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The Assault on the ACA (Affordable Care Act) Continues in the Federal Appeals Courts

Combative oral arguments were seen in two high profile federal court challenges to the Patient Protection and Affordable Care Act of 2010 (ACA).  The Supreme Court of the United States heard a vigorous oral argument concerning whether corporations must abide by the contraception mandate despite religious objections.  Simultaneously, the U.S. Court of Appeals for the District of Columbia Circuit saw a lively argument regarding whether premium tax credits should be available to exchange consumers nationwide.

The Supreme Court of the United States recently heard oral argument considering whether for-profit corporations must provide contraception coverage in their employee health insurance plans despite religious objections.  Simultaneously, the U.S. Court of Appeals for the District of Columbia Circuit considered whether consumers purchasing health insurance coverage through the exchanges may qualify for premium tax credits, regardless the state in which the consumer resides.

The Contraception Coverage Mandate Case Before the Supreme Court

The case pending before the nation’s highest court challenges Section 1001(5) of the Patient Protection and Affordable Care Act of 2010 (ACA) that created Public Health Service Act § 2713(4) (42 U.S.C. § 300gg-13(a)(4), which requires all health insurance plans to cover, without any cost-sharing, preventive services for women that are recommended by the Health Resources and Services Administration (HRSA).  Through rulemaking in 2012, the HRSA issued guidelines that included the full range of U.S. Food and Drug Administration (FDA)-approved contraception methods.  Churches and houses of worship are exempt from the contraception coverage mandate.  The government offers an accommodation to other nonprofit, religiously affiliated groups, such as church-run hospitals, parochial schools and charities, by allowing a third-party insurer to provide separate benefits without the employer's direct involvement.  
Hobby Lobby is an Oklahoma-based, closely held, family-owned corporation that sells arts and crafts, closes on Sundays, does not sell liquor, advertises its Christian orientation and plays religious music in its 600 stores, which employ about 13,000 workers nationwide.  Hobby Lobby objects to four of the 20 FDA-approved contraception methods that it considers to be tantamount to abortion: two types of IUDs, Plan B (commonly referred to as the “morning-after pill”) and Ella (commonly referred to as the “week-after pill,” which may work for five days). 

If Hobby Lobby were to exclude contraception coverage from its health insurance benefit plans, it would face a penalty of $100 per day/per employee, amounting to an estimated $475 million each year.  On the other hand, if Hobby Lobby declined to provide any health insurance coverage for its employees at all, the corporation would face an annual tax of $2,000 per employee, amounting to $26 million each year.  Hobby Lobby maintains that either choice is punitive, because failing to offer health insurance coverage would force the retailer to raise wages in order to attract and retain employees.  Consequently, Hobby Lobby sued in federal court in Oklahoma, arguing that the contraception mandate impermissibly burdened the free exercise of religion under the First Amendment and the Religious Freedom Restoration Act (RFRA), which prohibits the government from substantially burdening on a person’s exercise of religion, even if that burden results from a rule of general applicability.  RFRA permits the government to impose such a substantial burden on a person’s exercise of religion only upon showing that the law is the least restrictive means of furthering a compelling governmental interest. 

The U.S. Court of Appeals for the Tenth Circuit held that Hobby Lobby and its owners were entitled to bring a claim challenging the law under RFRA.  By contrast, the Third Circuit ruled that a closely held, Mennonite Christian family-owned Pennsylvania wood cabinet and furniture manufacturer, Conestoga Wood Specialties, was not entitled to challenge the mandate.  The two cases were consolidated before the Supreme Court for oral arguments on March 25, 2014, giving the parties 90 minutes, rather than the typical 60 minutes, for oral argument.

Hobby Lobby argues that the word “person,” left undefined in RFRA, must be defined according to the federal Dictionary Act to include for-profit corporations.  Hobby Lobby contends that the ACA’s contraception mandate does not pass muster under RFRA because there are less restrictive means of providing contraception coverage to its employees, such as the government paying directly for contraception, as it does to accommodate the objections of religious nonprofit organizations.  Hobby Lobby framed the case as being a matter of statutory interpretation of RFRA, arguing that the statute protects the free exercise rights of for-profit corporations. 

