Note: This post has been updated on August 13 to discuss the federal government’s delay until 2015 of the full effective date of the ACA’s maximum out-of-pocket limit requirement for group health plans.  In fact (as noted in a NY Times report today), this decision was made in February and covered by this Blog at that time. The update also covers other ACA implementation developments.

Whatever else may be said about the Affordable Care Act, it has proven a gold mine for lawyers.  The law and implementing regulations have provoked nearly 100 lawsuits, although over half of these challenge a single regulation promulgated under the law (the preventive services contraceptive requirement) rather than the law itself.  The contraceptive cases are proceeding up through the courts and may well reach the Supreme Court.  But these are fundamentally religious liberty cases, and whatever result the courts reach, they will not affect the implementation of the rest of the ACA.

Many of the issues raised by lawsuits that directly challenged the ACA were resolved by the Supreme Court’s decision in National Federation of Independent Business v. Sebelius, which upheld the ACA’s individual mandate but also prohibited HHS from terminating Medicaid participation for states that choose not to expand Medicaid coverage to non-parent adults.  Two lawsuits continue, however; although they concern a regulation promulgated under the ACA rather than the ACA itself, they do fundamentally threaten the implementation of the ACA in almost two thirds of the states.  These are the cases brought by Attorney General Scott Pruitt in the Eastern District Federal court in Oklahoma (Pruitt v. Sebelius) and by a group of employers and individuals in the District of Columbia District Court (Halbig v. Sebelius).

The Legal Background: Challenges To Premium Subsidies And Cost-Sharing Reduction Payments In States With Federal Exchanges

The Pruitt and Halbig plaintiffs challenge the Internal Revenue Service’s interpretation of the language of the ACA.  Section 1311 of the ACA creates and defines the responsibilities and powers of the ACA’s exchanges. These marketplaces will enroll individuals and employees of small employers in qualified health plans and dispense premium tax credits and cost-sharing reduction payments to make health insurance and health care affordable to millions of lower and middle-income Americans.  Section 1311, and Congress in drafting section 1311, assumed that the exchanges would be established and run by the states in most instances.  Indeed, section 1311 provides that “Each state shall, not later than January 1, 2014, establish” an exchange.  Section 1311 states that, “An Exchange shall be a governmental agency or nonprofit entity that is established by a State,” while section 1312 defines a “qualified individual” who may enroll in a qualified health plan through an exchange as an individual who” resides in the state that established the Exchange.”

In fact, however, under our Constitution, Congress cannot require a state to establish a regulatory program.  Recognizing this, Congress adopted section 1321 of the ACA, which provides that if a state fails to create the exchange “required” by section 1311, HHS shall create “such exchange” in its place.  The term “exchange” is defined in the ACA as a “1311” exchange, and it is clear that Congress intended the federal fallback exchange to take the place of and fulfill all of the functions of the state exchange.

One of these functions is to determine eligibility for premium tax credits.  Section 1411 of the ACA requires HHS to determine eligibility for premium tax credits based on information provided by applicants through the exchanges.  Section 1401 creates a new Section 36B of the Internal Revenue Code, requiring the IRS to provide premium tax credits to individuals determined eligible.  In promulgating rules under its statutory authority to implement section 36B, the Internal Revenue Service has determined that premium tax credits are available through both the state and federal exchanges.

Section 36B(b), however, provides a formula for determining the amount of the premium tax credits.  In this formula, the section refers to premiums paid and months of coverage of persons enrolled in a qualified health plan “through an Exchange established by the State under 1311.”  Opponents of the ACA have seized on to this phrase to claim that premium tax credits are only available through the state exchanges and that the IRS rule is contrary to the statute and invalid.

If they are correct, premium tax credits will not be available to millions of Americans in the two thirds of the states that currently have chosen to have federal exchanges.  Millions of additional Americans will remain uninsured.   Moreover, millions of Americans would not be subject to the individual responsibility provision of the ACA, since individuals are only subject to the penalty if they can afford health insurance and fail to purchase it, and millions of individuals will find insurance unaffordable if they cannot get premium tax credits to lower the cost.  Finally, the employer responsibility taxes only apply to employers who fail to offer affordable and adequate health insurance to their employees when an employee gets premium tax credits through the exchange. If the federal exchanges cannot grant premium tax credits, employers in federal exchange states are not subject to the employer responsibility provision.  If the ACA opponents are correct in their interpretation of the law, some of the most important ACA reforms are essentially a dead letter in states that choose not to establish a state exchange.

