Does the Fee Imposed by Section 9010 of the Affordable Care Act Apply to Stop-Loss Coverage?

It was the intent of Congress in enacting the Patient Protection and Affordable Care Act to regulate health insurance comprehensively. Most of the regulatory provisions of Title I (the insurance reforms) apply to “A group health plan and a health insurance issuer offering group or individual health insurance coverage.” The definitions of these terms are drawn from the definitional section of the Public Health Services Act (added by the Health Insurance Portability and Accountability Act), which defines a “group health plan” as an ERISA plan, and a “health insurance issuer” as “an insurance company, insurance service, or insurance organization (including a health maintenance organization, as defined in paragraph (3)) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance.” 42 U.S.C. § 300gg-91(a)(1), (b)(2). Thus the ACA covers both self-insured ERISA plans and insured individual and group plans.

In fact, however, the ACA does not apply to all health insurance coverage, and does not apply to all health insurance coverage to which it does apply to the same extent.  HIPAA excepted benefit plans, including specific disease and fixed-dollar indemnity plans, and short term individual coverage are not subject to ACA requirements, and many of the provisions of the ACA that apply to individual and small group plans, including the essential benefit package, the risk adjustment program, and the risk pooling, community rating, minimum medical loss ratio, and unreasonable premium increase justification requirements do not apply to self-insured plans.  It is, therefore, important to read the ACA section by section to determine which requirements or prohibitions apply to which types of health insurance.

One particularly important provision that has not received enough attention is section 9010, “Imposition of Annual Fee on Health Insurance Providers” (at 811-815 in the link).   This provision is found in Title IX of the ACA, but was amended both by the December 2009 Managers’ Amendment, which became Title X, and by the Health Care and Education Reconciliation Act, enacted in March 2010.  Section 9010 imposes a fee, beginning in 2014, on a “covered entity’s net premiums written with respect to health insurance for any United States health risk.” The fee is determined by multiplying the fraction determined by dividing the covered entity’s net premiums by the net premiums of all covered entities that are taken into account under the statute times a set annual amount, which begins at $8 billion, but rises to $14.3 billion by 2018.  This fee will be an important revenue source for funding the ACA’s coverage expansions.

The fee imposed by section 9010 does not apply to all insurers equally.  Insurers with annual net premiums of $50 million are fully taxed on their revenues, while insurers with annual net premiums of $25 to $50 million are taxed on only half of their net premium revenues, and insurers with net premiums below $25 million are not taxed at all.  Certain tax-exempt insurers are also taxed on only half of their net premium revenues (after applying the small insurer discount just mentioned).

The fee also only applies to “covered entities.”  Section 9010(c) defines “covered entity” as an entity that “provides health insurance for any United States health risk,” subject to a number of exclusions.  These exclusions include “any employer to the extent that such employer self-insures its employees’ health risks;” government entities; certain non-profit insurers that derive 80% of their revenue from government programs; and VEBAs that are tax exempt under I.R.C. § 501(c)(9).What is the universe of “covered entities,” however, that remain subject to § 9010 after these exclusions are applied?

To answer this question it is necessary to parse the meaning of “health insurance” and “United States health risk.”  Both terms are defined in the section, but only in part.  “United States health risk” is defined to include the health risk of an individual who is a United States citizen, resident, or located in the United States. § 9010(d).  “Health insurance” is defined to exclude certain but not all forms or HIPAA excepted benefits (as defined in I.R.C. § 9832(c)), long-term care insurance, and Medicare supplemental insurance.  Nowhere in § 9010, or indeed anywhere in the Internal Revenue Code, however, are the terms “health insurance” or “health risk” defined.  Section 9010 tells us what “health insurance” is not, but not what it is.

The most interesting question is whether health insurance for a United States health risk includes stop-loss coverage.  The sale of stop-loss coverage to small employer groups is increasing very rapidly.  As noted above, self-insured small groups are not subject to many of the consumer and market protections that the ACA applies to insured small groups.  Self-insured group plans are also not subject to state regulation because of ERISA preemption.  There is thus a great deal of interest in the part of small group plans in self-insuring.  Small groups can only self-insure, however, if they can find generous stop-loss coverage that will assume most of the health risk of employees.  A small employer that fully assumed coverage for its employees without stop-loss coverage would face unacceptable risk.  Some insurers, therefore, are actively marketing stop-loss coverage, often with very low attachment points, to small groups.

Is this stop-loss coverage subject to section 9010?  It certainly is “insurance” and it certainly covers a “health risk.”   It also does not fit within any of the explicit exclusions from the term “health insurance.”  But is “stop-loss insurance” “health insurance”?  The term “health insurance” is nowhere defined in the Internal Revenue Code (which would be the relevant code since the fee is administered by the Secretary of the Treasury and the fee is considered to be an excise tax, see § 9010(f),(h)(1)).  “Health insurance coverage” and “Health insurance issuer” are defined in § 9832, but those are not the terms used in section 9010, presumably intentionally.  By analogy, the term “group health plan” is used throughout the ACA to mean an ERISA plan, but in § 1301(b) the term “health plan” is explicitly defined to not include self-insured ERISA group plans.  Wherever the term “health plan” is used in the ACA without the adjective “group,” therefore, it does not include self-insured ERISA plans, but where it appears with the adjective “group” self-insured plans are included.  Similarly, it must be presumed that Congress used the term “health insurance” to mean something different from the defined terms “health insurance coverage” or “health insurance issuer,” which terms are used throughout the ACA in different contexts.

