A Mixed Message on Obamacare from Two Federal Circuits

By Greg Curfman and Holly Fernandez Lynch

It was as if lightning had struck twice in the same place.

On Tuesday two pivotal federal circuit court opinions that could dramatically impact the future of Obamacare were unexpectedly issued within hours of each other. And what’s more, the two opinions reached opposite conclusions on the same question, setting the stage for further appeals and possible Supreme Court review, potentially bringing the Affordable Care Act (ACA) before the high court for the third time since its passage.

At issue in both circuit court cases was the legality of providing subsidies in the form of Internal Revenue Service tax credits for the purchase of health insurance on the federal exchange (Healthcare.gov).

In a decision that stunned Obamacare supporters–but elated opponents–a three-judge panel of the Federal Appeals Court for the DC Circuit ruled in Halbig v. Burwell that the purchase of health insurance on the federal exchange may not be subsidized by IRS tax exemptions. This judgment would leave millions of Americans with earnings between 133% and 400% of the federal poverty level without affordable health insurance, and it would also threaten the viability of the employer mandate.

In contrast, in a unanimous (3-0) opinion in a nearly identical case, King v. Burwell, the Federal Appeals Court for the Fourth Circuit in Richmond, VA, came to the opposite conclusion.

Both decisions were based on different parsing of language in Section 1311 of the ACA, which authorizes federal subsidies for the purchase of insurance on an “Exchange established by the State.” Two of the three judges on the DC Circuit panel (Judges Thomas Griffith and A. Raymond Randolph) interpreted this language to mean that the subsidies do not apply to the federally-established exchange. Judge Harry Edwards dissented. Only 14 states (and the District of Columbia) have set up and administer their own exchanges, while the remaining 36 states have opted to rely instead on the federal exchange, either out of convenience or political opposition to the ACA’s requirements; the federal exchange was the default upon state inaction. The DC Circuit ruled that citizens of these 36 states do not qualify for subsidies.

In May 2012, the Internal Revenue Service issued a regulation, based on its interpretation of the language in the ACA, that subsidies in the form of tax credits would be applicable on both the state and federal exchanges. The DC Circuit’s decision overrules this regulation, at least within the court’s jurisdiction. The opinion, written by Judge Thomas Griffith, concluded that, “Nothing…requires interpreting ‘established by the State’ to mean anything other than what it plainly says.” Clearly the majority opinion relied heavily on a literal reading of the statutory language.

In contrast, the three judges on the Fourth Circuit panel parsed the law from a different perspective. The opinion, written by Judge Roger Gregory and joined by Judges Andre Davis and Stephanie Thacker, concluded, “As explained, we cannot discern whether Congress intended one way or another to make the tax credits available on HHS-facilitated Exchanges. The relevant statutory sections appear to conflict with one another, yielding different possible interpretations. In light of this uncertainty, this is a suitable case in which to apply the principles of deference called for by Chevron.”

Judge Davis explained it more colloquially with an analogy about pizza from Pizza Hut versus pizza from Domino’s: “If I ask for pizza from Pizza Hut for lunch but clarify that I would be fine with a pizza from Domino’s, and I then specify that I want ham and pepperoni on my pizza from Pizza Hut, my friend who returns from Domino’s with a ham and pepperoni pizza has still complied with a literal construction of my lunch order.”

Given that two circuit courts have issued opposing decisions (and there are two more similar cases in other jurisdictions yet to be heard), what are the next steps in the legal pathway? The Department of Justice immediately issued a statement that it will appeal the Halbig decision and request an en banc hearing before the entire panel of judges on the Court of Appeals, while the IRS continues to offer subsidies.

It is up to the 11 active judges on the DC Circuit to decide whether to conduct en banc review. Seven of the 11 were appointed by Democratic presidents and 4 by Republican presidents. Four of the 7 Democratic appointees were recently appointed by President Obama using the “nuclear option” invoked by Senate Majority Leader Harry Reid. As recently discussed by Matthew Lawrence in another Bill of Health post, if the case were accepted by a vote of the active judges, it would be heard by them along with the two senior judges on the Halbig panel.

No announcement has yet been forthcoming from the plaintiffs in King about an appeal plan. If an en banc hearing in Halbig overturned the decision by the three-judge panel, then the two circuits would be in agreement, which might mean there would be no Supreme Court review. Nonetheless, there is still every possibility that the final ruling will eventually be made by the Supreme Court. Until the matter is definitively resolved by the courts, the federal-exchange subsidies will not be cancelled.

If, hypothetically, subsidies on the federal exchange were ultimately ruled impermissible, what would be the consequences for consumers? Earlier this month the Urban Institute issued a report on the potential implications. Using a Health Insurance Policy Simulation Model, the researchers estimated that in 2016 11.8 million individuals would be expected to enroll for health insurance on the federal exchange. A total of 7.3 million of them would qualify for subsidies, and without this financial support they would be unlikely to afford health insurance. This amounts to $36.1 billion in subsidies, which would be lost if the DC Circuit’s decision in Halbig were ultimately to prevail.

In addition to affecting the insurance coverage of over 7 million individuals, the court’s decision in Halbig would also have major implications for the employer mandate, which requires employers with more than 50 full-time employees to provide health insurance for them or pay a substantial penalty. The penalty is triggered when just one of a company’s employees purchases health insurance on an exchange and receives a subsidy to do so. Since the Halbig decision, if it stands, would eliminate subsidies on the federal exchange, there could be no trigger in states on the federal exchange, effectively negating the employer mandate in these 36 states.

The mandate has already been a source of considerable controversy, and some employers—and politicians of both parties–would not be sorry to see it go. Its implementation has been delayed by the Obama administration, and, adding to the political theater, the president’s decision to delay it is ironically the focus of a lawsuit being brought against him by House Speaker John Boehner for abuse of power.

A solution for states that rely on the federal exchange would be to establish their own state-based exchanges. But this is not nearly as simple as it might seem; it is technically quite challenging, would demand considerable resources, and would require substantial time.

If Halbig, King, or both do ultimately reach the Supreme Court, what is the likely outcome? Given that Justices Scalia, Kennedy, Thomas, and Alito have shown no support for the ACA in their previous judgments on the law, the decision might well rest with Chief Justice John Roberts. While the Chief Justice saved the individual mandate in 2012 by declaring it a tax within the constitutional authority of Congress to levy, he ruled mandatory Medicaid expansion unconstitutional and provided a critical vote in Hobby Lobby to overrule the contraceptive mandate. How would the Chief Justice vote on the issue of federal-exchange subsidies? We can’t imagine who could know other than the Chief Justice himself.

Holly Fernandez Lynch

Holly Fernandez Lynch, JD, MBE, is the John Russell Dickson, MD Presidential Assistant Professor of Medical Ethics in the Department of Medical Ethics and Health Policy at Penn’s Perelman School of Medicine. She is also the Assistant Faculty Director of Online Education, helping to lead the university’s first online master’s degree, the Master of Health Care Innovation, and other online offerings.

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