Clearly this is not what Congress intended.  Although Congress did expect that most states would establish state exchanges, the federal exchange was always there to make affordable insurance available to individuals and small businesses if a state chose not to do so.  The federal exchange effectively becomes the 1311 “state” exchange, and fulfills its functions. In the voluminous records of ACA debates, there is not the least suggestion that Congress did not intend federal exchanges to issue premium tax credits, while there are many references to the fact that premium tax credits would be available in all states.  Indeed, it was not until late in 2010, months after the ACA was adopted, that the possibility that only state exchanges could issue premium tax credits was first noticed.  Since then the argument has been made repeatedly by opponents of the ACA, and several House subcommittee hearings have been held on the issue.

The Oklahoma case was originally one of many cases brought by state attorneys general challenging the individual mandate. After the Supreme Court’s decision in NFIB, however, General Pruitt amended his complaint to raise the premium tax credit issue.  Oklahoma has a federal exchange, and Pruitt argued that Oklahoma residents should be ineligible for premium tax credits.  Pruitt argued that Congress had meant to give the states a choice between their residents receiving premium tax credits, on the one hand, or their employers being free from employer responsibility penalties, on the other.  By choosing not to establish a state exchange, Pruitt argued, Oklahoma had chosen its employers over its uninsured residents.   Pruitt argued that the IRS’s interpretation of the law was illegal and should be invalidated.

Judge White’s Decision In Pruitt

The Department of Justice moved to dismiss the state’s complaint, arguing that the state had not been injured by the IRS’s interpretation of the law.  On August 13, 2013, Judge Ronald White ruled on the federal government’s motion, dismissing part of the case but allowing part of the case to proceed.  Judge White held, in accordance with well-established law, that Oklahoma could not sue the federal government on behalf of its residents.  State citizens are also federal citizens, and a state cannot sue the federal government on behalf of their shared citizens.  Pruitt had argued in one part of his complaint that the state could sue to defend a state law that purported to immunize its residents from the individual responsibility provision of the ACA.   Judge White held that the state could not sue to defend this provision, which was invalidated by the Supremacy Clause and the NFIB case, because Oklahoma was effectively attempting to sue on behalf of its citizens, which it could not do.

Pruitt further argued that Oklahoma could challenge the IRS’s rule allowing the federal exchanges to issue premium tax credits because the IRS rule deprived “Oklahoma of its authority under the Act to be the sole decision-maker regarding the availability of premium tax credits” under the ACA.  Judge White held, however, that Oklahoma as a state had not been injured by the IRS’s decision to allow the federal exchange to issue premium tax credits in Oklahoma.  Pruitt was attempting to raise a “generally available grievance about government,” arguing that the law had been improperly applied, and  could not do so in federal court.  Even had Congress intended to give the state a choice, it could not by doing so create a right in a state to sue to challenge the IRS interpretation of the law where the state had not been concretely injured in any way by the IRS decision.

Judge White did, however, recognize, however, that Oklahoma is also an employer, and as an employer may be subject to the employer responsibility penalty if one of its employees were to be denied affordable and adequate insurance and receive premium tax credits through the exchange.  Judge White, following the Fourth Circuit in the Liberty University case, found that as an employer Oklahoma would currently need to take steps to comply with the employer mandate (even though it has been delayed for a year), and thus could bring an action now to challenge its liability.  Judge White made it clear that Oklahoma would have to in fact prove that it is injured by the IRS rule as the case proceeds, but decided to let the case proceed for now based on the state’s allegations of injury.

Judge White also, following earlier circuit court decisions, held that the tax Anti-Injunction Act does not bar the state as an employer from proceeding to challenge the employer mandate.  Finally, Judge White allowed the state to proceed on a “hypothetical and contingent” claim that if HHS argues that the federal exchange is an “exchange established by the state,” the state might in some way be injured.

