Health Law

Second federal appeals court rules on health-care law, setting up a same-day circuit conflict

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The Richmond, Virginia-based 4th U.S. Circuit Court of Appeals has upheld a key interpretation of the Obama administration’s health-care law just hours after a contrary ruling by the U.S. Court of Appeals for the District of Columbia Circuit.

At issue is Section 36B of the Internal Revenue Code, which authorizes tax subsidies for low-income people participating in insurance exchanges “established by the state.” The Internal Revenue Service had interpreted Section 36B broadly to allow tax credits for those who buy insurance through federal as well as state insurance exchanges.

In a 2-1 decision issued Tuesday morning, the D.C. Circuit disagreed with the IRS interpretation. The court said Section 36B does not authorize tax credits for low-income residents in the 36 states that have opted out of insurance exchanges, leaving only the federal exchange available.

Just hours later, the 4th Circuit opinion (PDF) said the broad IRS interpretation was “a permissible exercise of the agency’s discretion.” The New York Times had breaking news of the opinion.

The 4th Circuit said the federal government defendants “have the stronger position, though only slightly.” The government had argued it was acting on behalf of the states by setting up its own exchange. The court saw some merit to the argument, pointing to other sections of the health law that require states to set up insurance exchanges but allow the federal government to operate an exchange within the state if the state declines to act.

On the other hand, there is a “common sense appeal” to those challenging the IRS interpretation, 4th Circuit said, and “a literal reading of the statute undoubtedly accords more closely with their position.”

“Having considered the parties’ competing arguments,” the 4th Circuit said, “we remain unpersuaded by either side.” Congress’ intent is unclear, the court said, and the IRS interpretation is entitled to deference.

The 4th Circuit acknowledged that denying tax credits to those who use the federal exchanges “would throw a debilitating wrench into the act’s internal economic machinery” because fewer people would participate in the federal exchanges. Sicker people would continue to use the exchanges, causing premium increases and even less participation among healthy people in an “adverse-selection ‘death spiral,’” the court said.

The tax credits are essential to fulfilling the goals of the health-care law, the court said, and the IRS interpretation advances the law’s purpose.

The D.C. Circuit had also pointed out “major ramifications” of the interpretation of 36B, 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 would be no tax credit under the D.C. Circuit’s holding and no penalty for companies that fail to offer coverage.

The 4th Circuit case is King v. Burwell and the D.C. Circuit case is Halbig v. Burwell.

Related coverage: “Health-care law takes another hit with DC Circuit opinion”

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