100 per day, various surgical procedures at different dollar rates per procedure, and/or prescription drugs at $15 per prescription. In such circumstances, for doctors' visits, surgery, and prescription drugs, payment is made not on a per-period basis, but instead is based on the type of procedure or item, such as the surgery or doctor visit actually performed or the prescribed drug, and the amount of payment varies widely based on the type of surgery or the cost of the drug. Because office visits and surgery are not paid based on "a fixed dollar amount per day (or per other period)," a policy such as this is not hospital indemnity or other fixed indemnity insurance, and is therefore not excepted benefits. When a policy pays on a per-service basis as opposed to on a per-period basis, it is in practice a form of health coverage instead of an income replacement policy. Accordingly, it does not meet the conditions for excepted benefits.

The Departments plan to work with the States to ensure that health insurance issuers comply with the relevant requirements for different types of insurance policies and provide consumers with the protections of the Affordable Care Act.

Payment of PCORI Fees

Section 4376 of the Code, as added by the Affordable Care Act, imposes a temporary annual fee on the sponsor of an applicable self-insured health plan for plan years ending on or after October 1, 2012, and before October 1, 2019. The fee is equal to the applicable dollar amount in effect for the plan year ($1 for plan years ending on or after October 1, 2012, and before October 1, 2013) multiplied by the average number of lives covered under the applicable self-insured health plan during the plan year. In the case of (i) a plan established or maintained by 2 or more employers or jointly by 1 or more employers and 1 or more employee organizations, (ii) a multiple employer welfare arrangement, or (iii) a voluntary employees' beneficiary association (VEBA) described in Code section 501(c)(9), the plan sponsor is defined in Code section 4376(b)(2)(C) as the association, committee, joint board of trustees, or other similar group of representatives of the parties who establish or maintain the plan.

Q8: Does Title I of ERISA prohibit a multiemployer plan's joint board of trustees from paying the Code section 4376 fee from assets of the plan?

In the case of a multiemployer plan defined in ERISA section 3(37), the plan sponsor liable for the fee would generally be the independent joint board of trustees appointed by the participating employers and employee organization, and directed pursuant to a collective bargaining agreement to establish the employee benefit plan. Normally, such a joint board of trustees has no function other than to sponsor and administer the multiemployer plan, and it has no source of funding independent of plan assets to satisfy the Code section 4376 statutory obligation. The fee involved is not an excise tax or similar penalty imposed on the trustees in connection with a violation of federal law or a breach of their fiduciary obligations in connection with the plan. Nor would the joint board be acting in a capacity other than as a fiduciary of the plan in paying the fee.(4) In such circumstances, it would be unreasonable to construe the fiduciary provisions of ERISA as prohibiting the use of plan assets to pay such a fee to the Federal government. Thus, unless the plan document specifies a source other than plan assets for payment of the fee under Code section 4376, such a payment from plan assets would be permissible under ERISA.

There may be rare circumstances where sponsors of employee benefit plans that are not multiemployer plans would also be able to use plan assets to pay the Code section 4376 fee, such as a VEBA that provides retiree-only health benefits where the sponsor is a trustee or board of trustees that exists solely for the purpose of sponsoring and administering the plan and that has no source of funding independent of plan assets.

The same conclusion would not necessarily apply, however, to other plan sponsors required to pay the fee under Code section 4376. For example, a group or association of employers that act as a plan sponsor but that also exist for reasons other than solely to sponsor and administer a plan may not use plan assets to pay the fee even if the plan uses a VEBA trust to pay benefits under the plan. The Department of Labor would expect that such an entity or association, like employers that sponsor single employer plans, would have to identify and use some other source of funding to pay the Code section 4376 fee.


  1. An HRA may be sponsored by an employer, an employee organization, or both. For simplicity, this section of the FAQs refers to employers. However, this guidance is equally applicable to HRAs sponsored by employee organizations, or jointly by employers and employee organizations.
  2. With respect to HRAs that are limited to retirees, the exemption from the requirements of ERISA and the Code relating to the Affordable Care Act for plans with fewer than two current employees means that retiree-only HRAs generally are not subject to the rules of PHS Act section 2711. See the preamble to the interim final rules implementing PHS Act section 2711 (75 FR 37188, at 37191). See also ACA Implementation FAQs Part III, issued on October 12, 2010 (available at
  3. See 26 CFR 54.9831-1(c)(4), 29 CFR 732(c)(4), 45 CFR 146.145(c)(4).
  4. See generally, ERISA Field Assistance Bulletin 2002-02 (trustees of multiemployer plans, if allowed under the plan documents, may act as fiduciaries in carrying out activities that otherwise would be settlor in nature), available at