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D.C. Cir.: Obamacare Subsidies for States Only; 4th Cir. Disagrees

By William Peacock, Esq. on July 22, 2014 | Last updated on March 21, 2019

This might be the quickest circuit split we've ever seen: Within hours of each other, the D.C. Circuit and the Fourth Circuit each ruled on parallel challenges to Obamacare subsidies provided to individuals who purchase insurance through the federal exchange.

The D.C. Circuit "reluctantly" ruled against the government, holding that the unambiguous text of the statute, which provides only for subsides for insurance policies "enrolled in through an Exchange established by the State," supports the plaintiffs' contention that the IRS was not authorized to provide tax credits individuals using the federal exchange. A dissenting judge from the D.C. Circuit, as well as the Fourth Circuit, disagreed, holding that the language of the statute as a whole is ambiguous, and that the IRS's interpretation was a "permissible exercise of the agency's discretion."

It's an instant circuit split, one that could end up before the U.S. Supreme Court as early as next term, depending on whether en banc review in the two courts is sought or granted.

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Unambiguous Statute

The statute provides that tax credits are available to subsidize the purchase of insurance on an "Exchange established by the State under section 1311 of the [ACA]." That seems clear enough, right? By "the State," not the Feds, so the argument goes. And so the D.C. Circuit panel's majority ruled.

The IRS, the dissent, and the Fourth Circuit panel, on the other hand, looked to the statute as a whole: From provision to provision, line to line, the Affordable Care Act bounces back and forth between state and federal exchanges, often treating them as one and the same.

"The fact is that the legislative record provides little indication one way or the other of congressional intent, but the statutory text does. Section 36B plainly makes subsidies available only on Exchanges established by states," Judge Thomas Griffith wrote for the Fourth Circuit panel's majority. "And in the absence of any contrary indications, that text is conclusive evidence of Congress's intent."

Judge Randolph, in concurrence, noted, "an Exchange established by the federal government cannot possibly be 'an Exchange established by the State.' To hold otherwise would be to engage in distortion, not interpretation."

Congress Couldn't Have Been That Stupid

Judge Harry Edwards, in dissent, and perhaps with a bit of naiveté, argued that Congress couldn't have been dumb enough to give states the power to destroy Obamacare.

"At the time of the ACA's enactment, it was well understood that without the subsidies, the individual mandate was not viable as a mechanism for creating a stable insurance market," he wrote. "As Appellants' amici candidly acknowledge, if subsidies are unavailable to taxpayers in States with HHS-created Exchanges, 'the structure of the ACA will crumble.' It is inconceivable that Congress intended to give States the power to cause the ACA to 'crumble.'" (citation omitted.)

Indeed, should the D.C. Circuit majority's opinion win out, Obamacare will be on shaky ground, absent legislative intervention: The enforcement mechanism tied to the employer-provided coverage mandate is triggered by employees' purchase of subsidized coverage. No subsidies, no penalties, no mandate.

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