District Court Follows Halbig Analysis

A federal district court in Oklahoma has ruled that the IRS rule granting premium tax subsidies to persons enrolled in health insurance plans purchased on federally-facilitated Health Insurance Exchanges, and not just those established by a state, is invalid. The court agreed with the analysis of a panel of the U.S. Court of Appeals for the District of Columbia Circuit in Halbig v Burwell and found that Congress’ choice of language in the Patient Protection and Affordable Care Act (ACA) unambiguously allowed for credits for plans purchased only through state-operated Exchanges. Without stating its opinion as to the appropriateness of the subsidy application, the district court quoted the Seventh Circuit in another case of statutory interpretation, stating, “The text is what it is, no matter which side benefits,” The case is Oklahoma v. Burwell (CIV-11-30-RAW).

Background. Section 1311 of the ACA directs states to establish Exchanges. However, where states choose not to operate Exchanges, Sec. 1321 authorizes the HHS Secretary to “establish and operate such Exchange within the State.” The ACA provides that tax credits will be allowed in particular amounts based on the number of coverage months during a taxable year. The Internal Revenue Code (IRC) defines a “coverage month” as one in which a taxpayer is covered by a qualified plan “enrolled in through an Exchange established by the State under Sec. 1311” (26 U.S.C. sec. 36B(c)(2)(A)(i)). The IRS issued a final rule making tax subsidies available to all individuals who purchased qualified plans through an Exchange, regardless of whether it was state-based of federally-facilitated (IRS rule).

The IRS rule has been the subject of challenges throughout the country. A circuit split was created on the same day when a panel of the U.S. Court of Appeals for the District of Columbia Circuit vacated the IRS rule in Halbig v Burwell and the U.S. Court of Appeals for the Fourth Circuit upheld the rule in King v Burwell. Halbig is scheduled to be reheard by the full circuit court, while King has been appealed to the U.S. Supreme Court.

Oklahoma. Oklahoma does not operate its own Exchange. Instead, state residents may enroll in qualified plans through the federally-facilitated Exchange. The state sued the HHS Secretary, claiming that tax credits should only apply to those who purchased policies on an Exchange operated by the state. As a large employer subject to the employer mandate, it argued that it would face a penalty if any of its employees enrolled in coverage through the federally-facilitated Exchange and received a tax subsidy.

Analysis. The district court determined that the compliance costs Oklahoma would face, for example, in training employees to determine which employees would be considered full-time employees under the ACA, were a sufficient injury to establish standing. It then applied the Chevron standard to the IRS rule. Chevron requires courts to “give effect to the unambiguously expressed intent of Congress.” If a statute is ambiguous or silent, however, courts may then determine whether an agency’s interpretation of a statute was based on a “permissible construction.”

The court determined that Congress’ language was unambiguous. The court quoted heavily from the Halbig decision, noting that the IRC authorized credits for a plan purchased “on an Exchange established by the state under section 1311,” rather than simply referring to “an Exchange.” It dismissed the King court’s legal fiction analysis, determining that “established by” and “established on behalf of” have entirely different meanings. The court discussed its role as an interpreter of laws rather than a policy maker, noting that its decision “does not ‘gut’ or ‘destroy’ anything. On the contrary, the court is upholding the Act as written. Congress is free to amend the ACA to provide for tax credits in both state and federal exchanges, if that is the legislative will.” It vacated the IRS rule, noting that vacatur would be stayed pending any appeal.

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