Clash of the Circuits: Federal Exchange Subsidies at Risk?

by BakerHostetler
Contact

These four words “established by the state,” at first blush do not appear obtuse or particularly vague. But these four words form the basis for the latest challenges to the Affordable Care Act (ACA) and have resulted in two courts issuing diametrically opposed opinions within several hours of each other.

The ACA generally requires most Americans to obtain health insurance coverage. Certain low income individuals are exempt from the Act’s requirements if the net cost of health insurance coverage exceeds eight percent of their net income. To make the coverage more affordable and, in turn, increase the number of individuals who must either obtain health insurance coverage or pay the applicable penalty, the ACA provided tax credits to reduce the net cost of coverage. Specifically, ACA section 1311 provides that tax credit subsidies shall be available for insurance purchased on an Exchange “established by the state.” 26 U.S.C. § 36B. Similarly, more employers will be subject to penalties if the tax credits are available for insurance on federally facilitated Exchanges. Certain large employers are subject to penalties if one or more of their employees enroll in a qualified health plan upon which a tax credit is allowed or paid.

The Internal Revenue Service (IRS) promulgated regulations interpreting section 1311 to make financial subsidies available to anyone “enrolled in one or more qualified health plans through an Exchange,” which includes state and federal marketplaces. 26 C.F.R. § 1.36B-2. See also 77 Fed. Reg. 30377 (May 23, 2012). Thus, individuals were eligible for a tax credit regardless of whether they purchased health insurance on a state-run Exchange established pursuant to section 1311 of the ACA or the Exchange established by the federal government under section 1321 of the ACA. Several lawsuits have been filed in which the plaintiffs challenged the IRS’s interpretation and claimed that it was contrary to the language of the statute, which, the plaintiffs asserted, authorized tax credits only for individuals who purchase insurance on state-run Exchanges. As a result of the IRS interpretation, the plaintiffs contended that they would be subject to the ACA’s penalties.

On July 22, 2014, the Fourth Circuit and the Court of Appeals for the District of Columbia addressed whether tax credits should be available to people who purchased insurance plans on federally run Exchanges. The U.S. Court of Appeals for the D.C. Circuit, in a 2-to-1 decision in Halbig v. Burwell, held that a federal Exchange is not an exchange established by the state and that tax credits were not available for insurance purchased on a federal Exchange. The Fourth Circuit, on the other hand, in King v. Burwell, held that the IRS interpretation was a permissible construction of the statutory language and was therefore entitled to deference. The underlying district courts in both cases concluded that the IRS interpretation was a permissible construction of ACA’s provisions and that “the ACA’s text, structure, purpose and legislative history make ‘clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated Exchanges.’” Halbig v. Burwell at 5.

The Halbig court’s decision limiting tax credits to state-run Exchanges was based upon the following:

  • The availability of tax credits under section 36B turns on who established the Exchange. The court found that states are to establish Exchanges pursuant to ACA section 1311, but if they fail to do so the federal government shall “establish and operate such Exchange within the State” pursuant to ACA section 1321. The phrase “such Exchange,” according to the court, indicates that the Exchanges are similar, but that the phrase “established by the State” has meaning and thus section 36B’s tax credits are not available on Exchanges established by the federal government. The federal government simply does not stand in the state’s shoes.
  • That the elimination of subsidies to purchasers of insurance on the federally run Exchange would not lead to absurd results under the ACA or make the act unworkable.
  • That the broad aims of the ACA did not demonstrate that the literal language of section 36B was demonstrably at odds with Congress’s intent.

The King court, reviewing the identical rule, unanimously held that the ACA authorized tax credits for policies purchased on federally facilitated Exchanges. The court’s decision was based upon the following:

  • In the absence of definitive legislative history, the IRS was permitted to choose among several equally plausible interpretations and acted reasonably in interpreting the ambiguous statutory provisions in section 36B to advance the goals of the ACA and, thus, was entitled to agency deference. In so holding, the court observed that Congress was aware that the broad application of tax subsidies was a crucial pillar to meeting the ACA’s principal goal of improving public access to health insurance while maintaining strong health insurance markets.
  • The reference to state Exchanges in section 36B did not exclude the possibility that Congress intended tax subsidies to be available in all states, regardless of who operated the Exchanges.
  • That federal Exchanges could be considered to be exchanges operated by the federal government on behalf of a state.
  • That the relevant portions of the ACA, when considered in conjunction with the legislative history of the ACA, indicated that Congress did not “definitively” restrict tax subsidies to state Exchanges.

The conclusive resolution of these cases and several others working their way through various courts will have a significant impact on the enrollees eligible for subsidies in the 36 states with federally facilitated Exchanges. Ultimately, the U.S. Supreme Court may be required to resolve the dispute between the various circuits, as it is unlikely that Congress will act to resolve the issue.

The Administration has indicated that it will quickly seek en banc review of the Halbig decision. In the interim, the Halbig decision will not take effect until the en banc court’s rehearing, but the uncertainty will hang over the open enrollment period for 2015, scheduled to begin on November 15, 2014. The King plaintiffs most likely will seek Supreme Court review in the coming weeks—perhaps even before the government is able to file an en banc petition in Halbig. Potentially, if the King plaintiffs rush in a petition, it could be ready for consideration by the “long conference” at the end of September or shortly thereafter, with an order to follow. At that point, if the court grants certiorari in King, the D.C. Circuit would surely hold Halbig in abeyance.

Providers should carefully monitor this litigation and ensure that their legislators at the state and federal levels are aware of the consequences if the nearly 4.7 million people receiving subsidies in federally facilitated Exchanges cease purchasing insurance coverage, especially in light of the significant reduction in disproportionate share payments to providers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BakerHostetler | Attorney Advertising

Written by:

BakerHostetler
Contact
more
less

BakerHostetler on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!