Tag Archive: Section 1401

Exchange plan subsidies face second major legal threat

Subsidies for qualified health plans (QHPs) sold on state health benefit exchanges are facing another significant legal threat, less than one year after the U.S. Supreme Court ruled in King v. Burwell that advance tax credit premium subsidies are available for all state health benefit exchanges, including those states that opted to allow the federal government to operate the exchange. The plaintiffs in that case unsuccessfully argued the language of Section 1311(d)(1) of the Affordable Care Act narrowly defined an exchange as a governmental agency or nonprofit entity that is “established by a State.” In King, the Obama administration argued and the high court agreed that read in the broader context of the law, the tax credit subsidies are intended to apply in all exchanges.

Citing King, the administration similarly contends in United States House of Representatives v. Burwell that context is key relative to Section 1402 of the Affordable Care Act. That section provides for supplemental subsidies in addition to advance premium tax credits for households earning between 100 and 250 percent of federal poverty levels. The additional subsidies limit out of pocket costs for households at that income level enrolling in a silver level QHPs — the most commonly selected metallic plan design. In House of Representatives, plaintiffs argue their funding is not a continuing appropriation and thus requires an annual appropriation as part of the federal budget.

The administration claims taken in the larger context of the Affordable Care Act, Section 1402 is ambiguous and must be read in context with Section 1401 that funds the advance tax credit premium subsidies via Section 36B of the Internal Revenue Code. The two funding mechanisms are intended to work tandem to make individual coverage more affordable to low income households, the administration posits. Disallowing funding for the supplemental cost sharing subsidies as the House seeks while leaving it intact for premium tax credits would produce an absurd outcome, it maintains.

In a ruling issued May 12, U.S. District Court judge Rosemary M. Collyer agreed with the House, finding the supplemental cost sharing subsidies must be annually appropriated. “Far from absurd, that is a perfectly valid means of appropriation” Collyer wrote, finding paying them for qualified silver QHP enrollees violates the Constitution’s allocation of spending power to Congress without a proper appropriation approved by Congress and the president.

The administration is expected to appeal Collyer’s ruling to the First U.S. District Court of Appeal. Because the unusual case involves a dispute between the legislative and executive branches over the power of Congress to appropriate funding under the Constitution, it’s possible it could go directly to the Supreme Court. In any case, Collyer’s ruling won’t likely have an impact on QHPs offered on the exchanges in 2017 given Collyer stayed the House’s requested injunction against further administration spending for the cost sharing subsidies pending appeals. The change in administrations in 2017 will also blunt the impact of the ruling given the next administration and Congress could opt amend or repeal the Affordable Care Act such as to moot the case.

According to this Urban Institute analysis, if Collyer’s ruling ultimately becomes the law of the land and the Affordable Care Act remains intact, it would force health plans to substantially increase premiums for silver plans in order to recover the lost federal funding for cost sharing subsidies since they would remain under the ACA’s requirement to offer silver QHPs with reduced cost sharing to eligible households. That premium increase would in turn boost advance premium tax credit subsidies that are pegged to the premium rate for the second lowest cost silver QHP offered on exchanges, according to the analysis.

States could also reassess their options under the ACA if the cost sharing subsidies remain unfunded given that a significant percentage of exchange enrollees rely upon them. They could opt to cover most of this population under “basic health plans” per ACA Section 1331 for low income households earning up to 200 percent of federal poverty and not eligible for Medicaid. They also have the option to waive the cost sharing subsidies under Section 1332 of the law affording states wide latitude to fashion their own state health plans provided they meet certain conditions of coverage and don’t entail additional federal funding.


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

Little noticed ACA provision has big implications for state health benefit exchange affordability

Individuals and families who purchase health coverage through state health benefit exchanges using advance tax credit subsidies under Section 1401 of the Patient Protection and Affordable Care Act will pay no more than 2 to 9.5 percent of their income towards premiums. Section 1401 delineates a sliding scale range of income maximums in six brackets and percentages for each level.

In 2015 and future years, however, those percentages could rise under a little noticed and discussed provision at Section 1401 amending Section 36B(b)(3)(A)(ii) of the Internal Revenue Code. It states the maximum income amounts “shall be adjusted to reflect the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year.” Then for calendar years 2018 and beyond, should premium tax credits and cost sharing reductions reach .504 percent of the gross domestic product for the preceding calendar year, the maximum income amounts are subject to an additional bump.

In 2011, the Congressional Budget Office (CBO) interpreted the clause to mean that “the maximum percentages of income that enrollees at a given income level will have to pay will increase over time.” By how much, exactly? “CBO and JCT (Joint Committee on Taxation) interpret that adjustment (relative only to premiums) as being equal to the difference between (1) the percentage change in average premiums for private health insurance for the nonelderly nationwide between the prior year and the year before that and (2) the percentage change in average U.S. household income.” (Final U.S. Treasury Department Regulations issued in May 2012 governing the Premium Tax Credit are silent on the provision)

CBO explained the need for the adjustment mechanism as follows: “Because private health insurance premiums generally grow faster than income, the regular indexing provision will keep the share of the premium paid by an enrollee at a given income level and the government roughly constant from year to year.” A report issued last month by the Commonwealth Fund noted that between 2003 to 2011, premiums for family coverage increased 62 percent across states—rising far faster than income for the middle- and low-income families comprising the population expected to buy coverage through the exchanges.

In conclusion, this means if premiums continue to rise as most observers expect, those purchasing subsidized coverage through state benefit exchanges won’t be protected from those increases and will have to pay a larger share of their incomes toward premium rates. (I apologize for a previous post in 2012 that asserted otherwise) This has enormous implications for the exchanges since they must offer affordable coverage in order to attract and retain sufficiently large numbers of enrollees in order to restore a functional individual health insurance market.


Need a speaker or webinar presenter on the Affordable Care Act and the outlook for health care reform? Contact Pilot Healthcare Strategies Principal Fred Pilot by email fpilot@pilothealthstrategies.com or call 530-295-1473. 

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