ACA Federal Exchange Subsidy: Federal Appeals Courts Rule for, Against Availability

Author: Gloria Ju

July 23, 2014

On July 22, two federal appeals courts issued opposing opinions on whether the Affordable Care Act (ACA) subsidy is available for health insurance purchased on the federal health care exchange.

In Halbig v. Burwell, a panel of the US Circuit Court of Appeals for the District of Columbia Circuit ruled 2-1 that the subsidy is only available to those who bought insurance through an exchange run by one of the states or the District of Columbia. Shortly after, a unanimous panel of the 4th Circuit Court of Appeals decided in King v. Burwell that individuals who buy health insurance on the federal exchange are eligible for the subsidy.

The ACA enacted §36B of the Internal Revenue Code, which makes tax credits available as a form of subsidy to individuals who purchase health insurance through health benefit exchanges that are "established by the State under section 1311" of the ACA. The ACA does not explicitly state that the subsidy is available if states choose not to establish an exchange. The IRS broadly interpreted §36B to authorize the subsidy for health insurance purchased through an exchange established by the federal government.

The plaintiffs in Halbig argued that the IRS's interpretation was not consistent with §36B. A district court had sided with the IRS, ruling that the ACA's text, structure, purpose and legislative history made clear that Congress intended to make premium tax credits available on both state and federal exchanges. In overturning the lower court's decision, the appeals court wrote that the ACA "unambiguously" restricts the §36B subsidy to insurance purchased on state-run exchanges.

The court in King, however, found that "the applicable statutory language is ambiguous and subject to multiple interpretations." The King court gave deference to the IRS's interpretation and upheld the rule as a permissible exercise of the agency's discretion.

James P. Anelli, a shareholder at LeClairRyan, expects the Obama administration to appeal the Halbig decision and thinks the King decision will be appealed as well. If a split still remains after the full appeals courts review their respective case, the issue will likely end up before the Supreme Court. "In the meantime, I expect all decisions to be stayed pending a final resolution, which will mean that subsidies will continue to be paid," said Anelli.

"Many employers may assume, fueled by the media, that this is the end of the ACA. That is very unclear," Anelli stated. "Politically how this shakes out is also very unclear, as the states can always start their own exchange. The real question is how quickly this gets resolved and by whom."