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.