Last week, two federal courts of appeals–the 4th Circuit and D.C. Circuit–considered whether the IRS reasonably interpreted the Affordable Care Act as allowing the IRS to give tax credits to taxpayers that purchase health insurance through an exchange set up by the federal government. Both courts of appeals considered the same statutory text, the same legislative history, the same regulation, and the same arguments. And they applied the same legal principles.

Yet they reached opposite results. In King v. Burwell, the 4th Circuit found the IRS’s interpretation reasonable. In Halwig v. Burwell, the DC Circuit found the IRS’s interpretation unreasonable. How?

Given that the issue was the propriety of an IRS regulation, both courts proceeded under the framework of Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). That analysis requires the court to determine whether the statute states an unambiguous direction on the issue addressed by the regulation. If it does, then the court must determine whether the regulation is consistent with the statutory command. If the statute is ambiguous and leaves room for agency interpretation, courts defer to the agency’s regulation so long as it is reasonable.

Both courts focused on the language of the statutory provisions. The difference between the two courts’ conclusions turned on disagreement over whether 26 U.S.C. section 36B(b)(2), which establishes the amount of premium assistance that is to be provided, unambiguously directs that only taxpayers who purchase coverage through a state-run plan receive premium assistance. More specifically, the courts of appeals disagreed about the impact of surrounding statutory provisions on the proper interpretation of section 36B.

The ACA Provisions at Issue    

Under section 36B(a), an “applicable taxpayer” (defined as a taxpayers whose income is between 100% and 400% of the poverty line) is entitled to a tax credit “equal to the premium assistance credit amount of the taxpayer…” The term “premium assistance credit amount” is defined in section 36B(b)(1) as the sum of monthly “premium assistance amounts,” as defined in section 36B(b)(2).  

The challenge to the IRS’s regulation allowing tax credits for taxpayers purchasing insurance on a federally established exchange was that section 36B(b)(2), in conjunction with section 36B(c)(2), defines the “premium assistance amount” as calculated solely based on premiums for coverage purchased through a state-established exchange. In defining “premium assistance amount,” Section 36B(b)(2) states that       

The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—

(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 [1] of the Patient Protection and Affordable Care Act, or

(B) the excess (if any) of—

(i) the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over

(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year.

Section 36B(c)(2), in turn, defines “coverage month” as any month in which “as of the first day of such month the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer is covered by a qualified health plan described in subsection (b)(2)(A) that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act…” 

According to the plaintiffs, these provisions unambiguously mean that a taxpayer can have no “coverage months” unless he or she is enrolled in a state-established exchange. So the statute does not provide any subsidy amount for taxpayers who are enrolled in exchanges established by the federal government in lieu of a state.

Reading the Provisions in Context

Both courts recognized that these statutory provisions cannot be read in isolation, but rather must be understood in the context of the statute as a whole. So both proceeded to analyze sections 1311 and 1321 of the ACA, which deal with establishing exchanges by the state and federal government.

Section 1311, read literally, requires all states to establish exchanges. It defines “Exchange” as “a governmental agency or nonprofit entity that is established by a State…” But section 1321 says that states may “elect” to set up exchanges, thus making it an option rather than a mandate. And if a state does not elect to itself establish the exchange, section 1321 directs the federal government to “establish and operate such Exchange within the State…” 

The two courts differed on how to understand the command that the federal government set up “such Exchange within the State.” Both agreed that it means that a federally established exchange is the functional equivalent of a state-established exchange and that a federal exchange must be understood as an exchange established under the authority of section 1311. But the courts disagreed about whether that makes it reasonable to understand the phrase “Exchange established by the State under section 1311” as including a federal exchange.

According to the DC Circuit, “section 1321 creates equivalence between state and federal Exchanges in two respects: in terms of what they are and the statutory authority under which they are established.” But it does not change the identity of who is establishing the exchange. The DC Circuit understood Section 36B(b)(2)(a) to have 3 elements: “(1) an Exchange (2) established by the State (3) under section 1311.” And, it explained, the only reasonable way to understand the statute is that a federal exchange is not an exchange “established by the State.” So the statute unambiguously sets the subsidy amount for coverage purchased through a federal exchange at zero. As such, the DC Circuit found the IRS regulation contravened the statute and could not stand.

According to the 4th Circuit, on the other hand, it is at least as reasonable to understand the interplay of sections 1311 and 1321 as requiring the federal government to set up an exchange essentially on behalf of the state when the state does not. So a federal exchange can reasonably be understood to be encompassed within the provisions defining premium assistance amounts. Because such an interpretation was reasonable, even if not the only plausible interpretation, the statutory provisions were ambiguous. And because they were ambiguous, the IRS’s interpretation of the statute was permissible, and the courts required to defer to it.

In short, two federal courts of appeals reached opposite conclusions about the propriety of the IRS’s regulation because they disagreed about whether the statutory provisions, read in context, are ambiguous. And perhaps that should not be surprising, given the complexity of the ACA. Indeed, the concurring and dissenting opinions reflect that there was disagreement even among the judges on each panel about how to interpret the statute.

Update (09-04-14): At the government’s request, the D.C. Circuit has voted to rehear the Halwig case en banc, and vacated the ruling of the panel. Grants of rehearing en banc are rare, but it’s not all that surprising that review by the entire court would be granted in this case, given the magnitude of the case and that the decision conflicted with a decision of another court of appeals. But even if the en banc court reaches the same result as the 4th Circuit, I would still expect the Supreme Court to eventually take up the issue. Although in run-of-the-mill cases, the Supreme Court is more likely to grant certiorari if there is circuit split, the Court can review any case it chooses, so long as there is a federal issue involved. And it has shown a penchant for taking on cases involving high profile, controversial issues of national import, whether there is a circuit split or not.