BREAKING — D.C. Circuit strikes down tax credits in federal exchanges

July 22

This morning the U.S. Court of Appeals for the D.C. Circuit released its much awaited opinion in Halbig v. Burwell.  In a 2-1 opinion, the Court held that the Internal Revenue Service regulation authorizing tax credits in federal exchanges was invalid.  Judge Griffith, writing for the court, concluded, “the ACA unambiguously restricts the section 36B subsidy to insurance purchased on Exchanges ‘established by the State.”  In other words, the court reaffirmed the principle that the law is what Congress enacts — the text of the statute itself — and not the unexpressed intentions or hopes of legislators or a bill’s proponents.  Judge Randolph joined Judge Griffith’s opinion and wrote a concurrence.  Judge Edwards dissented.  The opinions are available here.

Here is the introduction to Judge Griffith’s opinion:

Section 36B of the Internal Revenue Code, enacted as part of the Patient Protection and Affordable Care Act (ACA or the Act), makes tax credits available as a form of subsidy to individuals who purchase health insurance through marketplaces—known as “American
Health Benefit Exchanges,” or “Exchanges” for short—that are “established by the State under section 1311” of the Act. 26 U.S.C. § 36B(c)(2)(A)(i). On its face, this provision authorizes tax credits for insurance purchased on an Exchange established by one of the fifty states or the District of Columbia. See 42 U.S.C. § 18024(d). But the Internal Revenue Service has interpreted section 36B broadly to authorize the subsidy also for insurance purchased on an Exchange established by the federal government under
section 1321 of the Act. See 26 C.F.R. § 1.36B-2(a)(1) (hereinafter “IRS Rule”).

Appellants are a group of individuals and employers residing in states that did not establish Exchanges. For reasons we explain more fully below, the IRS’s interpretation of section 36B makes them subject to certain penalties under the ACA that they would rather not face. Believing that the IRS’s interpretation is inconsistent with section 36B, appellants challenge the regulation under the Administrative Procedure Act (APA), alleging that it is not “in accordance with law.” 5 U.S.C. § 706(2)(A).

On cross-motions for summary judgment, the district court rejected that challenge, granting the government’s motion and denying appellants’. See Halbig v. Sebelius, No.
13 Civ. 623 (PLF), 2014 WL 129023 (D.D.C. Jan. 15, 2014). After resolving several threshold issues related to its jurisdiction, the district court held that the ACA’s text,
structure, purpose, and legislative history make “clear that Congress intended to make premium tax credits available on both state-run and federally-facilitated Exchanges.” Id. at *18. Furthermore, the court held that even if the ACA were ambiguous, the IRS’s regulation would represent a permissible construction entitled to deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).

Appellants timely appealed the district court’s orders, and we have jurisdiction under 28 U.S.C. § 1291. Our review of the orders is de novo, and “[o]n an independent review of the record, we will uphold an agency action unless we find it to be ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’” Holland v. Nat’l Mining Ass’n, 309 F.3d 808, 814 (D.C. Cir. 2002) (quoting 5 U.S.C. § 706(2)(A)). Because we conclude that the ACA unambiguously restricts the section 36B subsidy to insurance
purchased on Exchanges “established by the State,” we reverse the district court and vacate the IRS’s regulation.

Although this decision is faithful to the text of the PPACA – that is, faithful to the text Congress actually enacted, as opposed to the health care reform some wanted or now wish they had gotten — it will provoke howls of outrage from ACA supporters.  (Let the disdain campaign begin.)

What comes next? The Administration will have to decide whether to seek en banc review of this decision or file a petition for certiorari. If I had to guess, I would say the former is more likely.  Supreme Court review will likely wait until there are more decisions on this question.  A decision remains pending in King v. Sebelius before the U.S. Court of Appeals for the Fourth Circuit and there are two pending cases in district courts.

If this decision is upheld, it will present some three-dozen states with a choice: Establish exchanges so as to authorize tax credits for state citizens while also triggering penalties on employers and individuals who do not wish to purchase qualifying health insurance.  As my co-author Michael Cannon notes, the implications of this decision go beyond its effect on tax credits.  How will states respond?  Time will tell.  As with the Medicaid expansion, it is not entirely clear how states will react now that so much of PPACA implementation is clearly in their hands.

Background on the case can be found here.

I will have additional posts on this decision later today.

Jonathan H. Adler teaches courses in constitutional, administrative, and environmental law at the Case Western University School of Law, where he is the inaugural Johan Verheij Memorial Professor of Law and Director of the Center for Business Law and Regulation.
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