Appeals court tosses ruling on Obamacare tax credits in win for administration

A federal appeals court in Washington voted Thursday to rehear a case that threatened to derail a central provision of President Obama’s health-care reform law.

The action by the US Court of Appeals for the District of Columbia Circuit means that an earlier ruling against the Obama administration and undercutting provision of tax credits through the ACA is thrown out. The case is to be re-argued Dec. 17 before the full 11-member appeals court.

The appeals court's decision to rehear the case is viewed by analysts as a victory for the Obama administration since it makes it less likely that the US Supreme Court will agree to immediately take up an identical ACA case now pending at the high court.

The action also highlights the importance of Senate majority leader Harry Reid’s decision to invoke the so-called nuclear option to suspend the Senate’s filibuster rules and allow a majority vote to approve three new Obama-appointed judges to the D.C. appeals court.

Prior to Reid’s gambit, the appeals court was split with four Democratic appointees and four Republican appointees. Now the court’s balance has shifted, with seven Democratic appointees to four Republican appointees.

At issue in the case is whether the Affordable Care Act – and a subsequent IRS rule – properly authorize the federal government to provide billions of dollars in tax credits to subsidize the cost of government-mandated health insurance for low- and moderate-income individuals.

Challengers argued that the clear text of the Affordable Care Act bars the federal government from directly providing the subsidies. They said the IRS overstepped its authority when it passed regulations permitting such subsidies despite the statutory restriction set by Congress.

The Obama administration defended the IRS rule as an appropriate use of executive discretion when confronted with an ambiguous statute.  

On July 22, two different appeals courts issued conflicting decisions. A three-judge panel of the Fourth US Circuit Court of Appeals in Richmond upheld the Obama administration’s view that the ACA and the IRS rule properly authorize the federal government to provide tax credits.

Earlier that same day, a three-judge panel of the District of Columbia Circuit ruled 2 to1 that the ACA did not authorize the federal tax credits and that the IRS lacked authority to issue its regulation.

That decision posed a major threat to the viability of health insurance exchanges required under the ACA. The exchanges are the backbone of the health insurance reform effort. They provide the mechanism for state residents to purchase government-approved policies and they also offer the mechanism to provide tax credits to qualifying consumers to help them afford the required coverage.

The problem giving rise to the litigation is that the text of the ACA appears to only authorize payment of federal tax credits to a qualified policy holder who is enrolled in a health care exchange “established by the State.”

This would not be a problem if all 50 states had agreed to fully participate in President Obama’s health-care reforms. They didn’t. Thirty-four states have declined to establish health-care exchanges as called for under the ACA.

To fill the void, the federal government is running exchanges in those states. The question is whether those exchanges are still state exchanges for purposes of the ACA, or whether the federal government is barred from providing tax credits in those 34 exchanges.

The Obama administration insists that the courts must read the ACA in context of a national health-care reform effort.

“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,” Alisa Klein, a Justice Department lawyer, wrote in her brief urging the D.C. Circuit to rehear the case.

“Congress intended an Exchange to operate effectively in each State and gave each State a real choice whether to create that Exchange itself,” Ms. Klein wrote. “It did not deny tax credits to individuals who need them in States that opted to have [the federal government] set up their Exchanges.”

Opponents of the ACA, argue that the bill was written to create incentives for states to establish health exchanges. They say lawmakers assumed that every state would participate, rather than lose out on substantial federal subsidies.

They argue that the law appropriated unlimited funding for states to set up their own exchanges, but earmarked zero for the federal government to set up exchanges.

“We believe we are correct on the merits in this case,” Sam Kazman, general counsel of the Competitive Enterprise Institute (CEI), said in a statement.

“Our position is supported by the text of the Affordable Care Act, and we intend to present our arguments forcefully before the full D.C. Circuit,” he said.

Mr. Kazman, whose organization is funding the challenges to the ACA in both the Fourth and D.C. Circuits, noted that the CEI has filed a petition asking the Supreme Court to take up the Fourth Circuit’s decision.

“We continue to believe that [the US Supreme Court] is the only court that can resolve this issue in the quick and final manner that the country deserves,” he said.

Elizabeth Wydra of the Constitutional Accountability Center said the D.C. Circuit’s decision would likely cause the Supreme Court to back away from the Fourth Circuit case.

“If the Supreme Court follows normal practice, they will not preempt the D.C. Circuit’s review process, as well as other lower courts now hearing similar cases,” she said in a statement.

“Opponents of the ACA have been desperate in moving to get this case before the Supreme Court, and with today’s ruling from the D.C. Circuit – and in the absence of any future split between the circuit courts – it is possible it will never get there,” she said.

The case is Halbig v. Burwell (14-5018).