Fate of Health Care Subsidy May Soon Go to Supreme Court

Will the fate of the Obamacare subsidy be in the Supreme Court's hands soon?

Short answer: almost certainly.

In an unusual turn of events, two federal courts of appeals on Tuesday issued opinions on whether the Affordable Care Act permits tax credits on insurance purchased through federal exchanges. Less surprisingly, perhaps, the D.C. Circuit and the Fourth Circuit disagreed, making Supreme Court review almost inevitable.

The ACA provides tax credits to low and middle income purchasers of health insurance. The question in these cases is whether it matters if insurance was purchased on a federal exchange rather than a state exchange. Only 14 states and the District of Columbia have established their own exchanges.

The implications of health insurance purchasers on federal exchanges not being eligible for tax credits are huge. Many people who want to buy insurance would no longer be able to afford it without the subsidy. And many who don’t want to buy insurance, depending on their income, will no longer be subject to the individual mandate that penalizes people for not buying insurance. Similarly, large employers that don’t offer health insurance to full-time employees would no longer have to pay a penalty.

More significantly, the Fourth Circuit—and many others—predict the ACA would crumble if tax credits are unavailable on federal exchanges. The ACA bars insurers from denying coverage or charging higher premiums based on a person’s health. The tax credit combined with the individual mandate was intended to create “an influx of enrollees with below-average spending for health care,” which would counteract adverse selection, where individuals disproportionally likely to use health care drive up the cost.

Regarding the legal issue in this case, the ACA makes tax credits available to those who buy health insurance “established by the State.” The Internal Revenue Service interpreted that language to include insurance purchased on federal exchanges too.

The Fourth Circuit, which upheld the IRS’s interpretation, concluded that “established by the State” is ambiguous, when read in combination with another section of the ACA, and could include federal exchanges. The “broad policy goals of the Act,” described above, primarily persuaded the court that the IRS’s interpretation of the statute was permissible.

The D.C. Circuit, which rejected the IRS’s interpretation, found no ambiguity in the ACA, which “plainly distinguishes Exchanges established by the states from those established by the federal government.”

Commentators are quick to point out that Republican presidents appointed both D.C. Circuit judges in the 2-1 majority and Democratic presidents appointed the unanimous three judges in the Fourth Circuit decision.

It is possible that the losing parties in both cases will first ask the entire panel of the D.C. Circuit or Fourth Circuit to review their case before asking the Supreme Court for review. Until all appeals are exhausted, the subsidy will remain in effect.