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On December 1, 2016, Parker Hannifin Corporation and CLARCOR Inc. announced that the companies have entered into a definitive agreement under which Parker will acquire CLARCOR for approximately $4.3 billion in cash, including the assumption of net debt. The transaction has been unanimously approved by the board of directors of each company. Upon closing of the transaction, expected to be completed by or during the first quarter of Parker’s fiscal year 2018, CLARCOR will be combined with Parker’s Filtration Group to form a leading and diverse global filtration business. Bass, Berry & Sims has served CLARCOR as primary corporate and securities counsel for 10 years and served as lead counsel on this transaction. Read more here.

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Supreme Court Tees up Another Blockbuster ACA Case: What Providers Need to Know about King v. Burwell

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December 16, 2014

Political commentators and constitutional law scholars took to the airwaves immediately following the U.S. Supreme Court's November announcement that it will hear a case regarding the availability of tax credits for the uninsured under the Affordable Care Act ("ACA"). Analyses and predictions abound about the potential implications of the Supreme Court decision, which is expected in the first half of summer 2015. Setting aside the complex legal issues and potential political repercussions, we summarize below what healthcare providers should know about this important court case, the issue and the impact of the decision.

Background

The Supreme Court agreed to consider an appeal of a case called King v. Burwell, which was decided by the U.S. Court of Appeals for the Fourth Circuit in July of this year.1 The case challenges whether individuals who purchase health insurance through an ACA exchange set up by the federal government, i.e., via healthcare.gov, (a "Federal Exchange"), as opposed to an exchange established by a state (a "State Exchange"), are eligible to receive subsidies from the federal government to cover some or all of the cost of purchasing that insurance. In King v. Burwell, the appeals court upheld the IRS regulation permitting all individuals purchasing health insurance on an exchange set up under the ACA to receive tax credits, despite language in the law that limits those credits to taxpayers enrolled in a health plan purchased "through an Exchange established by the State."2 The Court must grapple with the question of what exactly "established by the State" means in the context of the ACA.

The Supreme Court may agree with the appeals court—generally preserving the status quo—or it could find for the Petitioners, the individuals and entities challenging the IRS regulation. If the Supreme Court finds for the Petitioners, the IRS regulation would be invalidated and those currently receiving subsidies to offset the cost of purchasing insurance on a Federal Exchange would become ineligible for the subsidies, unless individual states or Congress take action.3 Commentators suggest that the practical implications of the Supreme Court decision could be significant, not only for individuals purchasing insurance from a Federal Exchange and for providers attempting to balance the new requirements imposed under the ACA, but also for the future of the ACA itself.4

Potential Ramifications of Invalidation

If the Supreme Court were to invalidate the existing IRS rule, the overwhelming majority of individuals who have purchased insurance through the ACA exchanges would be affected. As of the open enrollment period that just began on November 15, at least 34 states have Federal Exchanges.5 Approximately 6.7 million individuals were enrolled in health insurance purchased through exchanges as of October 2014, the vast majority of whom had enrolled through Federal Exchanges (estimated at more than 5 million). According to research published in June 2014, more than 85% of all enrollees (in both State and Federal Exchanges) received subsidies, covering on average 76% of monthly premiums.

Loss of Insurance. 

The most significant impact of a Supreme Court decision invalidating the IRS regulation likely would be on those individuals who would otherwise be eligible for subsidies. Congressional studies show that most of these individuals would be unlikely to afford insurance without the subsidies. Thus, in the absence of action from the states or Congress, commentators expect that most of the individuals who would be eligible for tax credits, but for having purchased insurance through a Federal Exchange instead of a State Exchange, are likely to lose their coverage.6 Moreover, because the ACA exempts those individuals who cannot afford insurance from the "individual mandate" to purchase insurance, most of these individuals would not be subject to a tax penalty for failure to obtain insurance.7

Employer Mandate.

The ramifications of a Supreme Court decision for the Petitioners extend far beyond that of the subsidy issue itself. If the Supreme Court finds for the Petitioners and invalidates the IRS regulation based on the "plain language" of the law, the so-called "employer mandate" to provide insurance in states with Federal Exchanges would essentially become a moot point, as the penalties are applicable only to employers with employees receiving subsidies.8

Death Spiral?

