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Northwest OH Legal Blog

Friday, April 25, 2014

Federal Court in Virginia Rejects Challenge to IRS Rule Concerning Federal Exchanges

A second federal court has ruled that IRS did not exceed its authority by promulgating a rule that allows individuals who buy health insurance from federally facilitated exchanges, as opposed to state-run exchanges, to be eligible for tax credits under ACA. The case is (King v. Sebelius, E.D. Va., No. 3-13-cv-630, 2/18/14). The court dismissed a complaint asserting that the Affordable Care Act provides for such subsidies only when individuals buy insurance on state-created exchanges or marketplaces. Thirty-four states, including Virginia, have opted not to operate their own exchanges.

The decision aligns with that of the U.S. District Court for the District of Columbia, which on Jan. 15 granted the Obama administration's motion for summary judgment in a similar case. That decision, Halbig v. Sebelius, is on a fast-track appeal to the U.S. Court of Appeals for the District of Columbia Circuit. Briefing was completed Feb. 20, and oral argument took place on March 25. Two other cases involving the same issue are pending in federal courts in Indiana and Oklahoma.

At issue is an IRS rule that grants eligibility for subsidies to anyone “enrolled in one or more qualified health plans through an Exchange,”26 C.F.R. § 1.36B-2(a)(1). The ACA set up the exchanges as a means for individuals who weren't able to obtain health insurance elsewhere to have access to affordable coverage. Although Congress intended for exchanges to be created and operated by the states, the ACA gives the federal government a mechanism to create an exchange in a state that opts not to do so.

To ensure health plans are affordable, the ACA provides subsidies, also known as tax credits, for individuals for whom coverage would cost more than 8 percent of their annual household income. The exchange pays the amount of the credit directly to the insurer, thus lowering the net cost of the insurance. These are known as Section 36B tax credits.

The plaintiffs contended that the tax credits are available only to those who buy insurance on state exchanges and, therefore, the IRS exceeded its authority in promulgating a rule that grants eligibility to individuals who buy insurance on federally funded exchanges. They relied on the language of one provision of the ACA, 26 U.S.C. § 36B (b)(2)(A), which says an individual who buys insurance “through an Exchange established by the State” under 42 U.S.C. § 18031, also known as Section 1311, is eligible for the credits.

The government said the plaintiffs' argument “defies common sense,” and moved to dismiss the complaint. The government said the ACA was intended to give access to insurance to people who otherwise might not be able to afford it. According to the government, limiting tax credits to individuals who live in states with active exchanges would be contrary to that goal.

In granting the motion to dismiss, the court said that, when viewed “in a vacuum, it seems comprehensible that the omission of any mention of federally-facilitated Exchanges under section 36B(b)(2)(A) could imply that Congress intended to preclude individuals in federally-facilitated Exchanges from receiving tax subsidies. ”However, when statutory context is taken into account, Plaintiffs' position is revealed as implausible.”

The court construed the law in accordance with Chevron U.S.A., Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837, (1984). Under Chevron, a court first must determine whether it can ascertain the plain meaning of the statute from its language, or whether the law is ambiguous. If the law is silent or ambiguous, then the court asks whether a regulation implementing it represents a reasonable construction of the statute.  The court stated:  “At first blush,” the plaintiffs' argument that Congress intended only to allow subsidies to individuals who buy insurance on state exchanges seems reasonable, the court said. But courts “have a duty to construe statutes as a whole.”

The ACA provides that if a state fails to establish an exchange by Jan. 1, 2014, the Health and Human Services Department will create “such Exchange,” defined in the statute as “an American Health Benefits Exchange established under” Section 1311, the court noted. The law doesn't make a distinction between the two types of exchanges.

Moreover, the court said a number of “statutory anomalies” would arise if the court were to adopt the plaintiffs' reasoning. For example, no one in a state with a federally facilitated exchange would be considered a “qualified individual” to purchase insurance under Section 1312, 42 U.S.C. § 18032, because Section 1312(a)(1) limits eligibility to individuals living in states with state-operated exchanges.  The court also noted that Section 36B(f)'s reporting requirements would be rendered a nullity in states with federally facilitated exchanges.

The court also found no direct support for the plaintiffs' argument that Congress deliberately tied the tax credits to state exchanges in order to prompt states to set up those exchanges as a condition to receiving federal funding. The court stated that if Congress had intended to condition subsidies on state participation, it would have had to give clear notice of that intention to the states. The court said that while the plaintiffs' “common sense” interpretation had a “certain appeal, the court also said “The lack of any support in the legislative history of the ACA indicates that it is not a viable theory.” The court also found that the ACA's legislative history shows that Congress intended to give the states the option of creating their own exchanges, “rather than an intent to coerce or entice states into participating,”

In any case, the court found the IRS rule was entitled to deference under Chevron, as it was a reasonable interpretation of the statute stating: “In light of the applicable legislative history of the ACA and the above discussion of the anomalous consequences of Plaintiffs' reading of the ACA,” the government presented a reasonable interpretation of the law.

The Halbig decision is on a fast-track review in the D.C. Circuit, and the plaintiffs in the present case Feb. 19 filed a notice of appeal to the U.S. Court of Appeals for the Fourth Circuit.  The plaintiffs are considering asking the appeals court to expedite review there as well.


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