Obamacare Subsidies Only for State-Run Exchanges, D.C. Cir. Rules

By Brett Snider, Esq. on July 23, 2014 | Last updated on March 21, 2019

A three-judge panel of the D.C. Circuit Court of Appeals has ruled that Obamacare subsidies are only authorized for eligible participants in "State"-established healthcare exchanges, and not for participants in the federally established exchange.

The ruling arises from an IRS interpretation of the laws underpinning Obamacare, specifically allowing taxpayers to take advantage of premium tax credits regardless of whether a state or federal entity created the insurance marketplace. Law professor Jonathan Adler writes for The Volokh Conspiracy that he believes this ruling is truer to the text of the law, though it may not mean the healthcare system many reformers had hoped for.

Why did the D.C. Circuit rule against Obamacare subsidies for participants in federally created marketplaces?

Plain Reading of Healthcare Laws

When interpreting statutes to elucidate their meaning, courts often will default to the plain meaning of the statute, especially when there is no good reason to look elsewhere. It's often difficult to divine Congressional intent, so courts try to apply the law in its plainest meaning.

This is how the Halbig v. Burwell panel sees the interpretation of the phrase "Exchange established by the State," which seems in its plainest meaning to cover only Obamacare healthcare exchanges which were established by one of the 50 states or Washington, D.C. This clashes with the IRS' interpretation of the statutory language, believing that Congress intended to give all eligible consumers who used a healthcare exchange to receive an Obamacare tax credit.

If the wording of the law were ambiguous, then the D.C. Circuit would typically defer to the IRS' interpretation. But the D.C. Circuit panel ruled that the existing law "plainly distinguishes Exchanges established by states from those established by the federal government." The D.C. Circuit believes the context of the law and its plain meaning are enough to ignore the IRS and only include the state-established exchanges (only available in a minority of states) for Obamacare subsidies.

Absurd Results?

Courts must generally avoid even the "plain reading" of statutes if the interpretation would produce an absurd result. For many Obamacare supporters, the absurd result would be that while most Americans are subject to the individual mandate (with some exceptions), only those who use state-run healthcare exchanges can get tax credits.

However, the D.C. Circuit makes a distinction between what may seem "odd" and what is absurd. In its estimation, the Obamacare system will still function reasonably even with a disparity in who gets a subsidy.

Perhaps, like Adler, the court believes that this interpretation of Obamacare subsidy law will provide incentive for the states to act where the federal government cannot. The Obama administration says it plans to appeal the ruling.

Editor's Note: Hours after the D.C. Circuit's ruling, the 4th U.S. Circuit Court of Appeals issued a conflicting ruling on the same issue. You can read our coverage of the 4th Circuit's ruling by clicking here.

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