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U.S. Appeals Courts Issue Conflicting Decisions on Whether ACA Permits Tax Subsidies of Health Care Coverage Purchased Through Federal Exchanges

On July 22, 2014, three-judge panels of the U.S. Courts of Appeals for the District of Columbia and Fourth Circuits issued conflicting decisions regarding whether the Affordable Care Act (ACA) permits federal tax credits for health insurance purchased through federal exchanges.  In Halbig v. Burwell, a divided panel of the D.C. Circuit struck down the Internal Revenue Service (IRS) rule providing for such credits.  On the same day, a unanimous panel in the Fourth Circuit upheld the same IRS rule in King v. Burwell.  If the circuit split is not resolved by further review by the courts of appeals en banc, Supreme Court review is very likely.  Even if the D.C. Circuit sitting en banc overturns the panel decision in Halbig and eliminates the circuit split, Supreme Court of the United States review is still a distinct possibility.  

The Issue

The plaintiffs in both Halbig and King seek to invalidate a May 2012 IRS rule providing that health insurance premium tax credits will be available to all taxpayers nationwide, regardless of whether they obtain coverage through state exchanges or federal exchanges.  (McDermott represented a group of deans, chairs and faculty members from schools of public health who filed amici curiae briefs in support of the federal government in both Halbig and King.)  The plaintiffs contend that the plain language of the ACA limits the availability of premium tax credits to health care policies purchased through state exchanges, which only 14 states and the District of Columbia have established.  By the D.C. Circuit’s count, the 36 other states use a federal exchange.  The plaintiffs’ argument is based on statutory language providing that premium tax credits only are available for plans “enrolled in through an Exchange established by the State under section 1311 of the [ACA].”  ACA § 1401(a), codified at 26 U.S.C. § 36B(c)(2)(A)(i) (emphasis added).

The D.C. Circuit’s Decision

In Halbig, the D.C. Circuit panel majority held that the plain language of the ACA restricts the availability of premium tax credits to health insurance purchased through state exchanges.  Applying the Chevron doctrine, which provides that a court must defer to an agency regulation’s reasonable interpretation of an ambiguous statute, the majority concluded that because the statutory language is unambiguous, the court was not required to defer to the interpretation of the statute reflected in the IRS rule.  In dissent, Judge Harry Edwards argued that when read as whole, the ACA is ambiguous, and therefore under Chevron the court should defer to the government’s reasonable interpretation of the statute as reflected in the IRS rule.    

The Fourth Circuit’s Decision 

In King, the Fourth Circuit panel unanimously concluded that the ACA is ambiguous on the question of whether premium tax credits are available for health insurance purchased through federal exchanges.  Applying Chevron, the panel held that it was required to defer to the government’s reasonable interpretation of the ACA as reflected in the IRS rule. 

Key Issues 

Immediate Impact

Neither decision will take effect until the losing side has exhausted the opportunity to seek rehearing en banci.e., consideration by the entire court.  That process will take months to play out.  As a practical matter, regardless of what either court does, it is very likely that any final decision that invalidates the IRS rule will be stayed—either by the issuing court or by the Supreme Court—pending review by the Supreme Court.  The Supreme Court’s review, in turn, likely would not be concluded until June 2015 at the very earliest.  

Potential Impact on the Affordable Care Act

If the D.C. Circuit’s decision is not ultimately reversed, it may have significant consequences for millions of U.S. citizens in states that do not establish state exchanges, and for the health insurance market as a whole. 

The significance of premium tax credits is illustrated by the fact that about 87 percent of consumers enrolled through federal exchanges nationwide (nearly 4.7 million people) are currently eligible to receive premium tax credits, according to federal government data.  The U.S. Department of Health and Human Services estimates that tax credits pay on average 76 percent of premiums of coverage purchased through exchanges.  HHS, Assistant Secretary for Planning and Evaluation Research Brief: Premium Affordability, Competition, and Choice in the Health Insurance Marketplace, 2014 at 3 (Jun. 18, 2014).  Absent the credit, coverage will be less affordable.

The D.C. Circuit’s decision also notes the decision’s practical impact on the individual mandate, which requires individuals to purchase health insurance coverage or face a tax penalty.  See 26 U.S.C. § 5000A.  Without the premium tax credit, individuals such as the plaintiffs in Halbig and King would be exempt from the mandate because health insurance would be “unaffordable” to them as a matter of law.

The D.C. Circuit’s decision also would decrease the number of employers subject to the ACA employer pay-or-play penalty provisions, enforcement of which has been delayed for medium-sized insurers.  See Shared Responsibility for Employers Regarding Health Coverage, 79 Fed. Reg. 8544 (Feb. 12, 2014).  Employers with 50 to 99 workers (about 2 percent of all employers) will be given until 2016 (two years longer than originally envisioned under the ACA) before they risk a federal penalty for not complying.  See id. Companies with 100 workers or more (about 2 percent of all employers) can avoid a fine by offering insurance to 70 percent of their full-time workers—rather than 95 percent of their full-time workers as envisioned by the ACA—in 2015.  See id. 

The pay-or-play penalties are triggered if a covered employer fails to offer health care coverage and an employee purchases coverage through an exchange with the benefit of the tax subsidy.  If there were no premium tax credit available to consumers through the federal exchanges, fewer employers would be subject to penalties for failure to provide coverage, thereby reducing the incentive of employers to provide employee health care coverage.

What’s Next

In Halbig, the government almost certainly will seek en banc rehearing by the entire D.C. Circuit, and rehearing is likely to be granted, given the importance of the issue and the fact that the government will be the party seeking rehearing.  In King, the plaintiffs may similarly seek rehearing en banc, although rehearing is much less likely to be granted in that case.    

If the conflict between the D.C. Circuit’s decision in Halbig and the Fourth Circuit’s decision in King is not resolved through the en banc proceedings in those courts, then Supreme Court review of this issue is very likely, if not practically certain.  If the conflict is resolved by the en banc D.C. Circuit overturning the panel decision in Halbig, Supreme Court review is less likely but still possible because of the sheer importance of the issue. 

In the meantime, unless and until the Supreme Court renders a decision invalidating the IRS rule, any final decision by the D.C. Circuit or the Fourth Circuit invalidating the IRS rule likely will be stayed pending the Supreme Court’s review of such decision.  Therefore, tax subsidies under the IRS rule for health care coverage purchased through federal exchanges should remain available unless and until there is a final decision by the Supreme Court invalidating the IRS rule.  The earliest the Supreme Court likely would issue a final decision would be June 2015.  

© 2022 McDermott Will & EmeryNational Law Review, Volume IV, Number 205

About this Author


Ankur J. Goel is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C. office. 

Ankur has experience in both government and the private sector, where he has assisted clients to successfully navigate significant litigation and enforcement matters.

Eric Zimmerman, Life Sciences Lawyer, Government Strategies Attorney, McDermott Will Emery, Law firm

Eric Zimmerman is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C. office.  Eric is co-chair of the Firm’s Life Sciences Government Strategies team, and is a member of the Firm’s Government Strategies practice and Personalized Medicine team.  Eric is a recognized Medicare law and policy authority who helps clients navigate federal legislative and regulatory processes related to Medicare coverage, coding, reimbursement and compliance.  He primarily counsels and represents hospitals and health...