Feds’ Argument in Favor of Premium Tax Credit Gains Momentum, Still Under Attack in Federal Courts

Overview


A second federal district court judge has ruled in favor of the government on one of the most serious challenges to the Patient Protection and Affordable Care Act of 2010 (ACA). The court dismissed a challenge to the availability of premium tax credits under the ACA. The plaintiffs now have appeals pending in two federal circuits, and similar challenges remain pending in two other federal trial courts.

In Depth


In King v. Sebelius, U.S. District Court Judge James R. Spencer dismissed a claim that the May 2012 Internal Revenue Service (IRS) rule conflicts with the “plain language” of the Patient Protection and Affordable Care Act of 2010 (ACA). The IRS rule provides that the health insurance premium tax credit will be available to all taxpayers, whether they obtain coverage through a state-based exchange or a federally facilitated exchange (FFE). On February 18, 2014, Judge Spencer, following the decision of Judge Paul L. Friedman a month earlier in the sister case, Halbig v. Sebelius, granted summary judgment to the government. Immediately after, the plaintiffs appealed to the U.S. Court of Appeals for the Fourth Circuit. The Fourth Circuit has granted the plaintiffs’ motion to expedite the King appeal; under the accelerated schedule, written briefing will be completed in March and oral arguments are tentatively set for mid-May. The appeal in Halbig v. Sebelius will be argued March 25, 2014, before the U.S. Court of Appeals for the District of Columbia Circuit.

King v. Sebelius, brought by the same attorneys who filed Halbig v. Sebelius, raises a challenge to the IRS rule by four Virginia residents who, but for the IRS rule’s application, would not be subject to the individual mandate to buy health insurance coverage or face a tax penalty. 26 U.S.C. § 5000A. Virginia is one of the 36 states that will be using the FFE in 2014. The plaintiffs argued that the ACA does not permit premium tax credits to be available to taxpayers obtaining coverage through the FFE, such as Virginians. By contrast, without the tax credit, the plaintiffs would be exempt from the mandate because health insurance would be “unaffordable” to them as a matter of law. See id.

Like Judge Friedman in Halbig v. Sebelius, Judge Spencer found that the plaintiffs had standing to sue and reached the merits of the arguments. Tackling the plaintiffs’ arguments head on, Judge Spencer admitted that, in a vacuum, the plaintiffs’ interpretation of section 1401(a) of the ACA (which enacted Internal Revenue Code section 36B(b)) would be reasonable. When taken in context of the entire statute, however, Judge Spencer deemed the plaintiffs’ position to be implausible.

Judge Spencer found the government’s argument that the plaintiffs’ reading would create anomalies with other portions of the statute to be particularly persuasive. Judge Spencer called the plaintiffs’ interpretation, which would render superfluous the definition of “qualified individual” under section 1312(a)(1) of the ACA (codified at 42 U.S.C. § 18032(a)(1)) in FFE states, “a telltale sign that their reading of section 36B is wrong.” Additionally, Judge Spencer agreed with Judge Friedman’s finding that the ACA’s legislative history supported the government’s argument that Congress afforded the states the flexibility to either set up their own exchanges or let the federal government set one up on their behalf. Judge Spencer rejected the plaintiffs’ argument that Congress meant to threaten states with the loss of premium tax credits if they failed to run their own exchanges. He found that even if Congress intended to impose such a condition on subsidies, Congress must provide clear notice to the states— and it failed to do so.

McDermott is counsel of record for a group of 34 Deans, Chairs and faculty members from Schools of Public Health around the country who have filed an amici curiae brief in support of Defendants-Appellees in Halbig in the D.C. Circuit, and who will be filing one in King in the Fourth Circuit. Both briefs highlight the likely public health impact of eliminating premium tax credits in states using the FFE.

Besides the appeals pending in Halbig and King, the premium tax credit remains under assault in two federal trial courts. Two FFE states, Oklahoma and Indiana, have challenged the premium tax credit, arguing that it is illegal and interferes with state policymaking. Regardless of their outcomes, these decisions will also likely be appealed immediately.

The case Pruitt v. Sebelius, pending in federal court in Muskogee, Oklahoma, is now awaiting the government’s response to the plaintiffs’ summary judgment motion. In that case, Oklahoma complains that the availability of the premium tax credit in FFE states triggers the application of the employer mandate (codified at 26 U.S.C. § 4980H) against the state. If so, the state would be forced to provide health coverage to its employees or face a $72,000 penalty each year. Additionally, the state would face penalties under the reporting requirement, section 1514(c) of the ACA (codified at 26 U.S.C. § 6056(c)), of $100 per return, capped at $1.5 million per year. The state further estimates that compliance with the ACA reporting requirements will cost at least $115,000 each year. In its summary judgment motion, Oklahoma argues that the decision in Halbig v. Sebelius was clearly erroneous and that the plain language of section 1401(a) of the ACA must prevail over any perceived anomalies that may result elsewhere from its strict construction. Oklahoma renews Halbig’s and King’s argument that the Congress intended to use the loss of the premium tax subsidy to compel states to set up their own exchanges, noting recent congressional and executive branch threats to kill the state’s “Insure Oklahoma” program (the state-tailored Medicaid program) unless Oklahoma expanded the program by relaxing its eligibility standards.

Indiana v. IRS, pending in federal court in Indianapolis, is still awaiting an initial conference and a ruling on the government’s motion to dismiss. In that case, Indiana and 39 of its public school districts argue that the IRS rule directly injures the state and school districts in their capacities as employers by subjecting them to increased compliance costs and administrative burdens.

The availability of tax premium credits to consumers purchasing coverage through the FFE affects a large number of enrollees. According to an evaluation released by the U.S. Department of Health and Human Services Assistant Secretary for Planning and Evaluation, as of February 1, 2014, nearly 2 million people had selected a Health Insurance Marketplace plan through the FFE, and 83 percent of those enrollees would be receiving federal financial assistance. In Virginia, Oklahoma and Indiana, 78 percent, 76 percent and 87 percent of enrollees, respectively, have received financial assistance in obtaining health coverage through the FFE.

If the federal circuit courts rule differently on these cases, this may propel the final decision on the matter to the Supreme Court of the United States. It would not be unsurprising if the federal courts continue to accept the government’s argument to permit premium tax credits to be available nationwide to avoid undermining the ACA.

McDermott Will & Emery will continue to monitor developments in these cases and to assess how the decisions reached by the federal courts may affect our clients.