In an eagerly awaited, mightily impactful health care decision, King v. Burwell (U.S. No. 14-114 June 25, 2015), the Supreme Court of the United States (the “Supreme Court”) held that individuals eligible for tax credits to subsidize their purchase of health insurance in health care marketplaces created by the Affordable Care Act (“ACA”) may receive such tax credits whether they purchase their policies in a State Exchange or a Federal Exchange (i.e., a health exchange established by the Secretary of the Department of Health and Human Services (“HHS”) on behalf of a state). The decision was written by Chief Justice John Roberts joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor and Kagan. Justice Scalia wrote the dissent and was joined by Justices Thomas and Alito.
The decision is a huge victory for the Obama Administration in a second major challenge to its signature piece of legislation. Many believe that a decision invalidating the subsidies’ availability in Federal Exchanges would have resulted in destabilization of the individual insurance markets in the 34 states with Federal Exchanges. Absent subsidies, millions of the insured would have dropped their insurance, resulting in a sicker insurance pool, escalating premiums to pay for the sickest of the sick and an exit of insurers – the so-called “death spiral.” Left unchecked, this would have fatally eviscerated the ACA, whose primary purpose was to expand health care coverage to most Americans.
At its core, this was a case that pitted two major principles of statutory construction against one another: the “plain meaning rule,” which requires the reader to interpret the language in its simplest, most natural form versus the “fundamental canon” that “the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” Context and statutory scheme ruled the day here.
Background, Facts of the Case and Procedural History
The ACA provided for three major health insurance reforms: 1) it prohibits insurers from denying coverage to any person based on pre-existing conditions or charging higher premiums based on health status; 2) it requires individuals to purchase health insurance or pay a tax penalty for failing to do so; and 3) it provides tax credits to individuals with incomes between 100 and 400 percent of the federal poverty level to make the required insurance affordable; eligible individuals may purchase insurance with the tax credits that are provided in advance directly to the individuals’ insurers.
Related, the ACA required the creation of a health care marketplace (mostly web-based) in each state where individuals could shop for insurance plans – the so-called “Exchange.” The ACA required each state to establish an “American Health Benefit Exchange” for the state (“State Exchange”), but if it chose not to, the ACA provided that the Secretary of HHS would “establish and operate such Exchange within the State” (“Federal Exchange”). The ACA further provided that tax credits “shall be allowed” for any “applicable taxpayer” and that the amount of the tax credit depended in part on whether the taxpayer enrolled in an insurance plan through “an Exchange established by the State.” It is this language, codified in the tax code at 42 U.S.C. Section 36B, that gave rise to the controversy subject of King v. Burwell.
To implement the tax credit provision of the ACA, the IRS promulgated a rule that made tax credits available on both State and Federal Exchanges, notwithstanding the plain meaning of the phrase, “an Exchange established by the State,” which would seem to suggest on its face that tax credits are only available to those who purchase on a State-established Exchange.
The petitioners in King v. Burwell are four individuals who do not want to purchase health insurance. They live in Virginia, which has a Federal Exchange. In their view, Virginia’s exchange does not qualify as an “Exchange established by the State,” so they are not entitled to any tax credits notwithstanding the IRS’s interpretation of the phrase at issue, “Exchange established by the State.” Without tax credits, the cost of buying insurance would exceed eight percent of the petitioners’ income, which would exempt them from the ACA’s mandatory coverage requirement – exactly what the petitioners sought. Under the IRS rule, however, Virginia’s exchange would qualify as an “Exchange established by the State.” Therefore, the petitioners would receive tax credits and would be required to purchase insurance they do not want or pay a penalty to the IRS.