In response to questions from Justices Samuel Alito and Antonin Scalia concerning why the government contends that RFRA does not cover for-profit corporations, the government countered that the operative phrase for the court to interpret is “exercise of religion.”  The government explained that RFRA did not define this phrase because it was intended to restore the court’s application of that free exercise law in the pre-Smith line of cases.  The government argued that, in light of that history, the court has never granted an exemption to a for-profit corporation based on the free exercise clause. 
Given the court’s recognition of the free speech rights of corporations, see Citizens United v. Federal Election Comm’n, 130 S.Ct. 876 (2010), commenters have predicted that the case will hinge on whether the court will find that the First Amendment protects the free exercise rights of for-profit corporations.  In the federal trial and appellate court cases, where the lower court has found that for-profit corporations may raise a free exercise challenge (the Tenth, Seventh and D.C. Circuits), the lower court has found that the contraception mandate violates that religious freedom based upon the test set forth under RFRA.  By contrast, the government has succeeded in other circuits (the Third and the Sixth Circuits) when the lower court has determined that for-profit corporations lack free exercise rights and thus cannot sue under RFRA. 

If the Supreme Court sides with the plaintiffs in the contraception cases, employers would have the opportunity to refuse to provide contraception coverage based upon the assertion of a religious objection.  It is difficult to try to predict how many employers might assert such an objection, as there are a number of calculations for the employers themselves to consider regarding the effect on their attractiveness to their employees and prospective employees, public relations and customer base.  Some amici briefs contend that a win for the plaintiffs might allow employers to assert religious-based objections to laws beyond the contraception mandate (e.g., nondiscrimination against homosexuals in the workplace, or coverage of vaccinations and blood transfusions).  A potential avenue for the court to narrow its ruling would be to sidestep the question of whether for-profit corporation can exercise religion.  Instead, the court could consider, as suggested by the Cato Institute’s amicus curiae brief, whether the contraception mandate impermissibly burdens the free exercise rights of the individual owners of these closely held corporations.

Court watchers predict that Justice Anthony Kennedy will be the swing vote in the decision.  During the argument, Justice Kennedy focused on the effect on third parties of extending an accommodation to the corporations. 

The Premium Tax Credits Case Before the D.C. Circuit

On the same day, premium tax credits, another provision of the ACA that is considered key to attaining near-universal coverage, came under a revived attack.  After winning at the district court level in federal trial courts in the District of Columbia and Virginia, the government appeared to be an underdog in the oral arguments in Halbig v. Sebelius held before the U.S. Court of Appeals for the District of Columbia Circuit.

Halbig challenges a May 2012 Internal Revenue Service (IRS) rule providing that health insurance premium tax credits will be available to all taxpayers nationwide, regardless of whether they obtain coverage through a state-based exchange or a federally facilitated exchange (FFE).  The plaintiffs argue that the plain language of the ACA limits the availability of premium tax credits to only those taxpayers that reside in the 14 states (plus the District of Columbia) that set up their own exchanges.  The plaintiffs seek to invalidate the IRS rule’s application to the FFE states.  The government defends the IRS rule by asserting that the plaintiffs’ isolation of a phrase in the statute is inconsistent with the legislative history, structure and purpose of the ACA.

Judge Harry T. Edwards aggressively questioned the plaintiffs’ counsel regarding the purpose of the ACA and congressional intent as evidenced by the legislative history.  Notably, Judge Edwards challenged plaintiffs’ counsel’s argument that Congress intentionally limited federal subsidies to residents of states that ran their own exchanges, offering a “carrot” to states that set up exchanges while using a “stick” on states that refused to do so.  Whereas Judge Edwards declared that a ruling invalidating premium tax credits in FFE states would “kill the individual mandate and gut the statute,” Judge A. Raymond Randolph countered that it was not the court’s job to save “stupid” and “poorly written” legislation.  The third panel member, Judge Thomas B. Griffith, appeared skeptical that legislative history would aid either side and wondered whether it was the court’s job to fix an unclear statute, which could be a signal that the plaintiffs’ plain language argument may carry the day before this panel.  The panel’s decision is expected in June 2014.  It is predicted that if the government loses, it will likely appeal to the D.C. Circuit for en banc review, which might delay the Supreme Court from deciding this issue. 

