While obtaining conflicting results in different Circuit Courts of Appeal on matters occurs from time to time, it’s not often the conflicting decisions are issued on the same day. But this is what occurred with regard to the validity of IRS regulations for the premium tax credit under IRC §36B.

The Court of Appeals for District of Columbia found that the regulations were invalid in the case of Halbig, et al. v. Burwell, CA DC, 114 AFTR 2d ¶ 2014-5068. However, the Fourth Circuit concluded that the regulations were valid in the case of King v. Burwell, 114 AFTR 2d ¶ 2014‑5071.

When this occurs, the Supreme Court often steps in and, in a case of this importance, is virtually forced to do so. In its decision in the appeal of the Fourth Circuit decision the Court, in a 6-3 decision, decided that the Fourth Circuit was correct—the regulations were valid, though the exact logic of the opinion suggests that the issue actually had to be decided by the United States Supreme Court (King v. Burrell, USSC, No. 14-114, 115 AFTR 2d ¶2015-841)

The Basic Issue

The issue is whether the premium tax credit, first available in 2014, is available to individuals in every state if the policy is purchased from a state-exchange, or whether the credit is limited only to individuals who are purchasing insurance from an exchange in the minority of states that established a state-sponsored exchange. In other states the federal government has established the exchange.

The issue revolves around IRC §36B(b)(2)(A) which provides the credit is available “which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act…”

However, Reg §1.36B-1(k) provides, via cross-reference, that the provisions is meant to include both purely state sponsored exchanges and those established for a state by the federal government.

The (Now Overruled) DC Circuit Decision

The DC Circuit argues this provision is at odds with the plain language of the statute. The statute specifically refers to an exchange established by the state and the IRS regulation cannot change the unambiguous wording of the statute. That is, if Congress wanted to include the federally sponsored exchanges it should have said so in the statute.

In a move that suggests the panel was aware a contrary ruling from another Circuit was anticipated, the Court nevertheless goes on to examine the legislative history and found that there was no evidence that Congress intended to give this credit to federal exchanges.

The Fourth Circuit Opinion (Right Answer, But Not Fully Correct Logic)

That anticipation proved correct, as the Fourth Circuit, looking at the totality of the statute’s language, the context of other relevant portions of the statute and legislative history that it was unclear if Congress did or did not mean for the credit to be available to individuals in federally sponsored exchanges. The Court placed emphasis on the stated policy goals of the Affordable Care Act and noted that the issue would have a major impact on the number of impacted Americans.

Thus, ambiguity was found to exist which, under Chevron standard as interpreted by the Supreme Court in the Mayo Medical Foundation case, opens the door for the IRS to resolve the ambiguity. And, of course, the IRS resolved that ambiguity by issuing regulations that provided the credit to individuals on both federal and state established exchanges.

The issue has importance beyond merely those who will receive (or not receive) a credit. The penalty for individuals applies only to individuals who fail to purchase affordable insurance (defined as 8% of household income). The credit lowers the cost of such insurance—so for certain individuals, not having access to the credit means that they did not have access to (by the terms of the law) affordable insurance and thus are not subject to the penalty.

Similarly, the employer pay or play penalty is only triggered if individuals obtain insurance from an exchange and qualify for support under the law via the §36B tax credit. Thus, it would appear, if there is no state sponsored exchange from which an individual could obtain coverage, there could not be a credit event that would trigger the penalty for the employer.

Note that none of this affects the issue in either case for the states which did establish their own exchanges—but it’s a big issue elsewhere.

The Supreme Court Opinion

Justice Roberts, writing for the majority, found that the credit was essentially for the working of the Affordable Care Act. The opinion found that states had discovered that requiring guaranteed issuance of health insurance to all who applied created a “death spiral” of insurance costs—it created an incentive for those who were healthy to delay buying insurance until they became ill, thus resulting in a population buying insurance who had higher claim experience.

That would result in increased premiums for the policies, increasing the incentive for healthy individuals to cease paying on the policies resulting in even higher premiums. This effect, known as adverse selection, was the reason why pre-existing condition clauses and the ability to deny coverage for new applications who posed excessive risk had been in existence.

The Court noted that the Affordable Care Act, taking its cue from the program originally established in Massachusetts, sought to avoid this problem by requiring individuals to purchase coverage and then providing tax credits to subsidize the coverage for certain individuals for whom the coverage was in excess of certain income percentages.

