King v. Burwell (Summary)

AFFORDABLE CARE ACT

King v. Burwell
No. 14-1158 (4th Cir. July 22, 2014)

The U.S. Court of Appeals for the Fourth Circuit ruled that the Internal Revenue Service (“IRS”) acted appropriately in determining that the Patient Protection and Affordable Care Act (“ACA”) authorized tax subsidies for individuals who purchase insurance policies on the federal health exchange.

The plaintiffs in this lawsuit had challenged the IRS’s interpretation of a particular section in the ACA addressing “premium assistance amounts.” Under the ACA, premium assistance amounts provide eligible individuals with tax credits intended to reduce the cost of acquiring a health insurance policy. The dispute involved a portion of the law that describes the formula used to calculate these premium assistance amounts. That formula refers specifically to policies purchased on “an Exchange established by the State.” The term “Exchange” means a health exchange, which is a kind of marketplace where people can compare and purchase different insurance plans. At this time, 16 states have established their own exchange. The rest use exchanges run wholly or partially by the federal government.

Each party in the lawsuit disputed the appropriate interpretation of the phrase “Exchange established by the State.” The plaintiffs argued that the court should read this phrase narrowly, limiting tax credits to individuals who purchased their policies on one of the 16 state-run exchanges. In contrast, the IRS argued that reading the phrase so narrowly would lead to significant contradictions with other parts of the ACA. The IRS had originally interpreted this law to permit the federal government to “stand in the shoes” of a state when creating an exchange. Under the IRS’s reading, individuals would not be denied tax credits simply because they did not purchase their policy from a state-run exchange.

Faced with this challenge, the Fourth Circuit acknowledged the “common-sense appeal” of the plaintiffs’ literal reading of the law. The judges contrasted this with the IRS interpretation, which they found slightly stronger because it was more consistent with other portions of the law. Although they preferred the IRS interpretation, the judges concluded that the law was ambiguous enough to permit both readings of the statute.

Under a body of principles known as “administrative law,” courts must sometimes defer to an agency’s interpretations of an ambiguous law. This is limited to those instances where Congress has authorized the agency to administer or execute the portion of the law in question. In this case, since the ambiguous law was located in the Internal Revenue Code, which the IRS administers, the court concluded that it must defer to the IRS’s legal interpretation. Consequently, the court upheld the IRS’s authority to provide premium tax credits for individuals who purchase policies from a federal exchange and affirmed the decision of the district court below.