On July 22, the U.S. Court of Appeals for the District of Columbia Circuit struck a blow to the Affordable Care Act (ACA) when it held that the ACA did not authorize the Internal Revenue Service (IRS) to provide tax credits for health insurance purchased on federal health exchanges.

That same day, the U.S. Court of Appeals for the Fourth Circuit, ruling on a similar challenge to the ACA, reached the opposite conclusion. Both cases are expected to be appealed to the U.S. Supreme Court. Whether the Supreme Court will accept the case remains to be seen. The outcome could have potentially significant consequences for the ACA depending on how the court cases are finally decided.

Below is a summary of the issues, potential outcomes, and likely next legal steps.

Halbig v. Burwell – Court of Appeals for D.C. Circuit

Under the ACA, the IRS makes tax credits available as a form of subsidy to individuals who purchase health insurance through marketplaces, commonly referred to as “Exchanges.”

The plaintiffs (individuals and employers) in Halbig v. Burwell challenged the IRS rule (26 C.F.R. § 1.36B-2(a)(1)) interpreting the ACA. The IRS rule states that an eligible taxpayer may receive a tax credit if he or she “is enrolled in one or more qualified health plans through an Exchange…regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange).”

The plaintiffs argued that the ACA does not allow individuals in states that have not implemented their own Exchanges to receive tax subsidies. Only 14 states have chosen to run their own Exchanges.

The plaintiffs pointed to the specific language under 26 U.S.C. § 36B(c)(2)(A)(i) of the ACA, which provides that a tax credit is available to subsidize the purchase of insurance on an “Exchange established by the State under section 1311 of the [ACA].” The plaintiffs argue that based on a plain reading of the statute that the tax credits can only be provided to those states that have established Exchanges.

In a 2-1 decision, the Court of Appeals for the D.C. Circuit agreed with this reading of the ACA and ruled that the IRS did not have authority to issue the regulation. According to the Court, “a federal Exchange is not an ‘Exchange established by the State,’ and section 36B [of the ACA] does not authorize the IRS to provide tax credits for insurance purchased on the federal Exchanges.

King v. Burwell – U.S. Court of Appeals for the Fourth Circuit Upholds IRS Rule

Within hours of the Halbig decision, the U.S. Court of Appeals for the Fourth Circuit issued its decision in King v. Burwell in which the Court upheld the IRS rule. The Court in King held that the statute’s language was ambiguous and that the interpretation of the ACA by the IRS was reasonable.

Implications of Decision by the Court of Appeals for the D.C. Circuit

When the Court of Appeals for the D.C. Circuit issued its decision, it created significant concerns for the supporters of the law. If upheld on appeal, the Court’s decision will have significant consequences for the ACA and individuals seeking health insurance under the Act.

The majority noted the importance of its decision:

We reach this conclusion, frankly, with reluctance. At least until states that wish to can set up Exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly. But, high as those stakes are, the principle of legislative supremacy that guides us is higher still.”

By making credits more widely available, the IRS Rule gives the individual and employer mandates—key provisions of the ACA—broader effect than they would have if credits were limited to state-established Exchanges. The individual mandate requires individuals to maintain “minimum essential coverage” and, in general, enforces that requirement with a penalty. [] The penalty does not apply, however, to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed eight percent of their projected household income. By some estimates, credits will determine on which side of the eight-percent threshold millions of individuals fall. [] Thus, by making tax credits available in the 36 states with federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.

Next Steps

Legal commentators are conjecturing what will happen now that there are split decisions in the federal Court of Appeals. While it’s uncertain what exactly will happen next, what is certain is that the tax subsidies will continue in all states until all appeals are final. Below are likely scenarios.

The Halbig decision was decided by just three judges (2-1) on the Court of Appeals for the D.C. Circuit. The Obama administration has the right to request what is known as en banc review, where the case would be heard a second time in front of all eleven judges on the D.C. Circuit. Currently, there are seven judges appointed by Democrat presidents and four judges appointed by Republican presidents. (President Obama recently appointed three judges to the bench.) While a judge’s party affiliation isn’t completely indicative of how he or she will rule on a case, it is important to note given their ideology. The two judges who struck down the IRS rule were appointed by a Republican president, while the dissenting judge was appointed by a Democrat.

If the full court were to overturn the 2-1 decision, then there no longer will be a split between two federal appellate courts. A split among the various federal Court of Appeals is one of the things the U.S. Supreme Court considers when deciding whether to take a case on appeal.

However, there are two similar cases still pending in the federal district courts, so eventually there could be more decisions in the appellate courts reaching opposite conclusions.

Moreover, even if the D.C. Circuit were to reverse the decision en banc, the U.S. Supreme Court may still choose to take the case because of its importance. If the U.S. Supreme Court were to accept the case, the earliest the case would be heard would be in the 2014-15 term, which doesn’t begin until October 2014.

In the meantime, the IRS rule will continue until all appeals have been exhausted, or unless a court orders that the tax subsidies not be provided to the states that have not set up their own Exchanges.