The problem, as noted above, is that such credits were available, effectively, to taxpayers enrolled in an exchange “established by the States.” The ACA provided that States were to establish exchanges, but if they failed to do so the Federal government would establish one on their behalf. A large number of states did fail to do, resulting in a significant number of taxpayers residing in states with federal (and not state) exchanges.

In the King case taxpayers in Virginia that did not want to purchase insurance argued that the credit was not available to them per the terms of the law. Thus, with no subsidy, the cost of insurance available to them was in excess of 8% of income, meaning they were also exempt from the penalty for failing to have insurance.

The Fourth Circuit had concluded that, as noted above, the language was ambiguous and, under the general rule of deference to agency regulations so long as they are reasonable, found the IRS regulations (which allowed the credit in these cases) to be a permissible interpretation that must be respected. The DC Circuit concluded, using the same basic analysis, that the statute simply was not ambiguous and thus the IRS lacked authority to allow such credits to members of federal exchanges.

The Supreme Court majority found that, due to the importance of this provision to the overall functioning of the Act, this rule would not be tested under the general Chevron test that the Fourth Circuit had applied. The Court agreed that, as both appellate courts had done, the law must be tested for ambiguity first—if not ambiguous then it must be applied that way. But the Court majority found that the overall context of the law made it clear the provision did not clearly provide that such credits were limited to state exchanges only.

But at this point the Court found that while, generally, the agencies resolve such ambiguities, there are cases that are so significant that the issue cannot be left to the agencies. As the majority opinion continues:

This is one of those cases. The tax credits are among the Act's key reforms, involving billions of dollars in spending each year and affecting the price of health insurance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep"economic and political significance" that is central to this statutory scheme; had Congress wished to assign that question to an agency, it surely would have done so expressly. Utility Air Regulatory Group v. EPA, 573 U. S. ___, ___ (2014) (slip op., at 19) (quoting Brown & Williamson, 529 U. S., at 160). It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort. See Gonzales v. Oregon, 546 U. S. 243, 266–267 (2006). This is not a case for the IRS.

The majority then looked at the overall statute. The majority concentrated on the following language as a key point:

First, all parties agree that a Federal Exchange qualifies as "an Exchange" for purposes of Section 36B. See Brief for Petitioners 22; Brief for Respondents 22. Section 18031 provides that "[e]ach State shall . . . establish an American Health Benefit Exchange . . . for the State." §18031(b)(1). Although phrased as a requirement, the Act gives the States "flexibility" by allowing them to "elect" whether they want to establish an Exchange. §18041(b). If the State chooses not to do so, Section 18041 provides that the Secretary "shall . . . establish and operate such Exchange within the State." §18041(c)(1) (emphasis added).

The majority effectively decides that this language provides for an “equivalence” of the two exchanges, effectively making an exchange established by the federal government as the “exchange established by the State” for these purposes.

There is the little problem of that “established by the State” language in Section 36B—such language would be unneeded if all exchanges are the same. While recognizing that the majority’s interpretation renders those words superfluous, it finds that isn’t an absolute requirement of statutory construction noting:

Petitioners and the dissent respond that the words "established by the State" would be unnecessary if Congress meant to extend tax credits to both State and Federal Exchanges. Brief for Petitioners 20; post, at 4–5. But "our preference for avoiding surplusage constructions is not absolute." Lamie v. United States Trustee, 540 U. S. 526, 536 (2004); see also Marx v. General Revenue Corp., 568 U. S. ___, ___ (2013) (slip op., at 13) ("The canon against surplusage is not an absolute rule"). And specifically with respect to this Act, rigorous application of the canon does not seem a particularly useful guide to a fair construction of the statute.

The majority justifies this largely to going on to explain that the Act was, effectively, poorly drafted in a process that, due to many factors involved in the political process, was effectively inevitably going to lead to poorly drafted provisions—so the Court has now resolved such poor drafting that the political process was unable to resolve as it normally would.

What all of this means that, basically, the credits will be available to residents of states with federal exchanges and, due to that, those who qualify for such credits will generally be required to obtain insurance or face the penalty for failing to purchase such insurance. It also means that other Act provisions that depend on such factors (such the large employer penalties triggered by employees obtaining subsidies) also will apply in full in all states.

As well, since the Court indicated that deciding this issue was not within the purview of the IRS, the Court has blocked the IRS (and the Executive Branch in general) from being able to change this resolution in the future through amendments to its regulations. Rather it will be up to the Congress to actually modify the law if a different result is desired.