Are the federal government’s subsidies to purchasers of health insurance available only to those who purchase insurance from state-run exchanges or to those who purchase from federal health care exchanges as well? Was the Internal Revenue Service’s rule making the subsidy available to purchases from both federal- and state-run exchanges lawful? On Friday, November 7, the Supreme Court of the United States agreed to put to rest these controversial issues related to federal health care subsidies established under the Affordable Care Act by granting review in King v. Burwell. The outcome of this case will affect to whom the federal government’s program of tax credits will apply: only those individuals who enroll in health plans through an exchange established by the state in which they reside or also to those individuals who enroll in health plans through an exchange established by the federal government.

The ACA-Federal Tax Credit Timeline

The issue that the Supreme Court agreed to decide has been a while in the making.

The Affordable Care Act (ACA) was signed into law in 2010. The ACA requires that every state operate a health insurance marketplace, also called health exchanges. In some states, the U.S. Department of Health and Human Services (HHS), rather than the states themselves, established these health exchanges. This gave rise to the present controversy because the ACA states: “A State may elect to authorize an Exchange established by the State under this section to enter into an agreement with an eligible entity to carry out 1 or more responsibilities of the Exchange.” (emphasis added)

In 2012, the Internal Revenue Service (IRS) and the U.S. Department of the Treasury interpreted the ACA to allow premium tax credits for individuals who purchase coverage through an exchange, regardless of whether the state or federal government established the exchange. The Supreme Court will decide whether the IRS was authorized to promulgate these regulations.

On July 22, 2014, the District of Columbia Circuit Court of Appeals ruled, in Halbig v. Burwell, that individuals may be granted premium tax credits if they enroll in qualified health plans through exchanges established by the federal government rather than through exchanges established by the states in which they reside.

On the same day, the Fourth Circuit Court of Appeals, in King v. Burwell, reached the opposite conclusion. The Fourth Circuit decided that the IRS is permitted to interpret the ACA to allow premium tax credits in all 50 states, even though the HHS, rather than the states themselves, established the exchanges in some states.

Because Halbig and King are in conflict, once King was decided, there was a circuit split on the issue of the IRS’s regulatory authority. However, on September 4, 2014, the D.C. Circuit vacated the initial panel’s judgment and voted to rehear the Halbig case en banc. Thus, the Supreme Court’s decision to review King in the absence of an active circuit split—a very unlikely circumstance. (The Supreme Court’s decision to grant review in King would be even more interesting if the en banc D.C. Circuit’s decision sided with the Fourth Circuit’s decision in King.)

On the morning of November 7, 2014, the Supreme Court released its order list, which included its decision to review King. The Court agreed to decide the following issue in the case:

Whether the Internal Revenue Service (IRS) may permissibly promulgate regulations to extend tax-credit subsidies to coverage purchased through exchanges established by the federal government under Section 1321 of the Patient Protection and Affordable Care Act.

Practical Implications of the Supreme Court’s Order

The ruling in the case is expected this term, most likely near the end. The outcome is expected to have an effect on individual health care consumers—who may be denied the federal subsidy depending on whether they purchase their health care insurance through a federal- or state-run exchange. The decision could also affect employers that are subject to the Internal Revenue Code’s pay or play penalties under section 4980H.