The petitioners challenged the IRS rule in Federal District Court in Virginia. The court dismissed the lawsuit holding that the act “unambiguously made tax credits available to individuals enrolled through a Federal Exchange.” The Court of Appeals for the Fourth Circuit affirmed the Virginia District Court’s decision, viewing the ACA as “ambiguous and subject to at least two different interpretations.” The Fourth Circuit deferred to the IRS’s interpretation under a Chevron analysis, finding that while the ACA was ambiguous as to whether persons purchasing insurance on a Federal Exchange could receive tax credits to subsidize their health insurance costs, the IRS interpretation permitting tax credits for plans purchased on a Federal Exchange was reasonable. The same day that the Fourth Circuit issued its decision, the Court of Appeals for the District of Columbia Circuit vacated the IRS Rule in a different case, Halbig v. Burwell, holding that the Act “unambiguously restricts” the tax credits to State Exchanges. The Supreme Court granted certiorari in King v. Burwell.
Issue: Whether the ACA’s health care reforms apply equally in each state regardless of who established the state’s health care exchange. More specifically, the question presented is whether the ACA’s tax credits are available in states that have a Federal Exchange rather than a State Exchange.
Holding: Yes – tax credits to subsidize health insurance purchases are available whether the policy was purchased in a State or Federal Exchange.
While the Supreme Court acknowledged the “strength” of the petitioners’ plain meaning argument with respect to the Section 36B language, “an Exchange established by the State,” it refused to view the language in isolation noting that “such a [plain meaning] reading turns out to be ‘untenable in light of [the statute] as a whole.'” For example, the Supreme Court noted that the ACA requires all Exchanges to make qualified health plans available to “qualified individuals.” In turn, it defines “qualified individual” as an individual who “resides in the State that established the Exchange.” According to the Supreme Court, if one were to attribute the phrase, “the State that established the Exchange” its most natural meaning, there would be NO qualified individuals on Federal Exchanges. Surely, the Supreme Court reasoned, the ACA contemplates qualified individuals on every Exchange. A Federal Exchange could not make qualified health plans available to qualified individuals if there were no such individuals.
The point: the ACA contains “more than a few examples of inartful drafting,” and it might not use the phrase “established by the State” in its most natural sense. Accordingly, the meaning of that phrase may not be as clear as it appears “when read out of context.” Therefore, it is necessary to view the structure of the entire statute and the statutory context to interpret the language.
The Supreme Court also noted that the ACA requires all Exchanges to: 1) create outreach programs that broadcast “fair and impartial information” concerning the availability of tax credits; 2) make available an electronic calculator to help individuals compute their cost of coverage after application of premium tax credits; and 3) report to the Treasury Secretary information about health plans, including information on advance payment of tax credits. These provisions would make little sense if tax credits were not available on Federal Exchanges. In summary, the Supreme Court viewed the language “an Exchange established by the State” as ambiguous, and while it could be limited to State Exchanges, it could also refer to both State Exchanges and Federal Exchanges based on contextual cues.
Finally, the Supreme Court rejected the petitioners’ interpretation because it would likely create the very death spirals that Congress designed the Act to avoid. The Supreme Court simply refused to interpret the ACA to “negate [its] own stated purposes.”
The Supreme Court’s position is aptly illustrated by the following excerpt from its opinion:
We have held that Congress “does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions.” Whitman v. American Trucking Assns., Inc., 531 U.S. 457, 468 (2001). But in petitioners’ view, Congress made the viability of the entire Affordable Care Act turn on the ultimate ancillary provision: a sub-sub-sub section of the Tax Code. We doubt that is what Congress meant to do. Had Congress meant to limit tax credits to State Exchanges, it likely would have done so in the definition of “applicable taxpayer” or in some other prominent manner. It would not have used such a winding path of connect-the-dots provisions about the amount of the credit. . .
In a fairly critical dissent, Justice Scalia opined that the majority’s statutory construction was untenable, stating “the normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved.”
In light of the opinion, states with Federal Exchanges and Congress need not scramble to find eleventh hour solutions to the loss of subsidies. Please stay tuned for further observations, analysis, industry guidance, practical takeaways and Congress’s reaction in an upcoming article on King v. Burwell.
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