Federal Subsidies Under the Affordable Care Act

On 7/22, the D.C. Circuit Court ruled that the Internal Revenue Service (IRS) lacked the authority to allow tax credits under the Affordable Care Act (ACA) to be provided in the Obamacare ‘exchanges’ (‘Marketplaces’) that are not run by states. Later that day, however, a Virginia District Court panel hearing a similar case upheld the IRS’ authority and protected the tax credits.

The outcome could have serious implications for states like New Jersey, which is one of 36 states that has a Federally managed exchange (vs state-based) online marketplace at for consumers to apply for medical coverage and government subsidies to pay for such coverage.

So what does this all mean?

  • The way the law is written, it is a bit vague about what constitutes a “state”exchange. One interpretation says funds can only run to exchanges that have been established by the states; another says the funds go to all the exchanges “serving” the states.
  • It would need to be determined if the states that choose not to run their own exchange (but to instead have the federal government to run it for them) intended for their enrollees to have or not to have access to subsidies to pay for their care. At this point it is assumed that states did want their enrollees to still get subsidies under the law, but just did not want to build the infrastructure to have their own state-based exchanges
  • The Obama Administration has already indicated they will appeal the DC ruling, as the subsidies are critical in implementation of the law, as the law mandates people to have health insurance and with lower-income folks, it would mean they have tospend half of their income or more to abide by the law if the subsidies were not available.
  • At this time, the ruling does not mean the 36 states with federally-run exchanges need to do anything; the final ruling will determine the next steps. If the ruling is upheld, these states will not be able to create the infrastructure that has already been built and is operating/working and has insured hundreds of thousands of individuals; instead, it would likely need to be determined how states can legally contract with the government, or external contractors to be able to provide subsidies vs. allowing all of those subsidies to lose them which in turn would disrupt the entire health insurance market.