Health Law Update - July 24, 2014

By M.J. Asensio, Robert M. Wolin, Thomas S. Campanella, Virginia Medina, Jonathan L. Lewis, Lynn Sessions, Samuel E. Endicott, Lee H. Rosebush
Baker & Hostetler LLP

Jul 24, 2014

Welcome to this week's edition of the Health Law Update. In This Issue

Clash of the Circuits: Federal Exchange Subsidies at Risk?
The Orphan Drug Wars: HHS Interpretive Rule Clarifies Orphan Drug Exclusion
In Case You Missed It: Postings From the Health Law Update Blog
Events Calendar

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Clash of the Circuits: Federal Exchange Subsidies at Risk?

These four words “established by the state,” at first blush do not appear obtuse or particularly vague. But these four words form the basis for the latest challenges to the Affordable Care Act (ACA) and have resulted in two courts issuing diametrically opposed opinions within several hours of each other.

The ACA generally requires most Americans to obtain health insurance coverage. Certain low income individuals are exempt from the Act’s requirements if the net cost of health insurance coverage exceeds eight percent of their net income. To make the coverage more affordable and, in turn, increase the number of individuals who must either obtain health insurance coverage or pay the applicable penalty, the ACA provided tax credits to reduce the net cost of coverage. Specifically, ACA section 1311 provides that tax credit subsidies shall be available for insurance purchased on an Exchange “established by the state.” 26 U.S.C. § 36B. Similarly, more employers will be subject to penalties if the tax credits are available for insurance on federally facilitated Exchanges. Certain large employers are subject to penalties if one or more of their employees enroll in a qualified health plan upon which a tax credit is allowed or paid.

The Internal Revenue Service (IRS) promulgated regulations interpreting section 1311 to make financial subsidies available to anyone “enrolled in one or more qualified health plans through an Exchange,” which includes state and federal marketplaces. 26 C.F.R. § 1.36B-2. See also 77 Fed. Reg. 30377 (May 23, 2012). Thus, individuals were eligible for a tax credit regardless of whether they purchased health insurance on a state-run Exchange established pursuant to section 1311 of the ACA or the Exchange established by the federal government under section 1321 of the ACA. Several lawsuits have been filed in which the plaintiffs challenged the IRS’s interpretation and claimed that it was contrary to the language of the statute, which, the plaintiffs asserted, authorized tax credits only for individuals who purchase insurance on state-run Exchanges. As a result of the IRS interpretation, the plaintiffs contended that they would be subject to the ACA’s penalties.

On July 22, 2014, the Fourth Circuit and the Court of Appeals for the District of Columbia addressed whether tax credits should be available to people who purchased insurance plans on federally run Exchanges. The U.S. Court of Appeals for the D.C. Circuit, in a 2-to-1 decision in Halbig v. Burwell, held that a federal Exchange is not an exchange established by the state and that tax credits were not available for insurance purchased on a federal Exchange. The Fourth Circuit, on the other hand, in King v. Burwell, held that the IRS interpretation was a permissible construction of the statutory language and was therefore entitled to deference. The underlying district courts in both cases concluded that the IRS interpretation was a permissible construction of ACA’s provisions and that “the ACA’s text, structure, purpose and legislative history make ‘clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated Exchanges.'” Halbig v. Burwell at 5.

The Halbig court’s decision limiting tax credits to state-run Exchanges was based upon the following:

The availability of tax credits under section 36B turns on who established the Exchange. The court found that states are to establish Exchanges pursuant to ACA section 1311, but if they fail to do so the federal government shall “establish and operate such Exchange within the State” pursuant to ACA section 1321. The phrase “such Exchange,” according to the court, indicates that the Exchanges are similar, but that the phrase “established by the State” has meaning and thus section 36B’s tax credits are not available on Exchanges established by the federal government. The federal government simply does not stand in the state’s shoes.
That the elimination of subsidies to purchasers of insurance on the federally run Exchange would not lead to absurd results under the ACA or make the act unworkable.
That the broad aims of the ACA did not demonstrate that the literal language of section 36B was demonstrably at odds with Congress’s intent.

