A same-day split decision has created an uncertain future for the Patient Protection and Affordable Care Act (ACA).1 On Tuesday, two Circuit Courts reached differing conclusions on the availability of premium subsidies for the purchase of individual health insurance coverage through the Exchange (e.g. the Health Insurance Marketplace).
There are two notable consequences of these rules. First, individuals who purchased insurance on the federally-facilitated Exchange may now decide to drop such coverage as it will become unaffordable without the application of the tax subsidies.2 Second, employers that solely operate in states where federally-facilitated Exchanges exist may escape application of any of the employer shared responsibility penalties (Code sections 4980H(a),(b)), as such penalties are dependent upon a full-time employee receiving a tax subsidy on the Exchange.3
In order to extend subsidies to those who purchased coverage on federally-facilitated Exchanges, the Internal Revenue Service (IRS) announced in a Regulation4, that it would interpret Internal Revenue Code5 section 36B (Section 36B) broadly to encompass subsidies for insurance purchased on the federal Exchanges. The Regulation specifically defined an Exchange as one established either by the State or by the federal government, and it has been challenged by many individuals in multiple courts. They contend that the IRS’s interpretation is contrary to the language of the statute, which they assert, authorizes tax credits only for individuals who purchase insurance on state-run Exchanges. Yesterday, the United States Courts of Appeals for the District of Columbia and Fourth Circuit reached differing conclusions on this question.
In the case of Halbig, et al. v. Burwell, the United States Court of Appeals for the District of Columbia concluded that premium subsidies were not available to individuals who purchased coverage through the federally facilitated Exchange. The case hinged on the Appellant’s argument that tax subsidies provided by the ACA under Section 36B were only available to individuals who purchased health insurance on an Exchange established by a state. Since the Appellants were employers who operated in states which had elected not to establish an Exchange (for which the Department of Health and Human Services then established a federally-facilitated Exchange), the Appellants challenged the extension of the tax subsidies to those who purchased insurance on federally established Exchanges, as these individuals were ineligible for the Section 36B tax subsidy. Currently, federally-facilitated Exchanges are the sole individual market Exchange in 36 states.
The Court sided with the Appellants argument that a plain reading of Section 36B did not permit the extension of the tax subsidies to federally-facilitated Exchanges, as they were not established by the State. The argument hinges on the fact that Section 36B(b)(2)(A) clearly identifies that the credit applies to coverage offered in the individual market within a State where the taxpayer is “enrolled through an Exchange established by a State under [section 1311] of the Patient Protection and Affordable Care Act….” The Court concluded the plain reading of the statute limits the application of the tax subsidies to only those Exchanges that were themselves established by the state. Therefore, the Court rejected the IRS’s broad interpretation of Section 36B and application to federally-facilitated Exchanges. The Court essentially struck down the Regulation finding that the IRS did not have authority to interpret Section 36B in such manner, as its interpretation was inconsistent with the clear meaning of the statute on its face.
In contrast, about two hours following the issuance of the Halbig decision, the Fourth Circuit issued its decision in King v. Burwell. In making this determination, the Court reviewed the alternative provisions within the ACA which utilize the same Exchange definition. In such instances, the use of Exchange to mean only an Exchange maintained by a state and not by the federal government would render the alternative provisions superfluous. For example, the reporting requirements that the federal government will utilize to determine whether an individual has obtained coverage to avoid the individual mandate penalty and the definition of individuals who can purchase coverage from these marketplaces (those people reside “in the State that established the Exchange”) both utilize the same definition of Exchange. The Court found that requiring this definition of Exchange to be limited to merely state-run marketplaces would be an unworkable reading of the law. As such, the Court concluded that Congress did not speak directly to the question at issue, and therefore, it left the IRS with the ability to interpret the provision. Since the IRS’ interpretation of the statute was based on the implementation of the ACA’s stated policy of increasing the number of Americans covered by health insurance and decreasing the cost of such insurance, the Court determined that the IRS's regulation was a permissible construction of the statutory language.
It remains to be seen how quickly Congress will act to gap-fill the hole carved by the D.C. Court, whether the now existing Circuit split will require further rulings by the Supreme Court (including whether the Supreme Court will quickly issue a stay of these rulings), or whether states themselves will step in to establish such Exchanges and permit their residents to utilize the subsidies. Preliminary reports indicate that the government and the Obama Administration will request a rehearing of the Halbig case en banc before the entire D.C. Circuit Court.
1 Patient Protection and Affordable Care Act, Pub. Law 111-148, (124 Stat. 119 (2010).
2 If such coverage is deemed unaffordable (greater than 8% of the taxpayer’s household income), the taxpayer would also not be subject to the individual coverage mandate/penalty under Section 5000A.
3 Although employers with operations that span multiple states and have employees that reside in a state that maintains and operates their own Exchange would still be subject to the Section 4980H(a) and (b) penalties for those employees who obtain a subsidy from that state Exchange.
4 26 C.F.R. 1.36B-2
5 Internal Revenue Code of 1986, as amended.