Full D.C. Appeals Court Takes Up ACA Tax Credit Case

Full D.C. Appeals Court Takes Up ACA Tax Credit Case

WASHINGTON, D.C. — (Mealey’s) The District of Columbia Circuit U.S. Court of Appeals granted en banc review on Sept. 4 of a decision finding that the Patient Protection and Affordable Care Act (ACA) provides tax credits only for individuals who enrolled through state-created exchanges (Jacqueline Halbig, et al. v. Sylvia M. Burwell, et al., No. 14-5018, D.C. Cir.) [an enhanced version of the opinion appealed from is available to lexis.com subscribers].

(This story is an excerpt from Mealey's Affordable Care Act Report.  For information on how to subscribe to this new monthly report, please contact your LexisNexis account representative or call 800-223-1940.)

The court granted the government’s petition, vacated the July 22 ruling and set oral argument for Dec. 17.

The ACA includes provisions for the creation of state health insurance exchanges, which are mechanisms “for organizing the health insurance marketplace to help consumers and small businesses shop for coverage in a way that permits easy comparison of available plan options based on price, benefits and services, and quality.”  The ACA required each state to establish an exchange by Jan. 1, 2014, but also provided that if a state opted out of the exchange, the federal government would establish and operate an exchange within the state.


The ACA encourages states to establish exchanges with a variety of incentives, chiefly the premiums-assistance subsidy for state residents purchasing individual health insurance through state-established exchanges. However, no premium assistance subsidy will be provided unless the citizen pays for the insurance through a state-established exchange.

Thirty-four states declined to establish exchanges, making the federal government responsible for establishing exchanges in those states. In May 2012, the IRS interpreted ACA Section 36B to allow for tax credits through either state-established or the federally established exchanges. The IRS rule states that subsidies shall be available to anyone “enrolled in one or more qualified health plans through an Exchange” and defines “exchange” to mean “a State Exchange, a regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.”  The rule means that premium assistance subsidies are available in all states, including those states that declined to establish their own exchanges.

Virginia resident Jacqueline Halbig, West Virginia resident David Klemencic, Tennessee resident Carrie Lowery and Texas resident Sarah Rump contend that because the subsidy expansion rule makes them eligible for a premium assistance subsidy, they will be disqualified from the exemption to the individual mandate and be subject to its penalties for failure to obtain insurance. Small businesses Innovare Health Advocates, GC Restaurants, Olde England’s Lion & Rose, Olde England’s Lion & Rose at Castle Hills, Olde England’s Lion & Rose Forum, Olde England’s Lion & Rose at Sonterra, Olde England’s Lion & Rose at Westlake and Community National Bank all have headquarters in states that chose not to establish their own insurance exchange. The businesses contend that absent the IRS rule, they would not be subject to assessable payments under the employer mandate contained in the ACA.


The individuals and small businesses sued Kathleen Sebelius, secretary of Health and Human Services (HHS); Jacob Lew, secretary of the Treasury; Steven Miller, acting commissioner of the IRS; the departments and the IRS in the U.S. District Court for the District of Columbia, seeking a declaration that the IRS regulations are unlawful. They asserted a claim for rulemaking in violation of the Administrative Procedure Act (APA) and sought a judgment declaring that the IRS rule violates the APA and a preliminary and permanent injunction. Sebelius resigned and was replaced by Sylvia M. Burwell.

The parties cross-moved for summary judgment. The District Court granted the federal government’s motion. Halbig appealed, arguing that tax credits are available to offset premium costs only when individuals purchase insurance through state-based exchanges.

Divided Panel

On July 22, a divided panel of the D.C. Circuit first held that a tax refund suit would offer only the unlikely chance of limited relief and, therefore, did not prevent standing.

Turning to the merits, the majority said the “federal exchange” is not an “exchange established by the state” and Section 36B does not authorize tax credits for insurance purchased through such exchanges.

“The government urges us, in effect, to strike from section 36B the phrase ‘established by the State,’ on the ground that giving force to its plain meaning renders other provisions of the Act absurd. But we find that the government has failed to make the extraordinary showing required for such judicial rewriting of an act of Congress. Nothing about the imperative to read section 36B in harmony with the rest of the ACA requires interpreting ‘established by the State’ to mean anything other than what it plainly says,” the majority said.

While the government argues that such a reading generates absurd results, the results are not so unreasonable as to justify disregarding Section 36B’s language, the majority said.

In dissent, Judge Harry T. Edwards said that “this case is about appellants’ not-so-veiled attempt to gut the [ACA].”  The claim that Congress intended to tie subsidies to the use of state exchanges “is nonsense, made up out of whole cloth. There is no credible evidence in the record that Congress intended to condition subsidies on whether a state, as opposed to HHS, established that exchange,” Judge Edwards said.


The government petitioned for en banc rehearing on Aug. 1, and the court requested a response.

In its petition, the government argued that “[t]he disruption threatened by the panel majority’s erroneous interpretation and the direct conflict with King [King v. Burwell (No. 14-1158 (4th Cir. July 22, 2014)] present a question of ‘exceptional importance’ warranting en banc consideration.”

“The text, structure, and purpose of the ACA make clear that tax credits are available to consumers ‘regardless of whether the exchange on which they purchased their health insurance coverage is a creature of the state or the federal bureaucracy,’” the government argued.

The government argued that Congress intended for an effective exchange to operate in each state and would not have denied credits for states relying on the federal exchange.

“The majority reached a contrary conclusion only because it deemed a single statutory phrase to be unambiguous, and then asked whether its reading of that phrase rendered ‘absurd” other provisions in the Act,” the government argued.

‘Definitive Answer’

In an Aug. 18 response, the plaintiffs said that although it involves “straightforward statutory construction,” the case is nonetheless of great national importance because of its policy implications. “Those implications, however, are precisely why rehearing would not be appropriate here,” the plaintiffs argued.

“Only the Supreme Court can lift that doubt by giving a definitive answer to the challenge raised here (and in other suits),” the plaintiffs argued.

And because a petition for review of the issue has already been filed with the Supreme Court in King v. Burwell (No. 14-114, U.S. Sup.), en banc review here would merely cause delay without providing any benefit, the plaintiffs argued.

The plaintiffs argued that the government’s argument that the majority erred in ruling that the term “by the state” could not mean the federal government “transparently mischaracterizes both the statute and the panel’s opinion.”

Michael A. Carvin, Jacob M. Roth and Jonathan Berry of Jones Day in Washington represent the plaintiffs. Acting Assistant Attorney General Stuart F. Delery, Deputy Assistant Attorney General Ian Heath Gershengorn, U.S. Attorney Ronald C. Machen Jr., Deputy Branch Director Sheila Lieber and Senior Trial Counsel Joel McElvain, all of the U.S. Department of Justice in Washington represent the government.

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