The King court, reviewing the identical rule, unanimously held that the ACA authorized tax credits for policies purchased on federally facilitated Exchanges. The court’s decision was based upon the following:

In the absence of definitive legislative history, the IRS was permitted to choose among several equally plausible interpretations and acted reasonably in interpreting the ambiguous statutory provisions in section 36B to advance the goals of the ACA and, thus, was entitled to agency deference. In so holding, the court observed that Congress was aware that the broad application of tax subsidies was a crucial pillar to meeting the ACA’s principal goal of improving public access to health insurance while maintaining strong health insurance markets.
The reference to state Exchanges in section 36B did not exclude the possibility that Congress intended tax subsidies to be available in all states, regardless of who operated the Exchanges.
That federal Exchanges could be considered to be exchanges operated by the federal government on behalf of a state.
That the relevant portions of the ACA, when considered in conjunction with the legislative history of the ACA, indicated that Congress did not “definitively” restrict tax subsidies to state Exchanges.

The conclusive resolution of these cases and several others working their way through various courts will have a significant impact on the enrollees eligible for subsidies in the 36 states with federally facilitated Exchanges. Ultimately, the U.S. Supreme Court may be required to resolve the dispute between the various circuits, as it is unlikely that Congress will act to resolve the issue.

The Administration has indicated that it will quickly seek en banc review of the Halbig decision. In the interim, the Halbig decision will not take effect until the en banc court’s rehearing, but the uncertainty will hang over the open enrollment period for 2015, scheduled to begin on November 15, 2014. The King plaintiffs most likely will seek Supreme Court review in the coming weeks—perhaps even before the government is able to file an en banc petition in Halbig. Potentially, if the King plaintiffs rush in a petition, it could be ready for consideration by the “long conference” at the end of September or shortly thereafter, with an order to follow. At that point, if the court grants certiorari in King, the D.C. Circuit would surely hold Halbig in abeyance.

Providers should carefully monitor this litigation and ensure that their legislators at the state and federal levels are aware of the consequences if the nearly 4.7 million people receiving subsidies in federally facilitated Exchanges cease purchasing insurance coverage, especially in light of the significant reduction in disproportionate share payments to providers.

For more information, please contact Robert M. Wolin, rwolin@bakerlaw.com or 713.646.1327; or Kinal Patel, kpatel@bakerlaw.com or 713.646.1325.

Subscribe to BakerHostetler's Health Law Update blog for the latest healthcare industry news and developments. Follow us on Twitter @HealthLawUpdate.

The Orphan Drug Wars: HHS Interpretive Rule Clarifies Orphan Drug Exclusion

On July 21, 2014, the U.S. Department of Health and Human Services (HHS) released an “Interpretive Rule” in response to a recent U.S. District Court decision that vacated the July 23, 2013, orphan drug rule on the grounds that HHS lacked the statutory authority to promulgate the rule. See PhRMA v. HHS, No. 13-01501 (D.D.C. May 23, 2014). However, according to HHS, the court’s decision in PhRMA v. HHS did not invalidate the agency’s interpretation of the orphan drug exclusion or prohibit related guidance, such as the Interpretive Rule, which, according to HHS, further explains how the agency will interpret and implement section 340B(e) of the Public Health Service Act (PHSA). 42 U.S.C. 256b(e). For more information, please see related blog postings.

The Interpretive Rule clarifies that HHS interprets section 340B(e) of the PHSA as “excluding drugs with an orphan designation only when those drugs are transferred, prescribed, sold, or otherwise used for the rare condition or disease for which the drug was designated under section 526 of the Federal Food, Drug and Cosmetic Act (FFDCA).” In other words, “[t]his section of the PHSA does not exclude drugs that are transferred, prescribed, sold, or otherwise used for conditions or diseases other than for which the drug was designated under section 526 of the FFDCA.”

The effective date of the Interpretative Rule is July 21, 2014. Consequently, pharmacies and other healthcare providers will need to ensure that they follow the Interpretive Rule when utilizing 340B pricing in the future.

For more information, please contact Lee H. Rosebush lrosebush@bakerlaw.com or 202.861.1567.

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In Case You Missed It: Postings From the Health Law Update Blog

Didn’t have a chance to catch up on postings from the Health Law Update Blog? Here’s a look back at recent postings you may have missed.

Don’t miss out! Subscribe to the Health Law Update blog for new and updated postings.

Subscribe to BakerHostetler's Health Law Update blog for the latest healthcare industry news and developments. Follow us on Twitter @HealthLawUpdate.

Events Calendar

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