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Federal Appeals Courts Issue Contradictory Rulings on Federal Marketplace Subsidies under Affordable Care Act


August 2014

Two federal appeals courts issued contradictory rulings on the validity of subsidies for the purchase of health insurance under the federal marketplace established pursuant to the Affordable Care Act (ACA). On July 22, a panel on the Court of Appeals for the District of Columbia ruled by a 2-1 margin that the subsidies under the federal marketplace were invalid; on the same day, a panel on the Fourth Circuit Court of Appeals unanimously upheld the subsidies. The subsidies available under the federal marketplace are a key component in the implementation of the ACA’s individual mandate and employer shared responsibility provisions.

Thirty-six states have opted not to establish their own health insurance marketplaces. Consequently, individuals living in these states who wish to purchase marketplace health coverage must do so from the federal marketplace, and may take advantage of the federal subsidies if they qualify. The ACA provides that premium subsidies are available to qualifying individuals who purchase health insurance “through an Exchange [marketplace] established by the State” (emphasis added). Plaintiffs challenging the validity of the federal subsidies claim that the statutory language only permits state-run insurance marketplaces, not the federal, to provide such subsidies. The dispute in the statutory interpretation, which has resulted in contradictory decisions, is whether the federal government is “standing in the state’s shoes” when establishing an insurance marketplace in a state unwilling to establish its own.

The Obama Administration stated that it planned to appeal the D.C. Circuit decision “en banc” to the entire D.C. Circuit panel.

In states that have a federal marketplace (such as Illinois), the outcome of these decisions could significantly impact the viability of the “employer shared responsibility” (“pay or play”) rules that apply to employers. If subsidies are found to be unavailable to individuals who receive coverage through a federal marketplace, employers in states with federal marketplaces would potentially not be liable for any of the “pay or play” tax penalties that otherwise begin to apply to employers in 2015.

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