July 23, 2014

Halbig v Burwell: D.C. Appeals Court Strikes Obamacare Health Insurance Subsidies

Holland & Knight Regulatory Litigation Blog
Miranda A. Franco

The U.S. Court of Appeals for the D.C. Circuit ruled, in a 2-to-1 decision, in Halbig v. Burwell that the IRS is not authorized under the Affordable Care Act (ACA) to provide tax credits intended to subsidize the cost of premiums of health insurance that individuals purchased on the federally-facilitated exchange. The Court did not order the subsidies stopped immediately, recognizing that the Obama administration will appeal.

The Court found that the Internal Revenue Service exceeded its statutory authority when it issued its May 2012 rule that provided health insurance premium subsidies (in the form of tax credits) to individuals purchasing coverage through the federally-facilitated exchange. To help low-income individuals purchase insurance through their exchange, the ACA provides subsidies in the form of tax credits, which should be administered "through an exchange established by the state." The ACA delegates primary responsibility to the states for establishing their own exchanges, but also provides that the federal government may establish and operate a federal exchange in any state that decides not to set up its own exchange. In its May 2012 rule, the IRS interpreted this provision to allow it to provide tax credits to qualified individuals "enrolled in one or more qualified health plans through an Exchange," including the federal exchange.

As a threshold matter, the court rejected the government's argument that Plaintiffs lacked standing, specifically because they had not suffered a concrete injury in fact. The court found that plaintiffs had standing because the subsidies effectively increased their incomes above the minimum threshold to be subject to the ACA's health insurance individual mandate. Thus, by bringing them within the scope of the individual mandate, the subsidies caused a sufficient injury for standing purposes.

On the merits, the court applied the traditional Chevron analysis, finding that the plain meaning of the ACA's statutory language clearly does not authorize the IRS to provide subsidies to individuals who enrolled in a health plan through the federal exchanges. The government's arguments to the contrary based on the ACA's legislative history and other considerations did not sway the court.

Only 16 states and the District of Columbia opted to create their own exchanges in time for the 2014 plan year.  Thus, if the subsidies are ultimately blocked, an estimated 7.3 million people — about 62 percent of those expected to enroll in federal-run exchanges by 2016 — could lose out on $36.1 billion in tax credits, according to a report from the Robert Wood Johnson Foundation. The success of the Affordable Care Act hinges crucially on the subsidies. The primary purpose of the law was to extend affordable health coverage to millions of Americans; the two main ways the law achieves this is through the Medicaid expansion and through subsidized coverage on the insurance exchanges.

Notably, just hours after the D.C. Circuit's ruling in Halbig v. Burwell, the Court of Appeals for the Fourth Circuit issued a contrary opinion in King v. Burwell, unanimously finding that the statute's ambiguity allows for subsidies for those who signed up using either state exchanges or federal exchanges. Together, these cases have had the unheard of effect of creating a circuit split in a single day, and this division will almost assuredly be compounded by two additional cases challenging the IRS's rule (Pruitt v. Burwell in the Eastern District of Oklahoma and Indiana v. IRS in the Southern District of Indiana), both of which are very likely to be appealed, regardless of their outcomes at the district level.

Halbig v. Burwell, No. 14-5018 (D.C. Cir. July 22, 2014)

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