Affordable Care Act—Availability of Tax Credits

The Patient Protection and Affordable Care Act (ACA) created state-wide health insurance exchanges.  Individuals are now generally required to obtain qualifying health insurance coverage or to pay a tax penalty.  Low-income individuals who do not qualify for Medicaid are entitled to tax credits to subsidize the purchase of health insurance when they acquire that insurance through the exchange "established by the State" under 42 U.S.C. § 18031.  26 U.S.C. § 36B(c)(2)(A)(i).  Today, the Supreme Court granted certiorari in King v. Burwell, No. 14-114, to decide whether that provision can permissibly be construed by the Internal Revenue Service to permit tax credits for individuals who acquire insurance through exchanges operated by the federal government in states that do not administer their own exchange.  The Court's resolution of this issue will be of substantial importance to health insurance plans and health care providers as well as to employers, whose responsibility to provide health insurance coverage for their employees depends on the availability of tax credits to their employees.

As background, the ACA called for "[e]ach state" to establish an exchange (42 U.S.C. § 18031(b)(1)), but did not compel them to do so (42 U.S.C. § 18041(b)). In cases where a state either elected not to create an exchange or failed to create an exchange that complied with other statutory requirements, the federal government was empowered to "establish and operate such Exchange within the State." 42 U.S.C. § 18041(c). Because only sixteen states (plus the District of Columbia) set up their own exchanges, federally-facilitated exchanges have been established in thirty-four states.

Based on the interplay between §§ 18031 and 18041, the IRS promulgated regulations specifying that when the federal government steps in to operate a state's exchange, that federally-facilitated exchange is the exchange "established by the State" within the meaning of § 18031.  Accordingly, premium tax credits are available to qualifying individuals who purchase health insurance either from state-run or federally-facilitated exchanges. 26 C.F.R. § 1.36B-1(k). Although the IRS rule expands the number of people eligible for premium tax credits, it also expands the number of people potentially liable under the ACA for tax penalties for not purchasing insurance that is otherwise "affordable" to them. 

Each of the four plaintiffs in King is a resident of Virginia, a state that has a federally-facilitated exchange. The plaintiffs filed suit under the Administrative Procedure Act, claiming that the IRS rule—which has the effect of requiring them to buy insurance or to face a tax penalty—exceeds the agency's statutory authority, is arbitrary and capricious, and is contrary to law. The U.S. District Court for the Eastern District of Virginia granted the government's motion to dismiss, ruling that the IRS's rule is based on a reasonable interpretation of the ACA. The Fourth Circuit affirmed the district court. After examining the language of the statute, its structure, and its legislative history, the Fourth Circuit concluded that the ACA is ambiguous as to whether individuals purchasing plans through the federally funded exchanges qualify for tax credits. The court thus looked to the ACA's "broad policy goals" of increasing the number of insured Americans and reducing the cost of health care. As the court explained, the IRS's rule is essential to achieving these goals because it helps prevent adverse selection and premium inflation. Consequently, the IRS's rule is a reasonable one warranting deference from the courts.

The petition for certiorari urged the Supreme Court to hear this case because the Fourth and D.C. Circuits were split on the validity of the IRS's rule. A divided panel of the D.C. Circuit had invalidated the IRS's rule, but the en banc D.C. Circuit subsequently vacated the panel opinion and set the case for rehearing. 

In the proceedings before the Fourth and D.C. Circuits, Mayer Brown filed amicus curiae briefs for America's Health Insurance Plans in support of the Government. 

Absent extensions, amicus briefs in support of the petitioners will be due on December 29, 2014, and amicus briefs in support of the respondent will be due on January 28, 2015.


Civil Procedure—Service of Process

Federal Rule of Civil Procedure 4(m) addresses the time limit for service of summonses in civil cases. It provides: "If a defendant is not served within 120 days after the complaint is filed, the court . . . must dismiss the action without prejudice against that defendant or order that service be made within a specified time. But if the plaintiff shows good cause for the failure, the court must extend the time for service for an appropriate time."

Today, the Supreme Court granted certiorari in Chen v. Mayor & City Council of Baltimore, No. 13-10400,to resolve a circuit split concerning whether district courts have discretion under Rule 4(m) to extend the time for service of process absent a showing of good cause. The Second, Third, Fifth, Seventh, Ninth, Tenth, and Eleventh Circuits have held that they do; the Fourth Circuit has held that they do not.

The plaintiff in Chen is a pro se litigant who filed a complaint against the city of Baltimore and certain of its employees, alleging that they razed a building that he owned in violation of his due-process rights. But the plaintiff did not serve the defendants within 120 days after filing his complaint. In response to an order to show cause why the case should not be dismissed, the plaintiff provided three justifications for his failure to serve the defendants on time, and he requested an extension of the deadline to do so. The district court granted a 60-day extension, and the plaintiff served the summons within the time allotted. The defendants then moved to dismiss, arguing that the extension was improvidently granted. The district court agreed and granted that motion, concluding that the plaintiff had failed to show good cause for not serving the defendants on time and that, in accordance with binding Fourth Circuit precedent, district courts lack discretion to grant extensions under Rule 4(m) absent such a showing. The Fourth Circuit affirmed the decision in a summary unpublished opinion.

The Supreme Court's resolution of the circuit split concerning a district court's discretion to grant extensions under Rule 4(m) will be of significant interest to the business community because it will affect the frequency with which plaintiffs' failure to effect timely service may be excused.

Absent extensions, amicus briefs in support of the petitioners will be due on December 29, 2014, and amicus briefs in support of the respondents will be due on January 28, 2015.

In recent weeks, the Supreme Court has also invited the Solicitor General to file briefs expressing the views of the United States in five cases of interest to the business community:

Spokeo, Inc. v. Robins, No. 13-1339: The question presented is whether Congress may confer Article III standing upon a plaintiff who suffers no concrete harm, and who therefore could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of a federal statute. Mayer Brown is counsel for the petitioner.

Coventry Health Care of Missouri, Inc. v. Nevils, No. 13-1305: The question presented is whether the Federal Employees Health Benefits Act, which governs the federal government's provision of health benefits to millions of federal employees and their dependents, preempts state laws precluding carriers that administer FEHBA plans from seeking subrogation as required by their contracts with the Office of Personnel Management.

Aetna Life Insurance Co. v. Kobold, No. 13-1467: The question presented is whether the Federal Employees Health Benefits Act, which expressly "preempt[s] any State or local law" that would prevent enforcement of "[t]he terms of any contract" under FEHBA that "relate to the nature, provision, or extent of coverage or benefits (including payments with respect to benefits)," preempts state laws precluding carriers that administer FEHBA plans from seeking reimbursement or subrogation pursuant to the terms of FEHBA contracts.

Athena Cosmetics, Inc. v. Allergan, Inc., No. 13-1379: The question presented is whether, under Buckman Co. v. Plaintiffs' Legal Committee, the Federal Food, Drug, and Cosmetic Act impliedly preempts a private state-law claim for unfair competition premised on a party's purported failure to obtain Food and Drug Administration approval, where the Food and Drug Administration itself has not imposed any such requirement.

Dollar General Corp. v. Mississippi Band of Choctaw, No. 13-1496: The question presented is whether Indian tribal courts have jurisdiction to adjudicate civil tort claims against nonmembers, including as a means of regulating the conduct of nonmembers who enter into consensual relationships with a tribe or its members.

Originally published November 7th, 2014.

Keywords: Affordable Care Act, tax credits, civil procedure, service of process

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