Appeals courts differ on health insurance subsidies

Opposite rulings on whether federal exchanges can offer tax credits

Updated with details on Virginia ruling that followed D.C. decision

Two U.S. federal courts came to opposite conclusions Tuesday on the legality of health insurance subsidies provided to federally-run exchange plans.

The crux of both cases was language in the Affordable Care Act that established to whom subsidies apply: "Applicable taxpayers" who enrolled in plans "through an Exchange by the state." The federal government argued that the ACA established "complete equivalence between state and federal exchanges," while the opposition argued the language clearly denied tax credits to consumers in states with federally-run marketplaces.

In the first ruling, the U.S. Court of Appeals for the District of Columbia Circuit found the language to "plainly distinguish" between state-run and federally-run exchanges. That decision dealt a major blow to the affordability piece of health reform, stripping subsidies from consumers in the 36 states that did not create their own marketplaces, including Tennessee. BlueCross BlueShield reported in May that 80 percent of its 133,000 Tennessee enrollees received such subsidies.

Hours later, the U.S. Court of Appeals for the Fourth Circuit in Richmond, Virginia, published its ruling on the matter, which found that because the statute was ambiguous, the court should defer to the agency in question's interpretation and intent.

Given that the Department of Health and Human Services considers federally-run exchanges as acting "on behalf of the state," the court ruled that Congress intended for tax credits to be available on both state- and federally-facilitated exchanges.

Notably, in both rulings, the courts wrote that the decision was tough. "We reach this conclusion, frankly, with reluctance," wrote Judge Thomas Griffith in D.C. "We remain unpersuaded by either side," said Judge Roger Gregory in Virginia.

The government will almost certainly appeal the first ruling, and the opposing decisions all but guarantee a U.S. Supreme Court review. Pending the appeals, neither ruling has an immediate impact, but does create a period of uncertainty for the upcoming enrollment period and tax season.

Should the higher court find that subsidies do not apply to federally-run exchange plans, the individual and employer mandates would be significantly affected. The penalty for not having insurance does not apply to individuals for whom the cheapest health insurance exceeds eight percent of their income. For many, the eliminated tax credit would make insurance unaffordable and the individual mandate would no longer apply.

Likewise, the employer mandate penalizes employers who fail to offer coverage to employees who enroll in health plans using subsidies. If the subsidies are not available in 34 states, employers in those states are off the hook for that penalty.

For the District of Columbia ruling, click here. For the Fourth Circuit ruling, click here.