Appellate Courts Split on Validity of Key ACA Regulation

by Foley & Lardner LLP
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In two important decisions issued July 22, 2014, both addressing the validity of a key regulation promulgated under the Patient Protection and Affordable Care Act (ACA), two federal appeals courts reached opposite conclusions, possibly setting the stage for another ACA showdown in the Supreme Court. The two cases, Halbig v. Burwell (formerly Halbig v. Sebelius) and King v. Burwell, address the issue of whether the tax subsidies that are payable to qualifying persons who buy insurance from the exchanges created by the ACA are limited to purchasers who buy from state operated exchanges, or whether such subsides are also available to purchasers from a federally operated exchange.

In the two cases, the Courts of Appeals for the Fourth Circuit and the District of Columbia Circuit reached opposite conclusions regarding the validity of an IRS regulation promulgated under the ACA that authorizes the payment of subsidies to qualifying individuals who purchase from either a state or federal exchange. In both cases, the key issue before the court was whether such subsidies should be limited to individuals in the 14 states and the District of Columbia that operate their own state exchanges, or whether subsidies are also payable to qualifying residents of states with federally operated exchanges.

The plaintiffs in both cases asserted that unambiguous statutory language of the ACA clearly restricts the payment of subsidies to persons who buy insurance on exchanges “established by the State.” The Obama Administration argued that the statutory language of the ACA is ambiguous and must, therefore, be interpreted in light of the overall intent and structure of the ACA. Read in that light, the defendants argued, the IRS Regulation providing for subsidies for purchasers in both types of exchanges was valid.

As noted above, the courts reached opposite conclusions. The DC Circuit ruled in favor of the plaintiffs, holding that the plain language of the statute clearly limits subsidies to buyers in the 15 jurisdictions that operate their own exchanges. Even though the DC Circuit acknowledged the “significant consequences” both for millions of individuals receiving tax credits through federal exchanges and for health insurance markets more broadly, the Court reached its conclusion “with reluctance.” Because the IRS Regulation is inconsistent with the plain meaning of the statute, the court found the regulation invalid.

In contrast, the Fourth Circuit found that the ACA statutory language in question is ambiguous; therefore, the IRS was entitled to deference in interpreting the statute as permitting subsidies in jurisdictions with federally operated exchanges. The court further found that the ACA must be interpreted in light of the underlying congressional intent and the overall structure of the statute. Based on this standard, the court agreed with the Administration that subsidies may be made in connection with insurance sold on federal as well as state-operated exchanges. The court reasoned that Congress could not have intended to limit subsidies to state exchanges only, since that would subvert the entire purpose of the statute (expanding access to affordable coverage).

The split decisions indicate that the subsidy question, which is a linchpin issue under the ACA, may be destined for resolution by the Supreme Court. However, en route to the Supreme Court it is possible that at least one of the decisions will be reviewed en banc by one of the appeals courts. In the meantime, it is unclear how the 36 states that do not operate their own exchanges will react. Additionally, other states, like Massachusetts, that have been considering migrating from a state exchange to a federal exchange for technical convenience should evaluate whether specific state legislation would be helpful. Some may take steps to establish their own state-operated exchanges, which would qualify them for subsidies even if the plaintiffs prevail. Theoretically, Congress could also solve the problem by amending the ACA to eliminate the ambiguity, but this is not likely to happen in light of the gridlocked state of Congress. Therefore, it remains to be set seen how this issue will play out or how long it will take. If the subsidies are eliminated in the 36 states with federal exchanges, insurance may become unaffordable for millions of Americans who live in those jurisdictions. The employer and individual mandates may also be rendered unenforceable if the plaintiffs prevail. Regardless of the outcome, the Burwell and King cases may well dictate the fate of the ACA for many years to come.

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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.

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