Does the Affordable Care Act (ACA) authorize the payment of premium and copayment subsidies, or “premium assistance subsidies,” to individuals enrolled in a federally established Exchange? On July 22, 2014, two federal courts issued conflicting opinions on this subject. The U.S. Court of Appeals for the District of Columbia Circuit, in Halbig v. Burwell, concluded that the subsidies were not available for individuals enrolled in federal Exchanges. By contrast, the U.S. Court of Appeals for the Fourth Circuit held in King v. Burwell that it was reasonable for the Internal Revenue Service (IRS) to conclude that the ACA allowed for the subsidies in federally established Exchange plans.

The premium assistance subsidies are authorized under Section 36B of the ACA for taxpayers covered by a plan on an Exchange “established by the State under section 1311”; federal Exchanges are authorized under section 1321. Treasury tax regulations authorized premium assistance for coverage purchased under either a state or a federally established Exchange. Both circuits reviewed the challenge to the Treasury tax regulations using the two-step analysis established by Chevron U.S.A., v. Natural Res. Def. Council, Inc., but reached entirely different conclusions.

The outcome of this controversy is critical to the continued viability of the insurance market reforms under the ACA. If premium assistance subsidies are not available in the 34 states where only federal Exchanges are offered, not only will affordable coverage be unavailable to millions of newly enrolled individuals, but the ACA’s employer mandate provisions will also be completely undermined in those states.

Without the premium assistance subsidies for low-income individuals, the Exchange plans will become unaffordable to many of the new enrollees. Many are likely to drop out without penalty because the individual coverage mandate does not apply if coverage is unaffordable. In addition, the penalties under the employer coverage mandate only apply if an employee of a large employer enrolls in an Exchange plan and receives a subsidy. Without subsidies, there would be no employer penalties in those states.

In a majority opinion of two out of three D.C. Circuit judges, the court in Halbig v. Burwell found that the IRS abused its discretion when it authorized premium assistance subsidies for individuals who purchase health insurance from a federal Exchange. In the first step of its Chevron analysis, the D.C. Circuit concluded that the plain meaning of the statutory text requires that subsidies are only available under the ACA for individuals who purchase health insurance from an Exchange established by a state. The court considered the ACA’s legislative history and declined to adopt an alternate interpretation for lack of evidence that the plain meaning of the statute is “demonstrably at odds with the intentions” (emphasis added) of the ACA.

Just hours after the Halbig decision was released, the Fourth Circuit published its opinion in King v. Burwell. A Fourth Circuit panel concluded that IRS’s interpretation of the statute is a reasonable policy choice and therefore not an abuse of the agency’s discretion. Unlike the D.C. Circuit, the Fourth Circuit found that the plain meaning of the statutory language was not clear and that certain sections of the statute, when examined together in context, are irreconcilable. Finding that the plain meaning of the statute was unclear, the Fourth Circuit moved to the second step of the Chevron analysis and concluded that the IRS’s final rule implementing the premium assistance subsidies for coverage obtained from both the state and federal Exchanges is a permissible exercise of agency discretion.

Appeals for hearings before the full courts of appeals and ultimately for a review by the U.S. Supreme Court are expected. In the meantime, the Obama administration has announced that it intends to continue providing the subsidies in federal Exchange plans.

As the federal health care reform effort gained steam, Ballard Spahr attorneys established the Health Care Reform Initiative to monitor and analyze legislative developments. With federal health care reform now a reality, our attorneys are assisting health care entities and employers in understanding the relevant changes and planning for the future. They also have launched the Health Care Reform Dashboard, an online resource center for news and analysis on developments under the ACA.

For more information, please contact Jean C. Hemphill at 215.864.8539 or, Brian M. Pinheiro at 215.864.8511 or, Edward I. Leeds at 215.864.8419 or, Diane A. Thompson at 424.204.4334 or, or Alisa M. Huth at 215.864.8516 or