Published 11/1/2014
Julie Balch Samora, MD, PhD, MPH; David B. Bumpass, MD

Halbig v. Burwell: An Update on Legal Challenges to the Affordable Care Act

In 2010, Congress enacted the Patient Protection and Affordable Care Act (ACA) with the goal of increasing the number of Americans with health insurance and decreasing the cost of health care. Since then, numerous court cases have challenged various provisions of the ACA. Perhaps the most notable was National Federation of Independent Business v. Sebelius on the constitutionality of the individual insurance mandate, a key provision of the ACA. Now, Halbig v. Burwell (known previously as Halbig v. Sebelius until Sylvia Mathews Burwell succeeded Kathleen Sebelius as Secretary of Health and Human Services) is challenging another essential component of the ACA.

Under the ACA, Americans must either obtain “minimum essential” health insurance coverage or pay a tax penalty imposed by the U.S. Internal Revenue Service (IRS). To facilitate the acquisition of insurance, the law provided for the establishment of healthcare exchanges through which individuals could purchase competitively priced health insurance.

Individual states could choose either to create and manage their own healthcare exchange or to defer to the federal government’s exchange (HealthCare.gov). To date, only 17 states and the District of Columbia have established their own exchanges, with 5 states forming federal/state partnerships and 28 states defaulting responsibility to the federal government.

The question of credits
The core issue in Halbig v. Burwell is whether the ACA granted the IRS power to provide health insurance subsidies in the form of tax credits to residents of states that declined to establish their own health insurance exchanges. The plaintiffs in Halbig v. Burwell contend that the precise language of the law only allows the credits to be issued for insurance purchased through exchanges established by individual states—not for insurance purchased on federal exchanges.

The section in question defines coverage that qualifies for a subsidy as “a qualified health plan…that was enrolled in through an Exchange established by the State.” However, the IRS interpretation, as stated in a 2012 internal rule, is that Congress did not intend to limit subsidies only to those who purchased through state-based exchanges. The IRS has proceeded with issuing credits for insurance purchased on either type of exchange.

One reason this distinction becomes crucial is that the penalty for not obtaining individual health insurance is predicated on the availability of affordable health insurance plans. The plaintiffs argue that if IRS subsidies in states with federal exchanges are deemed illegal, then the individual mandate could arguably fail to apply. The same argument would apply to the mandate that businesses employing at least 50 people also face tax penalties under the ACA for failing to provide health insurance.

In response, the government posits that the intent of the legislation was to grant tax subsidies regardless of whether the state or federal government administered the exchange.

Initial rulings
On July 22, 2014, the U.S. Court of Appeals for the District of Columbia Circuit handed down a 2–1 decision siding with the plaintiffs and striking down federal subsidies for insurance plans purchased on federally operated exchanges. If upheld, this decision might disrupt the implementation and success of the ACA reforms, creating potential confusion and financial repercussions for many of the estimated 4.7 million Americans who chose to buy insurance plans in federally operated health exchanges.

On Sept. 4, 2014, however, the appeals court took the highly unusual step of vacating the July 2014 ruling; instead, the full court (up to 13 judges) will re-hear the case in an en banc hearing. En banc review is done in rare cases when, according to the Federal Rules of Appellate Procedure, a case is of “exceptional importance” or there is a need to “secure or maintain uniformity of the court’s decision.” Of the average 500 cases heard each year by the Court of Appeals for the District of Columbia Circuit, only one, on average, leads to an en banc hearing.

Without question, this court case has both political and regulatory implications. The decision to hold the en banc hearing was applauded by the White House and theoretically favors the administration’s position because Democratic appointees on the court outnumber Republican appointees. Arguments are scheduled to begin on Dec. 17, 2014, and a decision is not expected before spring 2015.

Whether Halbig v. Burwell eventually makes its way to the U.S. Supreme Court remains to be seen. Three other similar cases are currently being heard in the federal court system. Only hours after the initial Halbig v. Burwell decision was handed down, the U.S. Court of Appeals for the 4th Circuit released a conflicting judgment in King v. Burwell, unanimously upholding the PPACA subsidies regardless of whether a state’s exchange is state-run or federally run.

The judges in this case based their decision on the argument that the ACA statute defined “state exchanges” as both those established by the states as well as those run by the federal government. The judges used a legal test known as the Chevron deference to argue that the IRS’ expanded interpretation of the original ACA language was a valid interpretation of the intent of Congress. The plaintiffs have requested that the Supreme Court hear the case; if the case is accepted, a ruling could come as early as June 2015.

On Sept. 30, 2014, a federal district court judge in Oklahoma ruled against the government in Pruitt v. Burwell, essentially handing down an opposite judgment to that in King v. Burwell. This ruling found that the criteria for the Chevron deference were not met, making the IRS rule on insurance subsidies an “invalid implementation of the ACA” that must be vacated. This case will now likely be appealed as well.

The fourth case, Indiana v. IRS, is based on similar arguments against the IRS rule and is currently in process in federal district court.

Impact of decisions
While the legal system continues to adjudicate these challenges to portions of the ACA legislation, the IRS will continue to grant tax subsidies for plans purchased on both state and federal exchanges. There is a low likelihood that these legal cases will result in the undoing of the ACA’s reforms and, given the tectonic changes that the law has already had on the healthcare system, such a result would be highly disruptive to patients and providers. However, these current legal challenges will clearly result in further judicial delineations of the extent and limitations of the ACA.

Julie Balch Samora, MD, PhD, MPH, and David B. Bumpass, MD, were the 2012–2013 AAOS Washington Health Policy Fellows. Dr. Samora is currently pursuing a hand fellowship at Brigham and Women’s Hospital in Boston, and Dr. Bumpass is a clinical instructor at Washington University in St. Louis.

Editor’s Note: Policy Timeout is a series on advocacy issues written by the AAOS Washington Health Policy Fellows.

Bottom Line

  • The issue of tax credits to individuals who purchased healthcare coverage through the federal exchange has been challenged in several states.
  • Lower courts have issued contradictory rulings, virtually ensuring that the U.S. Supreme Court will hear the challenge.
  • It is unlikely that these cases will result in the undoing of the ACA, regardless of the courts’ decisions.

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