Obamacare’s Tax Credits in Jeopardy

Today, we received dueling circuit court decisions on Obamacare’s tax credit component. The D.C. Circuit held (2-1) that the tax credits do not apply to health insurance purchases through an exchange established by the federal government, whereas the Fourth Circuit held that they do. If the subsidies are not available for insurance purchased through exchanges established by the feds, then Obamacare could unravel. Because of this split in the circuits, this issue is almost guaranteed to be taken up by SCOTUS in the coming term.

Exchanges operate websites that allow individuals and employers to shop for and purchase approved health insurance. The president and Congress envisioned all the states scurrying to establish exchanges, but only 14 states and D.C. have done so. The Obamacare statute recognized that some states might not establish exchanges, and provided that the federal government could establish exchanges in states that refused to create an exchange for its citizens.

The individual mandate of Obamacare requires that folks purchase health insurance or suffer a monetary penalty. The penalty does not apply to individuals for whom the annual cost of coverage, less any tax credits, would exceed 8 percent of projected household income. If credits are unavailable in states with federally created exchanges, the number of people subject to penalties decreases dramatically—qqqwithout the substantial tax credits, they fall into the exempted category because the costs of health insurance will exceed 8 percent of household income. If the individual mandate is gutted, then Obamacare suffers a major setback.

The statutory language provides that the tax credits are available only when purchasing a “qualified health plan” purchased through “an Exchange established by the State under [section] 1311” of the statute. There is no mention in the statute of tax credits applying to insurance purchased through federally established exchanges. Accordingly, the plain language dictates that tax credits do not apply in the federally established exchanges and thus millions of Americans will be exempt from the penalties of the individual mandate.

Unlike the D.C. Circuit, the Fourth Circuit avoided the clear language of the statute and held that the statute is “ambiguous” and thus allows for flexible agency interpretations about the applicability of the tax credits.

Chief Justice John Roberts worked hard to save Obamacare in the first go-round. It will be interesting to see if he chooses to yet again save Congress and the president via judicial legerdemain.