Federal appeals courts issue conflicting decisions on ACA subsidies

A few weeks after the U.S. Supreme Court dealt a blow to the Affordable Care Act’s (ACA) contraceptive mandate, federal courts are looking at a different aspect of the law—exchange subsidies. On July 22, there was a flurry of activity on the issue, with two federal appeals courts issuing conflicting rulings.

States had the option to design and operate exchanges (also known as marketplaces) that best met their unique needs while complying with the ACA’s statutory and regulatory standards. All states had to make a choice regarding what kind of exchange they wanted. States could:

  • Build a fully state-based exchange;
  • Default to a federal exchange (often referred to as a “federally facilitated exchange”); or
  • Enter into a state partnership exchange with the federal government.

More than 30 states chose to either default to a federal exchange or enter into a state partnership exchange.

In Halbig v. Burwell, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit held 2-1 that the federal government cannot subsidize premiums for individuals in states that defaulted to federal exchanges. However, hours later, the 4th Circuit upheld the subsidies in King v. Burwell.

In Halbig, the D.C. Circuit addressed Section 36B of the Internal Revenue Code (enacted as part of the ACA), which makes tax credits available as a subsidy to individuals who purchase health insurance through the exchanges. The court stated that on its face, the provision authorizes the credits for insurance purchased on an exchange established by a state or the District of Columbia. However, the IRS has interpreted the provision to authorize subsidies for insurance purchased on exchanges established by the federal government. The D.C. Circuit disagreed with the IRS, concluding that “the ACA unambiguously restricts the Section 36B subsidy to insurance purchased on exchanges ‘established by the State.’”

In the King decision, the 4th Circuit found that the applicable statutory language is ambiguous and subject to multiple interpretations. Thus, it gave deference to the IRS’s determination and upheld the interpretation as “a permissible exercise of the agency’s discretion.”

The decisions are not the end of the challenges to the subsidies. More courts are expected to address the issue, and the Obama administration is expected to fight the D.C. Circuit’s Halbig decision. Many commentators anticipate the issue will reach the U.S. Supreme Court.

Various spokespeople for the Obama administration quickly spoke out to assure the public that the tax credits are still available for now. However, if the Halbig ruling is upheld, it could cause a lot of damage to the ACA since the law’s provisions are so interconnected and the subsidies come into play in many of the law’s mandates, including the individual mandate and the employer shared responsibility mandate (also known as the “play or pay” provision).