In an unusual move before oral argument, the U.S. Department of Justice filed a letter with the court asserting that any adverse ruling should apply only to the named plaintiffs (and thus could not overturn the IRS rule nationwide) because the suit was not a class action.  At the end of the oral argument, Judges Randolph and Griffith admonished the government lawyer for what they deemed to be an “improper” filing.

The sister case, King v. Sebelius, brought by the same attorneys as Halbig, will be argued before the Fourth Circuit on May 14, 2014, in Richmond.  At the district court level, the Commonwealth of Virginia filed an amicus brief in support of the plaintiffs’ position.  However, the Commonwealth switched sides in the appeal; after being sworn into office in January 2014, Attorney General Mark Herring (D) filed an amicus brief in support of the government that expressly repudiated the Commonwealth’s prior position. 

Two other cases challenging the premium tax credit remain pending in federal trial courts.  In Indiana v. IRS, pending in federal court in Indianapolis, the state and 39 of its public school districts argue that the IRS rule directly injures the state and school districts in their capacities as employers by subjecting them to increased compliance costs and administrative burdens.  Similarly, in Pruitt v. Sebelius, pending in federal court in Muskogee, Oklahoma, the state complains that the availability of the premium tax credit in FFE states forces the state to choose between the costs of providing coverage to its employees or paying the IRS a significant financial penalty.  The parties’ written motions briefings will wrap up in May 2014 in both cases. 

The availability of premium subsidies affects that vast majority of consumers enrolling through the exchanges because people who are not eligible for premium subsidies can buy comparable coverage with similar consumer protections outside of the exchanges.  According to an evaluation released by the U.S. Department of Health and Human Services, as of March 1, 2014, more than 4.2 million people had enrolled in health insurance coverage through an exchange.  Most of those enrolled—2.6 million—lived in FFE states.  Among these FFE enrollees, more than 2.2 million (85 percent) received federal assistance. 

Kaiser Family Foundation reports that 83 percent of enrollees nationwide qualify for premium subsidies but that only about 21 percent of those eligible for premium subsidies have applied for assistance.  Generally, states that run their own exchanges and face minimal technical problems have the highest percentages of subsidy-eligible consumers actually enroll; for instance, 40 percent of subsidy-eligible Californians have applied for subsidies through their state-based exchange.  On the other hand, although 92 percent of Wyoming residents qualify for premium subsidies, only 13 percent have applied for subsidies when enrolling through the FFE.  Kaiser Family Foundation estimates that 3.5 million people have qualified for a total of about $10 billion in annual premium subsidies, averaging to about $2,890 per person.

© 2014 McDermott Will & Emery

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About this Author

Lauren D’Agostino, Litigation attorney, McDermott WIll Emery Law firm
Associate

Lauren D’Agostino is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  She is a member of the Trial Practice Group and focuses her practice on complex civil litigation.  She also works with the Health Industry Advisory Practice Group to advise health insurers, health maintenance organizations, and pharmacy benefit managers on regulatory matters, including health insurance market reforms enacted under Health Care Reform and federal health care programs, including the Medicare managed care (Medicare...

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J. Peter Rich is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Los Angeles office.  He co-chairs the Firm’s Insurance / Payers Affinity Group.  For over 30 years, Peter has practiced almost exclusively in the health law field, and routinely advises hospitals, health plans, medical groups, health insurers, and PPOs and similar organizations, as well as other health industry clients, in negotiating and structuring managed care and other health industry transactions, including major Medicare Demonstration Projects....

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