Healthcare Business News
Joel Ario, managing director at Manatt Health Solutions

Courts issue conflicting rulings on federal insurance subsidies

By Joe Carlson
Posted: July 22, 2014 - 3:45 pm ET

(Story updated at 7:25 P.M. ET on Tuesday, July 22.)

The federal courts kicked up new uncertainty for the healthcare reform law with conflicting rulings on whether the U.S. can help consumers buy health plans on federally run exchanges. If states without their own exchanges are depriving their citizens of subsidies to health insurance, the HHS could side-step the controversy by making it much easier for states to set up their own exchanges.

The decisions address whether the IRS can offer subsidies to low- and middle-income Americans who live in the 34 states without their own insurance exchanges. A three-judge panel of the 4th U.S. Circuit Court of Appeals ruled unanimously that the subsidies are legal, while the U.S. Court of Appeals for the District of Columbia Circuit ruled that they are not, with the judges splitting 2-1.

Appeals are in the works, but a Supreme Court decision on the matter is likely at least a year away.

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More than 6 million people in those states received the subsidies, and most are unlikely to renew coverage without the subsidies, which averaged $2,900 per enrollee. But it's not clear how the uncertainty raised by Tuesday's rulings will affect participation in the open enrollment period for 2015 exchange plans later this year.

One way to resolve the problem would be to let more states use the federal exchange technology while still technically running their own exchanges. That would be similar to what Oregon and Nevada were recently allowed to do when their attempts at state-run exchanges failed, said Joel Ario, a managing director at Manatt Health Solutions and a former HHS official over the insurance exchanges.

“You could imagine a scenario where all that a governor has to do to avoid this parade of horribles is send a letter to HHS saying we want to be a state exchange and we will enforce the Affordable Care Act,” Ario said.

An online post from University of Michigan Law School Assistant Professor Nicholas Bagley touched on a similar theme: “A state could, for example, establish an exchange and appoint a state-incorporated entity to oversee and manage it,” Bagley wrote. “That state-incorporated entity could then contract with to operate the exchange. On the ground, nothing would change. But tax credits would be available where they weren't before.”

Neither of Tuesday's rulings will go into effect for 52 days, and at least one of them appears likely to be granted a type of appeal that would automatically stay the decisions until final outcome of the case is decided.

At issue in the cases are rules published by the IRS in 2012 that provide tax credits to buy insurance. Three judges with the 4th Circuit in Richmond, Va., ruled in King v. Burwell (PDF) that Congress intended to make those subsidies widely available to make insurance more affordable. That meant the IRS had a right to interpret the strict wording of the Affordable Care Act to mean all states would be eligible for tax-credits.

Just two hours earlier, the D.C. Circuit Court made the opposite ruling on the same question.

The judges in Washington ruled 2-1 in Halbig v. Burwell (PDF) that the wording of the reform law says unambiguously that subsidies are only available “through an exchange established by the state,” which at least 34 states did not do. That meant the IRS did not have the right to offer subsidies to millions of people living in those 34 states.

The White House immediately vowed to appeal the Washington decision for full review before the 11-member D.C. Circuit Court, which could overturn Tuesday's ruling in Washington. Seven judges on that court were appointed by Democratic presidents, and four were appointed by Republicans.

Filing for that appeal would immediately stay Tuesday's ruling. If the Washington court eventually comes to agree with the judges in Virginia, that could deprive the law's challengers of the “split” in circuit-court decisions that traditionally would trigger a review at the nation's highest court.

“It's not clear at all that the two circuits will disagree over the legality of the IRS rule,” the University of Michigan's Bagley said.

The White House may be eager to avoid a showdown before the conservative-leaning Supreme Court, which has issued several critical decisions on the healthcare reform law including a June 30 ruling in Burwell v. Hobby Lobby exempting some for-profit companies from a mandate to cover contraceptives in employee insurance plans.

Regarding the subsidies, the key legal point on which the two courts disagreed Tuesday was whether there was enough ambiguity in the wording of the 2010 reform law to defer to the IRS' interpretation to offer subsidies in all states.

The judges in Washington ruled that the wording was clear and enforcing it would not create an “absurdity,” so the court should not wander into an analysis about what lawmakers intended or whether the IRS rule was a reasonable interpretation.

“The government urges us, in effect, to strike … the phrase 'established by the state,' on the ground that giving force to its plain meaning renders other provisions of the act absurd. But we find that the government has failed to make the extraordinary showing required for such judicial rewriting of an act of Congress,” the two judges in Washington wrote.

But the judges in Richmond disagreed, finding that the other sections of the reform law pointed to several equally plausible interpretations, and that Congress' true intent was impossible to discern from the law or the 2009-10 hearings on the bill. Lacking evidence of congressional intent, courts are generally supposed to uphold agency rules.

“Confronted with the act's ambiguity, the IRS crafted a rule ensuring the credits' broad availability and furthering the goals of the law. In the face of this permissible construction, we must defer to the IRS rule,” the Virginia judges wrote. “We are satisfied that the IRS rule is a permissible construction of the statutory language.”

Follow Joe Carlson on Twitter: @_JoeCarlson

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