In sum, the Oklahoma case is likely to reach the merits of the challenge to the IRS rule.  It will do so, however, before a judge that seems skeptical of the claim that the state of Oklahoma has been injured in some way by the IRS’s decision to ensure that its residents receive premium tax credits.  In his opinion, Judge  White also described the article by Michael Cannon and Jonathan Adler setting out the theory on which the state bases its case as “polemical law review article.”

As already mentioned, the IRS rule is also being challenged in the District Court for the District of Columbia in Halbig v. Sebelius by employers and individuals from states with federal exchanges.  These plaintiffs claim that they will be subject to employer and individual responsibility penalties only because the IRS rule allows federal exchanges to issue premium tax credits.  The Department of Justice has also moved to dismiss that case for lack of standing, and this issue is currently being argued.

The Delay In Caps On Total Out-Of-Pocket Spending For Plans With Separate Benefit Administrators 

The delay of various ACA requirements has been a major theme of recent media coverage, triggered, of course, by the administration’s delay of the employer mandate penalty.  But the staging of implementation of ACA requirements is not a recent development.  Indeed, over the past three years the administration has repeatedly delayed various ACA requirements, responding to claims by affected parties that they faced practical difficulties with immediate implementation.  These delayed requirements have included, for example, various external review and summary of benefits and coverage requirements, the prohibition on discrimination in insurance coverage in favor of highly compensated employee, and the requirement for auto-enrollment of new employees by large employers.

In fact, brief delays in the enforcement of laws are not uncommon in the implementation of complex statutory schemes, and the Obama administration has attempted to minimize disruption of business practices while it has moved forward with ACA implementation.

On February 20, the Department of Labor issued a “frequently asked questions” that addressed the application of out-of-pocket limits to group health plans in 2014.  The FAQ provided that if a group health plan used more than one benefit service provider (such as a separate health insurer and pharmaceutical benefits manager), the ACA’s annual out-of-pocket maximum requirement would be met if both:

  1. the plan complied with the ACA out-of-pocket maximum with respect to its major medical coverage (excluding, for example, prescription drug coverage and pediatric dental coverage); and
  2. to the extent the plan included an out-of-pocket maximum on coverage that did not consist of major medical coverage (for example, if a separate out-of-pocket maximum applies with respect to prescription drug coverage), such out-of-pocket maximum did not exceed the ACA’s maximum out-of-pocket limit.

Under this rule, an employer that provided different health benefits under different plans will be able for 2014 to impose an out-of-pocket maximum under each plan separately, and could potentially offer coverage with no out-of-pocket limit for coverage other than major medical.  This FAQ was covered by this Blog at the time it came out.

HHS referenced this 2014 out-of-pocket maximum exception with respect to small group plans in the federal SHOP exchange in its April 5, 2013 letter to issuers and again with respect to small group plans with separate dental providers in a qualified health plan FAQ on its website on August 2, 2013.

The maximum out-of-pocket delay will cause serious problems for consumers with high medical and pharmaceutical costs who are covered by employers who have separate coverage, a fact that was noted earlier.  It is also hard to understand why it was needed, as employers have had to offer high-deductible health plans with total capped out-of-pocket maximums for a decade now to provide tax-subsidized health savings accounts, and this has not stopped employers from offering HSAs.

But it is important to realize that the exception does not apply to individual plans and will only apply for 2014.  It is one of many accommodations that the Obama administration has offered employers in implementing the ACA, but it does not mean that implementation is about to collapse.

Other FAQ.  Although the August 2, 2014 FAQ contained primarily technical information for exchanges and health plans, it did include a number of answers of general interest. No link is provided to the FAQ here, because you must register at RegTAP to get to it, but it is easily located once you register (and anyone can register).

FAQ 1 clarifies that only expenditures for essential health benefits need be counted toward the maximum out-of-pocket, although plans can count other health care expenditures as well if this is simpler for the plan administratively.  FAQ 5 notes that all benefits and services covered by the benchmark plan are considered EHB and coverage of these benefits and services by all insurers must be substantially equal.  FAQ 6 clarifies that states have flexibility to define the categories into which benefits fit, although plans do not have the ability to substitute benefits across categories.

