Benefits and Compensation

Appeals Courts Issue Opposite Rulings on Health Care Reform Subsidies

Two appeals court rulings with differing views on the availability of premium subsidies for policies purchased through state-based health insurance exchanges establish a circuit split that sets the stage for the U.S. Supreme Court to step in. One court ruled that federal subsidies should be available only in states that run their own exchanges; another upheld the government’s interpretation that subsidies can be issued for insurance purchased on either a state-run or federally run exchange.

The Obama administration should not be allowed to issue subsidies to those buying health insurance from exchanges in states that opposed health care reform, the U.S. Circuit Court for the District of Columbia ruled in Halbig v. Burwell, No. 14-5018, (D.C. Cir., July 22, 2014). In doing so, that court struck down subsidies for individuals buying coverage in federally run health insurance exchanges. The court said subsidies were available only if purchases were made in exchanges run by the states themselves.

The ruling is a threat to the law’s core tenets: the individual and employer mandates. The administration called for a full panel hearing and said it would try to reverse this outcome.

Earlier that same day, the 4th U.S. Circuit Court of Appeals (King v. Burwell, No. 14-1158, 4th Cir., July 22, 2014) ruled the opposite way, saying the statute is ambiguous on this point and subject to multiple interpretations. Deferring to a federal agency’s interpretation and taking into account a broader field of contextual information, the 4th Circuit court upheld the IRS interpretation as reasonable.

The Anti-Reform Ruling

The ruling in which the court chose the supremacy of Congress over the administration’s ability to interpret the health care reform law was written by Circuit Judge Thomas Griffith of the U.S. Circuit Court in Washington, D.C.

Griffith remanded the case with instructions to rule in favor of the plaintiffs and vacate the IRS rule. There was a short concurring opinion by Circuit Judge Raymond Randolph; and a dissenting opinion by Sr. Circuit Judge Harry Edwards, the lone Democratic-appointed judge on the three-member panel.

The plaintiffs objected to an IRS rule they said was not consistent with the statute. The IRS final rule from May 23, 2012 (77 Fed. Reg.30377) said subsidies for health insurance were available whether consumers bought coverage on an exchange, whether state or federally run.

On Jan. 15, the federal district court held that the IRS can issue premium tax credits to individuals whether they enrolled for coverage through a federally or state-run health insurance exchange. Halbig v. Sebelius, 13-CV-0623 (D. D.C., Jan. 15, 2014).The district court said the law’s authors’ intended for subsidies to be available to policy holders from all exchanges, including ones that are federally run and facilitated.

Note: Sixteen states have set up their own exchanges, and the federal government set up (or partnered with states to set up) exchanges in 34 states.

The appeals court pointed to the primacy of statutory language at 26 U.S.C. §36B(c)(2)(A)(i), that restricts the subsidy to insurance purchased on exchanges “established by the State.” The regulating agency had the right to amplify existing Congressional intent, not to add to its construction by supplying elements that didn’t exist in the statutory text before.

The effect of IRS’ interpretation was to broaden the individual and employer mandates.

The Halbig decision, however, would make buying mandated coverage on exchanges more expensive for individuals, but it would also prevent the government from identifying corporations that violated the employer mandate, because tax credits for citizens trigger penalties on employers for unaffordable, inadequate or no health insurance coverage.

The crux of Griffith’s argument was that the law is the text of the statute as enacted by Congress — and not that text altered by the desires of the proponents to advance the statute’s primary objectives. Griffith wrote:

The fact is that the legislative record provides little indication one way or the other of congressional intent, but the statutory text does. Section 36B plainly makes subsidies available only on Exchanges established by states. And in the absence of any contrary indications, that text is conclusive evidence of Congress’s intent.

Griffith said he made the ruling with reluctance, and that states will have the choice of establishing exchanges so as to authorize tax credits for state citizens.

The Pro-reform Ruling

Circuit Judge Roger Gregory, writing for the 4th Circuit, upheld the federal subsidies, saying the law was clearly designed to make the tax credit as widely available as possible.

The district court in King v. Burwell said the statute as a whole clearly illustrates Congress’s intent to make tax credits available in all states. The statute tells states to set up exchanges, but also says that the federal government can step in and set up an exchange on a state’s behalf.

Gregory wrote that the outcome – a situation in which 34 states have a non-functioning exchange, an individual mandate that financially harms millions of individuals, and an employer mandate that does not function – was not Congress’s intent.

The overly literal reading of a few words in the federal statute should not be allowed to override the law’s goals and the interplay of its elements, text and structure, the unanimous 4th Circuit decision held.

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