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District Court Sides with House Republicans, Rejects Obamacare Cost-Sharing Reimbursements.

(Parker Tax Publishing MAY 2016)

A federal district court held that the Obama Administration's payment of reimbursements to insurance providers under a provision of the Affordable Care Act was unconstitutional because Congress had not appropriated funds for the reimbursements. The court enjoined further payments, but stayed the injunction pending appeal. U.S. House of Representatives v. Burwell, 2016 PTC 167 (D.D.C. 2016).


Since January 2014, the Treasury has been making advance payments of premium tax credits and cost-sharing reimbursements to issuers of qualified health plans to eligible individuals. The payments arise from two sections of the Affordable Care Act (ACA): Section 1401, which provides tax credits to make insurance premiums more affordable, and Section 1402, which reduces deductibles, co-pays, and other means of "cost sharing" by insurers.

Section 1401 added Code Sec. 36B, which provides refundable tax credits to individuals with household incomes between 100 percent and 400 percent of the federal poverty line in order to make the insurance more affordable.

Under Section 1402, insurers offering qualified health plans through ACA Exchanges are required to reduce deductibles, coinsurance, copayments, and similar charges (collectively, "cost sharing reductions") for eligible insured individuals enrolled in their plans. If such issuers notify the Treasury, the Treasury is required to make periodic and timely payments to the issuer equal to the value of the reductions. Section 1402 was codified as 42 U.S.C. Sec. 18071.

Section 1401 was funded by adding Code Sec. 36B to a preexisting list of permanently-appropriated tax credits and refunds in 31 U.S.C. Sec. 1324(b). Section 1402 was not added to that list.

The U.S. House of Representatives brought suit in a federal district court in 2014, alleging that Secretaries of Health and Human Services and of the Treasury (the Secretaries) violated the Constitution when they spent public monies that were not appropriated by Congress in order to reimburse issuers of qualified health plans under Section 1402.


The question before the district court was whether Section 1402 can be funded through the same, permanent appropriation that funds Section 1401. The court held that it cannot, and found that reimbursements under Section 1402 were unconstitutional.

The Secretaries argued that 31 U.S.C. Sec. 1324, which expressly appropriates money for Section 1401 premium tax credits, also appropriates funds for Section 1402. In relevant part, 31 U.S.C. Sec. 1324 provides that disbursements may be made only for "refunds due from section 36B."

The court noted that the Secretaries could only prevail if Section 1402 payments are properly considered "refunds due from section 36B." However, the court said, a refund "due from Code Sec. 36B" means a refund due from that section, and no amount of context could make it "due from 42 U.S.C. Sec. 18071." The court said that Section 1402 reimbursements are made to compensate insurers for the costs that they bear, and the reimbursements are not "refunds" as that term is used in 31 U.S.C. Sec. 1324(b).

The Secretaries alternatively argued that because Sections 1401 and 1402 are economically and programmatically integrated, a contrary reading of the amended appropriations statute would yield absurd economic, fiscal, and healthcare-policy results. For example, the Secretaries argued, if the insurers are not reimbursed, they will charge higher premiums to cover their expenses, leading to taxpayers becoming entitled to greater tax credits under Section 1401. In addition, unreimbursed insurers might sue the government under the Tucker Act to receive the money owed them under Section 1402. Those arguments, the court said, focused on the wrong consequences.

For purposes of interpreting the ACA, the court stated, the relevant question was not whether Congress intended premiums to skyrocket, deficits to explode, or enrollment to plummet, but whether it would have been "nonsensical" or "absurd" for Congress to authorize a program permanently in 2010 but not appropriate for it permanently at the same time. Far from absurd, the court said, that was a perfectly valid means of appropriation. The court noted that the results predicted by the Secretaries flowed not from the ACA, but from Congress' subsequent refusal to appropriate money.

Finding the Secretaries' arguments that the amendment to 31 U.S.C Sec. 1324 also appropriated money for Section 1402 unconvincing, the court turned to the issue of whether reimbursements under that section were unconstitutional.

The court noted that the Constitution provides, in Art. I, Sec. 9, cl. 7, that "No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law." In addition, the court observed that under 31 U.S.C. Sec. 1301(d), "a law may be construed to make an appropriation out of the Treasury only if the law specifically states that an appropriation is made." Congress, the court said, authorized reduced cost sharing but did not appropriate monies for it, in the FY 2014 budget or since. Because Congress is the only source for such an appropriation, no public money can be spent without one, and accordingly, the court held that paying out Section 1402 reimbursements without an appropriation was unconstitutional.

The court enjoined any further reimbursements under Section 1402 until a valid appropriation was in place, but stayed the injunction pending any appeal.

OBSERVATION: Unlike previous legal challenges that threatened to either overturn or cripple the Affordable Care Act, the potential impact of the ruling in U.S. House of Representatives v. Burwell is more ambiguous. If the district court's decision is upheld and Congress declines to fund ACA cost-sharing reimbursements through annual appropriations, it would create considerable uncertainty for insurance companies. Insurers might have to choose between raising premiums, absorbing the additional costs, suing the government for the unreimbursed amounts, or a combination thereof. Some healthcare experts have concluded that premiums for policies sold on government exchanges could increase by as much as 8 percent on average. Such price increases would be partly offset by increased tax credits under Code Sec. 36B, but only for eligible taxpayers.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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