Health Law

Health-care law takes another hit with DC Circuit opinion

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Updated: Low-income residents in states that opt out of insurance exchanges under the Obama administration’s health care law aren’t eligible for tax credits, a federal appeals court has ruled.

The 2-1 decision (PDF) by the U.S. Court of Appeals for the District of Columbia Circuit is a major blow to the health-care law, report the Chicago Sun-Times, the Washington Post and the New York Times. Residents in 36 states are affected because they purchase insurance through the federal insurance exchange, rather than state exchanges.

The appeals court based its decision on a reading of Section 36B of the Internal Revenue Code, which was enacted as part of the Affordable Care Act. The Internal Revenue Service had interpreted the law broadly to allow tax credits for those who buy insurance through federal as well as state exchanges. The appeals court disagreed.

“We conclude that the ACA unambiguously restricts the Section 36B subsidy to insurance purchased on exchanges ‘established by the state,’ ” Judge Thomas Griffith wrote in the majority opinion.

“We reach this conclusion, frankly, with reluctance,” Griffith wrote. “At least until states that wish to can set up exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal exchanges and for health insurance markets more broadly.”

The broad IRS interpretation “has major ramifications,” Griffith said, particularly with respect to the employer mandate. That mandate penalizes large employers that fail to offer health coverage if one or more of their employees enroll in a health plan for which a tax credit is allowed. In states where only the federal exchange is available, there is no tax credit and no penalty for companies that fail to offer coverage.

The IRS interpretation also broadens the number of low-income individuals who are required to purchase insurance, the appeals court said. The law does not penalize low-income individuals who fail to buy health insurance if the cost of insurance, minus tax credits, exceeds 8 percent of their projected household income. Without tax credits, a greater number of low-income people will be exempt from the law.

In a dissent, Judge Harry Edwards said the case is about a “not-so-veiled attempt to gut” the health-care law. An amicus brief supporting those challenging the law acknowledges that “the structure of the ACA will crumble” absent tax subsidies in states with federal exchanges, Edwards said. “It is inconceivable that Congress intended to give states the power to cause the ACA to ‘crumble,’ ” Edwards wrote.

If states can block subsidies by refusing to establish an exchange, a large number of people would be exempted from the insurance mandate, causing “the risk pool to skew toward higher risk people, and effectively cut the heart out of the ACA,” Edwards said.

“The majority opinion ignores the obvious ambiguity in the statute,” Edwards wrote, “and claims to rest on plain meaning where there is none to be found.”

The case is Halbig v. Burwell.

In a ruling issued just hours later, a different federal appeals court upheld the IRS interpretation. The Richmond, Virginia-based 4th U.S. Circuit Court of Appeals said it was unpersuaded by either side’s competing arguments, so the IRS interpretation was entitled to deference. The 4th Circuit case is King v. Burwell.

Subsequent developments: “Second federal appeals court rules on health-care law, setting up a same-day circuit conflict”

Updated at 1:40 p.m. to refer to the 4th Circuit opinion.

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