Federal Appeals Courts Disagree On Subsidies, Creating More ACA Uncertainty

by Leonardo M. Tamburello and Brooks Evan Doyne

Two separate federal appeals courts have come to opposite conclusions regarding key provisions of the Affordable Care Act (ACA) that make subsidies available to individuals who purchase coverage through federally-run exchanges in thirty-six states.  Approximately 4.7 million people, or 86 percent of all HealthCare.gov enrollees, qualify for a subsidy to assist in offsetting the cost of coverage in 2014.

Mid-morning on Tuesday, July 22, 2014 a three-judge panel of the U.S. Court of Appeals for the District of Columbia held that the IRS exceeded their jurisdiction when it extended subsidiaries through federally-run exchanges in the states refused or failed to set up their own.  Hours later, the Fourth Circuit of Appeals sitting in Richmond, Virginia upheld the IRS’s authority to grant the subsidies in question.  Statutory language in the ACA which authorizes subsidies in the form of tax credits specifically for insurance bought “through an exchange established by the State,” (emphasis added) is central to both rulings.  Although the contradictory decisions will have no immediate impact on consumers, they have cast additional doubt on the long-term survival of the ACA.

The first opinion, Halbig v. Burwell, held the IRS regulation authorizing tax credits in federal exchanges was invalid. Judge Griffith, writing for the majority, concluded that “the ACA “unambiguously restricts” the section 36B subsidy to insurance purchased on Exchanges ‘established by the State.’”  The court reaffirmed the principle that the law is what Congress enacts, the text of the statute itself, and not the unexpressed intentions or hopes of legislators or a bill’s proponents.  Acknowledging the far-reaching ramifications of its ruling, Judge Randolph, concurring, noted the majority’s hesitancy, saying, “[w]e reach this conclusion, frankly, with reluctance. At least until states that wish to can set up their own Exchanges, our ruling will likely have significant consequences both for millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly.” If upheld, this decision could lead many, if not most, individuals who received subsidies through a federally-run exchange unable to pay their future healthcare premiums.  The Department of Justice has indicated its intention to file a request that all eleven judges of the D.C. Circuit Court of Appeals hear the case en banc.

The ink had barely dried on Halbig when a three-judge panel of the Fourth Circuit Court of Appeals issued a unanimous contradictory ruling in King v. Burwell, a separate case that raised the same challenge to subsidies provided through federally-run exchanges.  In King, the court remarked that challengers could not “rely on our help to deny to millions of Americans desperately-need health insurance through a tortured, nonsensical construction of a federal statute whose manifest purpose, as revealed by the wholeness and coherence of its test and structure, could not be more clear.”

The ACA has been subject to a series of legal challenges since it was enacted four years ago.  Although it has not escaped unscathed, it has thus far survived any cataclysmic damage from the courts.   It seems all but certain that the Government will ask that Halbig be heard en banc by the D.C. Circuit Court of Appeals where Democratic appointees outnumber Republicans seven-to-four.  If the judges vote along partisan lines, that would resolve the split with King from the Fourth Circuit.  These cases are not the last word on this issue, however; similar challenges to the federal subsidies are currently before courts in Oklahoma and Indiana.

Although the Supreme Court could be petitioned to review the matter, the Court is unlikely to intervene unless there is an obvious clash among Courts of Appeals.  Because it is not yet clear if a true schism exists among the Courts of Appeal on this issue, the Supreme Court is unlikely to consider the issue imminently, but would be more likely to do so if a split emerges in the coming months among the lower courts.  For the time being, the Government has indicated that the IRS will continue to provide ACA subsidies in the form of tax credits.