On July 22, 2014, two federal appellate courts issued conflicting decisions, within hours of each other, regarding the IRS final rule published on May 23, 2012 (the “IRS Rule”), intended to implement the exchange-related tax credit provisions of the Affordable Care Act (“ACA” or the “Act”). The decisions will likely lead to another Supreme Court decision addressing fundamental provisions of the ACA. How these issues are reconciled and resolved will affect the further implementation of Obamacare, and even whether its core policies will survive.
ACA Section 1401 provides for tax credits for eligible taxpayers purchasing insurance “through an Exchange established by the State under [ACA Section 1311]” (emphasis added). ACA Section 1311 directs the states to establish health insurance exchanges. It does not refer to federally-facilitated exchanges. Under ACA Section 1321, if a state does not elect to create an exchange that meets federal requirements, the federal government will “establish and operate” one in that state. Currently 16 states and the District of Columbia have established their own exchanges. Thirty-four states rely on federally-facilitated exchanges. The IRS Rule authorized tax credits for insurance purchased on both the state and the federally-facilitated exchanges.
Both decisions addressed whether tax credits are available for residents in the 34 states that have federally-facilitated exchanges. The District of Columbia Court of Appeals (the “D.C. Circuit”), in Halbig v. Burwell, said “no”; the Fourth Circuit Court of Appeals (the “Fourth Circuit”), in King v. Burwell, said “yes.” The decisions turned on readings of the relevant statutory language and application of the principles set out in the 1984 Supreme Court case, Chevron U.S.A. v. NRDC.
The Chevron test is used to assess whether agency action, in this case the IRS, is within the scope of the agency’s authorization, in this case the authority granted by the ACA. The Chevron test has two prongs:
- First, has Congress “directly spoken to the precise question at issue? If the intent of Congress is clear, that is the end of the analysis; for the court as well as the agency must give effect to the unambiguously expressed intent of Congress.”
- Second, “if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.”
The D.C. Circuit relied principally on the first prong, concluding that the governing language, the specific language of Section 1401, was unambiguous: the IRS cannot provide for tax credits in conjunction with federally-facilitated exchanges.
The Fourth Circuit, weighing the conflicting arguments put forth by both parties and looking at Section 1401 in a broader context, concluded there was ambiguity in a very complex statute, and so it moved on to the second prong of the Chevron test: whether the IRS Rule was based on “a permissible construction of the statute.” This review standard, the Fourth Circuit noted, is highly deferential, with a presumption in favor of finding the agency action valid. Under this prong, in concluding that the IRS Rule should be upheld, the Fourth Circuit was “primarily persuaded by the IRS Rule’s advancement of the broad policy goals” of the ACA: a major overhaul of the entire health insurance market in the US, for which the individual mandate and the tax subsidies are integral. Further, the court noted that the IRS Rule took on even greater importance in light of the number of states that chose not to establish their own exchanges.
If ultimately no premium subsidies are available in states with federally-facilitated exchanges, then millions of individuals in these 34 states will be adversely affected. They will be subject to the individual mandate and not have access to the tax credits that would make their coverage affordable. Some who are willing to risk the penalties may cancel their coverage, and, if they do, the risk pools in those states could be subject to increased adverse selection and become economically untenable. This could spell the end of federally-facilitated exchanges and undermine, in a large majority of the states, the benefits that are key to the ACA.
On the other hand, in those same 34 states, employers subject to the ACA’s employer shared responsibility rules would have no exposure for assessable payments on account of employees who receive tax subsidies. Assessable payments are triggered only where one or more employees qualify for a premium tax credit. If no employee is eligible, then there can be no liability for any assessable payments, even if the employer offers no coverage.
Where an employer operates in a mix of states, the analysis is more complicated, but the penalties for offering unaffordable or inadequate coverage could be imposed only with respect to employees living in states that establish exchanges. Or, put another way, employers operating in states that have federally-facilitated exchanges would be placed at a competitive advantage.
What Happens Next
Both cases were decided by three judge panels. Federal appellate courts will sometimes rehear a case before the entire court where the issues involve a matter of exceptional public importance or where the panel’s decision conflicts with a prior decision of the court. For the D.C. Circuit decision, it has already been reported that the Administration will seek review before the entire panel of judges.
The decision of either court could change. If the two circuits end up agreeing, an appeal to the Supreme Court is still possible. The Supreme Court may be inclined to take up the matter, even if there is no disagreement among the circuits, if it sees the case as raising important policy issues (which could be the situation here). A decision by the Supreme Court is unlikely to be reached much before June 2015 and could be as long as two years away. For the immediate future, provided that the D.C. Circuit stays its decision, the IRS final rule stays in effect. And open enrollment to purchase insurance on the exchanges for 2015 begins on November 15.