Both sides of the dispute consider the potential impact of the decision to be monumental. According to the Petitioners, if the Supreme Court found in their favor, "the consequences for individuals, employers, insurers, states, and federal spending [would] be vast" and could lead to potentially great upheaval.9 The federal government argues that a decision for the Petitioners would eventually trigger a "death spiral" leading to a collapse of the entire individual insurance market in the states with Federal Exchanges.10 As explained by the government, removal of the subsidy for millions of low- and middle- income individuals and families is likely to lead to a substantial population remaining uninsured (or becoming uninsured yet again) and who will not be subject to the individual mandate to purchase insurance.11 Because insurers will still be subject to the ACA requirements to sell insurance to anyone without preexisting condition limitations, healthy individuals not subject to the individual mandate will have an incentive to wait to purchase health insurance only if they become sick or are injured. With the bulk of healthy individuals opting not to purchase insurance, premiums in the individual insurance market would skyrocket, leading to an eventual collapse of the exchanges in these states.

Keeping the Status Quo

If, on the other hand, the Supreme Court affirms the IRS interpretation of the ACA which makes subsidies available to all applicable taxpayers, whether enrolled in Federal Exchanges or State Exchanges, the ambitious healthcare reform law will remain largely intact. A ruling in favor of the government would be a major victory for the Obama administration, as this is arguably the most significant challenge to the ACA since the constitutional challenge decided by the Supreme Court in 2012.12

How Can Providers Prepare?

Providers in States with Federally Facilitated Exchanges. For healthcare providers located in states with Federally Exchanges, the bottom line is that a decision for the Petitioners, absent action by Congress or the states to prevent such a consequence, would lead to a reversal of all or most of any reduction in the uninsured population experienced by the state since January 1, 2014—and would prevent further gains anticipated in the future.13 Several factors could actually increase the number of uninsured in such states beyond the number of uninsured on December 31, 2013.14 In combination with the reduction in funds available for uncompensated care, the financial health of safety net providers and hospitals in particular could be endangered. Importantly, it is unlikely that any Supreme Court decision will apply retroactively,15 meaning that individuals will keep subsidies already received, and insurer's ability to retroactively cancel policies is limited by law.16

Providers in States with State-Run Exchanges. For healthcare providers located in states with State Exchanges, the impact of a decision for the Petitioners would be less immediate. Such healthcare providers are unlikely to see a substantial increase in the number of uninsured, particularly in the short term. The long-term effect of the decision on the overall implementation of the ACA would eventually impact all healthcare providers, however.

Potential Fixes in the Event of Invalidation

In the event of a decision in favor of the Petitioners, the two main avenues for a "fix" to the "death spiral" would be Congress or the States. First, Congress could amend the law to fix the issue. Given that a Republican majority will be in place in Congress before any decision, this may not be a likely path. Alternatively, States with Federal Exchanges could establish their own exchanges to preserve subsidies for their residents. For states interested in such a course of action, it is likely that the government could develop viable possibilities within a short time frame. For example, although there are limits on the ability of state exchanges to contract out functions, it seems likely that the federal government could craft an arrangement that complies with the statute but permits the use of healthcare.gov as a backend.17

Conclusion

Providers should expect a decision from the Supreme Court in late June or early July 2015, with oral argument occurring as early as March 2015. Even if the Supreme Court were to invalidate the IRS regulation and no action were taken by Congress or the States, the immediate impact on providers will likely be minimal as the federal government may continue to pay subsidies on behalf of individuals enrolled in health plans purchased through Federal Exchanges for one to two months as the result of protections currently in place for consumers.18 And, in states that opt to establish State Exchanges, thereby preserving subsidies for their residents, the direct impact will remain minimal. The long term impact of a decision in favor of Petitioners is not as clear. If the Supreme Court finds for the Petitioners, what happens in the weeks, months and years after the decision in Congress and in states that do not establish a State exchange, however, will be closely watched.