A number of FAQs concern stand-alone pediatric dental plans.  FAQ 7 provides that stand-alone pediatric dental plans may have pre-existing condition requirements and FAQ 8 provides that they may have waiting periods.  Dental plans must, according to FAQ 9, cover preventive services equal to the state’s pediatric oral benefits EHB but need only cover preventive services without cost-sharing as required by the ACA preventive services regulation.  Under FAQ 11, annual and lifetime limits cannot be applied to pediatric oral benefits.

FAQ 14 clarifies that plans that have three-tier benefit designs must consider expenditures for providers in the first two tiers as in-network for purposes of cumulating expenditures towards the maximum out-of-pocket limit.  Only expenditures for providers that are truly out-of-network do not count.  But, under FAQ 26, if a plan does not offer coverage for a particular service in-network, out-of-network services must be counted toward maximum out of pocket, and emergency services must always be counted, whether provided in or out of network.  Plans that do not have networks must consider all expenses toward the out-of-pocket maximum under FAQ 27.

Under FAQ 17, state “offer only” or “make available” mandates are not required benefits for which the state must pay.  FAQ 18 clarifies, however, that states must defray the cost of all benefit mandates that are not EHB for qualified health plans outside as well as inside of the exchange.  Under FAQ 40, a state requirement that plans cover oral chemotherapy and parity with IV chemotherapy is not considered a new benefit mandate for which the state will need to pay.  Under FAQ 41, a state requirement defining habilitative services is not a new mandate for which the state must pay, but a law requiring a new habilitative service, such as applied behavioral analysis (ABA) therapy, is.

FAQ 24 addresses the question of how insurers can make mid-year changes to remove drugs that are identified as unsafe or ineffective or are reclassified as over-the-counter.  It clarifies that mid-year formulary changes should be infrequent, and that insurers must continue to meet numerical formulary requirements if a formulary change is necessary.

A number of FAQs concern the SHOP exchange.  These will not be discussed here, other than FAQ 32, which clarifies that both inside and outside of the SHOP, the geographic rating area for the employer’s principle place of business will apply.  In the federal SHOP, employers will only be allowed to have one SHOP account per state.

Under federal regulations, if an enrollee with an advance premium tax credit fails to pay the premium for a qualified health plan the plan cannot terminate the enrollee for 90 days.  For the first 30 days the plan must pay claims, but then for days 31 to 90 may pend claims, which must be paid if the enrollee subsequently pays premiums due.  FAQ 43 provides that after the first 30 days, a plan may deny rather than pend pharmacy claims.  If the enrollee subsequently pays premiums due, the plan must reimburse the enrollee for incurred pharmacy costs upon the presentation of a receipt.  Under FAQ 44, however, if the plan provides for dispensing 90-day supplies of drugs, the plan must pay for a 90-day supply if it is dispensed during the first month.

IRS Disclosure Of Tax Information To HHS

In other news, on August 13, 2013, the Internal Revenue Service released a final rule on disclosure of tax return information to HHS to carry out eligibility requirements for health insurance affordability programs.  The regulation provides that, upon the request of a taxpayer who has applied for premium tax credits or cost-sharing reduction payments, the IRS may disclose to the HHS tax return information necessary for establishing eligibility.  This will normally be information needed to determine the modified adjusted gross income for all persons on the application for the reference tax year, normally the calendar year before the application.

The IRS may also notify HHS that tax information is unavailable on an applicant, for example in situations where a taxpayer filed a joint return and the spouse on the return has not joined on the application, or where the identify of the applicant cannot be authenticated.   Finally, the IRS will inform HHS if an applicant received premium tax credits in a prior year but did not file a return for reconciliation, as required by the law.

State SHOP Applications Modifications

Finally, on August 9, 2013, HHS released a guidance on state alternative SHOP exchange applications.  Under the guidance, states may make minor changes in the SHOP application put out by the federal government in May  without approval, but must obtain HHS approval for more substantial changes.  For 2014, states may receive conditional approval by attesting that they meet regulatory requirements and subsequently receive full approval if they make required changes.  States may not collect more or less information than is necessary to establish SHOP eligibility and enroll in a QHP.