Is stop-loss insurance that covers health care risks health insurance?  This is certainly a reasonable interpretation of the term.  Moreover, the fact that Congress explicitly excluded from the definition of “covered entity” risk borne by employers in self-insured plans, but not risk that they pass on to stop-loss insurers, indicates that Congress did not intend to exempt stop-loss plans from the fee.

Applying the fee to stop-loss coverage would help to level the playing field between conventional health insurers and health insurers that insure health risk through stop-loss plans, and might help stem the flood of small groups to self-insured status, which in turn threatens to undo the consumer protections extended to employees insured through small groups and the market protections built into the ACA to stabilize the small group market (such as the risk adjustment and risk pooling requirements).

Section 9010(c) tasks the Secretary of the Treasury with providing implementing regulations and guidance.  It is to be hoped that the Secretary will clarify through the regulatory process that the § 9010 fee applies not only to conventional insurance, but also to stop-loss insurance.  Stop-loss insurance increasingly serves as an alternative mechanism for covering the same health risks that are covered by conventional insurance, while at the same time providing a means of evading ACA consumer and market protections.  Section 9010 should be applied to stop-loss insurance just as it is to conventional insurance.

Yes, the Federal Exchange Can Offer Premium Tax Credits

Whatever else the Affordable Care Act may accomplish, it has provided endless entertainment for law professors. The latest ACA kerfuffle involves the discovery by critics of the ACA of an ACA drafting error that would seem to deprive millions of uninsured Americans of tax credits to purchase health insurance and invalidate regulations recently proposed by HHS and the Treasury Department. The mistake is found in section 1401 of the ACA, which creates a new section 36B of the IRC. Two subsections of 36B ((b)(2)(A) and (c)(2)(A)(i)) suggest that premium tax credit eligibility under the ACA depends on the applicant being enrolled in a qualified health plan “through an Exchange established by the State under section 1311.” This would in turn suggest that individuals enrolled in a qualified health plan through a federal exchange established under section 1321(c) would not be eligible for premium tax credits, contrary to the recent proposed regulations.

That this is a drafting error is obvious to anyone who understands the ACA. Section 1311 of the ACA requests the states to establish American Health Benefit Exchanges and sets out the duties of the exchanges. Section 1321 of the ACA, however, provides that if a state elects not to establish and exchange or fails to do so, HHS must “establish and operate” an exchange in such a state and “take such actions as are necessary to implement” the other requirements of title I of the ACA, which includes section 1401. There is no coherent policy reason why Congress would have refused premium tax credits to the citizens of states that ended up with a federal exchange. None of the CBO reports scoring the ACA suggest that premium tax credits would only be available though 1311 state exchanges and not through 1321 federal exchanges. It is, finally, highly unlikely that the House, whose bill included only a federal exchange, would have approved a bill that only provided tax credits through state exchanges but not through the federal exchange.

No one pretends that the ACA is a model of statutory drafting. The bill, for example, contains three section 1563’s. No one intended the current ACA to become the final law. It was the Senate bill, enacted after the House bill, which was to go through conference before the final ACA was enacted. The election of Scott Brown in Massachusetts, and the adamant refusal of the Republicans to allow the legislation to become law without a supermajority in the Senate, doomed efforts to craft a final bill. Of course, major pieces of legislation are often replete with drafting errors. They are commonly followed by technical correction bills, which are often adopted by unanimous consent. If Congress were functioning as a normal deliberative governing body rather than as the legislative equivalent of trench warfare, errors in the ACA would long ago have been fixed.

But now we seem to be stuck with the textualists delight: a statute whose words clearly say what Congress clearly did not mean.

Is there a way out of this quandary? One possibility is to simply recognize that this is a drafting error. The Supreme Court has occasionally recognized that it is appropriate to exercise common sense in recognizing that “a busy Congress is fully capable of enacting a scrivener’s error into law.” Koons Buick, Pontiac, GMC, Inc. v. Nigh, 543 U.S. 50, 65 (2004) (Stevens concurring). But we do not need to rely on the courts to correct this error. Congress corrected it itself.

Four days after Congress passed the Patient Protection and Affordable Care Act, it enacted the Health Care and Education Reconciliation Act of 2010. Section 1004 of HCERA amended section 36B(f) of the IRC to impose on exchanges established under section 1311(f)(3)—that is, state exchanges—and under section 1321(c)—that is federal exchanges, the obligation to report to the IRS and to the taxpayer information regarding tax credits provided to individuals through the exchange. In this later-adopted legislation amending the earlier-adopted ACA, Congress demonstrated its understanding that federal exchanges would administer premium tax credits.

Section 36B(g) gives the Secretary of the Treasury the responsibility of issuing regulations to implement section 36B. This includes the authority to reconcile ambiguities in the statute, such as the inconsistency between subsections (b), (c), and (f) of 36B. In proposed regulations published on August 17, Treasury has proposed to recognize as eligible for premium tax credits any individual who is enrolled in a qualified health plan through an exchange and who meets other eligibility requirements, and adopts the HHS proposed definition of an exchange, which includes a federally-assisted exchange.

Under the Chevron rule, this official construction of an ambiguous statute should be accorded deference by any reviewing court. In fact, however, there will be no judicial review of this determination. It is not possible to conceive of a person who would be injured in fact by this interpretation of the rule such that they could present a case or controversy under Article III. The possibility, expressed by some, that a state official might be able to challenge the IRS rule should be put to rest by Thursday’s Fourth Circuit ruling, reaffirming long established Supreme Court precedent holding that state officials do not have the authority to serve as “roving constitutional watchdog[s].”