1 See& King v. Burwell, No. 14-114, 574 U.S. __ (Nov. 7, 2014) (granting petition for writ of certiorari); see also Lyle Denniston, Court to rule on health care subsidies, SCOTUSblog (Nov. 7, 2014), http://www.scotusblog.com/2014/11/court-to-rule-on-health-care-subsidies/.
2 See King v. Burwell, No. 14-1158 (4th Cir. July 22, 2014). The quoted statutory text is found at 26 U.S.C. § 36B(c)(2)(A)(i).
3 It is also possible for the Supreme Court could to issue a decision that does not fully resolve the matter.
4 See, e.g., Drew Altman, How 13 Million Americans Could Lose Insurance Subsidies, The Wall Street Journal, Nov. 19, 2014; John Harwood, In Cooperation's Absence, a Phrase Yields a Supreme Court Case, N.Y. Times, Nov. 24, 2014, at A14; Sarah Ferris, Top policy group: SCOTUS move puts healthcare at stake, The Hill, Nov. 20, 2014.
5 This number could be as high as 37 states, but has been subject to conflicting interpretations, as well as fluctuations over time. The seven states with "state partnership" exchanges (AR, DE, IL, IA, MI, NH, and WV) are included in the total, as these states are not generally considered to have a "State Exchange." It is unclear whether New Mexico, Nevada and Oregon qualify as exchanges "established by the State" for subsidy purposes, as these state-run exchanges are using the healthcare.gov platform for the 2015 open enrollment period (Nevada and Oregon previously operated their own IT infrastructure). Idaho utilized healthcare.gov in 2014, but has rolled out its own state exchange for the 2015 open enrollment period. See Kaiser Family Foundation, State Health Insurance Marketplace Types, 2015, available at http://kff.org/health-reform/state-indicator/state-health-insurance-marketplace-types/ (last accessed Dec. 3, 2014).
6 The subsidies are primarily paid as "advance premium payment credits," where the federal government directly pays some or all of an enrollee's premium directly to the insurer on the enrollee's behalf, or as "cost-sharing subsidies," which are paid directly to the insurer to reduce the enrollee's cost-sharing burden. Any decision based on the language of the statute would affect all types of subsidies.
7 26 U.S.C. § 5000A(e).
8 The employer mandate, originally set to take effect in 2014, will not be implemented until 2015 for most employers; certain small employers will have until 2016 to comply.
9 Petition for Writ of Certiorari, King v. Burwell, No. 14-114, at *18 (July 31, 2014).
10 Brief for Respondents in Opposition, King v. Burwell, No. 14-114, at *4 (Oct. 3, 2014).
11 See id.
12 Chief Justice Roberts penned the 2012 Supreme Court decision on ACA, and his views are expected to be crucial to the Supreme Court's decision in King v. Burwell. There is some speculation that Chief Justice Roberts might view the subsidy issue through the lens of an expanded conditional grants doctrine, which he relied upon to invalidate the Medicaid expansion in 2012. The doctrine describes the restrictions on Congress' ability to attach strings to federal grants.
13 See Kaiser Family Foundation, Map: How Many Americans Could Lose Subsidies If the Supreme Court Rules for the Plaintiffs in King vs. Burwell?, available at http://kff.org/interactive/king-v-burwell/ (last accessed Dec. 3, 2014) (based on KFF extrapolation of Congressional Budget Office 2016 projections of the number of people who will receive subsidies nationwide).
14 This includes both the changes in Medicaid eligibility permitted in certain states since Jan. 1, 2014 (although it is unclear if such changes would be allowed to remain in place) and the effect of "adverse selection," where healthy individuals have no incentive to purchase insurance, resulting from the "guaranteed issue" and "community selection" provisions of the ACA.
15 Although the statute does require a reconciliation of advance premium tax credits on an individual enrollee's tax return, the IRS generally is prohibited from applying a regulation retroactively, and the Supreme Court has no authority to invalidate the regulation as of an earlier date. See 26 U.S.C. § 7805(b) (discussing retroactivity of IRS regulations).
16 See 45 C.F.R. § 147.148(a) (limiting rescission of coverage). For individuals not receiving a subsidy, state law determines the effective date of any cancellation for nonpayment. See 45 C.F.R. § 155.430(d)(5).
17 See ACA § 1311(d) (limiting use of contracts by State Exchanges); Nicholas Bagley, Working around Halbig, The Incidental Enconomist, available at http://theincidentaleconomist.com/wordpress/working-around-halbig/ (Jul. 22, 2014) (suggesting possibility of State Exchanges contracting for use of healthcare.gov infrastructure).
18 See 45 C.F.R. § 155.330(f)(3) (providing that a reduction to enrollee's subsidies based on a redetermination of eligibility cannot be effective until first day of month in which notice of redetermination is provided to enrollee or, depending on when enrollee receives notice, first day of subsequent month).

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