Supreme Court Holds Tax Subsidies Available Under Affordable Care Act to Those Who Buy Insurance on Federal Exchange

Our blog is 9 years old!  Our Firm is, not coincidentally, celebrating its 9th anniversary as well. Thank you for reading!  

To celebrate, I will post about King v. Burwell, opinion here, the Supreme Court's latest ruling upholding the Affordable Care Act (aka Obamacare, PPACA, etc.).  The Court saved one of the key provisions of the Act, 6-3, in a statutory interpretation case.  Chief Justice Roberts authored the majority opinion, writing for himself, and Justices Kennedy, Sotomayor, Kagan, Ginsburg, and Breyer. 

Whatever you think of the ACA, this is a good opinion to read because it explains in simple terms how the law works, why it was designed the way it was, and what the dispute was in King v. Burwell.   

Here's the overview of the Act in the Court's words. I insert emphasis:

First, the Act adopts the guaranteed issue and community rating requirements. The Act provides that “each health insurance issuer that offers health insurance coverage in the individual . . . market in a State must accept every . . . individual in the State that applies for such coverage.” 42 U. S. C. §300gg–1(a). The Act also bars insurers from charging higher premiums on the basis of a person’s health. §300gg.

Second, the Act generally requires individuals to maintain health insurance coverage or make a payment to the IRS. 26 U. S. C. §5000A. Congress recognized that, without an incentive, “many individuals would wait to purchase health insurance until they needed care.” 42 U. S. C. §18091(2)(I). So Congress adopted a coverage requirement to “minimize this adverse selection and broaden the health insurance risk pool to include healthy individuals, which will lower health insurance premiums.” Ibid. In Congress’s view, that coverage requirement was “essential to creating effective health insurance markets.” Ibid. Congress also provided an exemption from the coverage requirement for anyone who has to spend more than eight percent of his income on health insurance. 26 U. S. C. §§5000A(e)(1)(A), (e)(1)(B)(ii).

Third, the Act seeks to make insurance more affordable by giving refundable tax credits to individuals with household incomes between 100 percent and 400 percent of the federal poverty line. §36B. Individuals who meet the Act’s requirements may purchase insurance with the tax credits, which are provided in advance directly to the individual’s insurer. 42 U. S. C. §§18081, 18082.

So, there are three principal components to the ACA that work closely together:

Congress found that the guaranteed issue and community rating requirements would not work without the coverage requirement. §18091(2)(I). And the coverage requirement would not work without the tax credits. The reason is that, without the tax credits, the cost of buying insurance would exceed eight percent of income for a large number of individuals, which would exempt them from the coverage requirement.

Next, the ACA created the system of "exchanges" where consumers could shop for and buy the insurance:

In addition to those three reforms, the Act requires the creation of an “Exchange” in each State where people can shop for insurance, usually online. 42 U. S. C. §18031(b)(1). An Exchange may be created in one of two ways. First, the Act provides that “[e]ach State shall . . . establish an American Health Benefit Exchange . . . for the State.” Ibid. Second, if a State nonetheless chooses not to establish its own Exchange, the Act provides that the Secretary of Health and Human Services “shall . . . establish and operate such Exchange within the State.” §18041(c)(1).

Now you know just about everything you might want to know about the 2000 page law.  The Supreme Court already upheld the law a couple of years ago.  So, what was the issue in King v. Burwell?  Glad you asked:

The issue in this case is whether the Act’s tax credits are available in States that have a Federal Exchange rather than a State Exchange. The Act initially provides that tax credits “shall be allowed” for any “applicable taxpayer.” 26 U. S. C. §36B(a). The Act then provides that the amount of the tax credit depends in part on whether the taxpayer has enrolled in an insurance plan through “an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act [hereinafter 42 U. S. C. §18031].” 26 U. S. C. §§36B(b)–(c) (emphasis added).

So, some states have their own exchanges for insurance shoppers, such as "Covered California" here in the Golden State.  Other states rely on the federal exchange.   The ACA's tax credit language, though, says that the law's tax credits depend on the taxpayer's membership in an "Exchange established by the state."  Does that include the federal exchange?

Yes, said the IRS.  The IRS issued a regulation in which it said that an "Exchange established by the State" would include the federal exchange (presumably because the state decided to rely on the federal exchange as its "established" Exchange.)

The Court, though, did not defer to the IRS's interpretation. Rather, the Court held that the statute itself authorized the tax credits regardless of whether the taxpayer purchased insurance on a state or federal exchange.  To do so, the Court's majority engages in a lengthy analysis and explanation of why a federal exchange counts as a state exchange.  It's in the opinion, and you may almost be convinced.  So much for calling balls and strikes, CJ.    Anyway:

The upshot of all this is the phrase “an Exchange established by the State under [42 U. S. C. §18031]” is properly viewed as ambiguous. The phrase may be limited in its reach to State Exchanges. But it is also possible that the phrase refers to all Exchanges—both State and Federal—at least for purposes of the tax credits. If a State chooses not to follow the directive in Section 18031 that it establish an Exchange, the Act tells the Secretary to establish “such Exchange.” §18041. And by using the words “such Exchange,” the Act indicates that State and Federal Exchanges should be the same. But State and Federal Exchanges would differ in a fundamental way if tax credits were available only on State Exchanges—one type of Exchange would help make insurance more afford- able by providing billions of dollars to the States’ citizens; the other type of Exchange would not.

By the way, if you think I'm cynical, you're right. But the Court sort of acknowledged that it was doing some gymnastics to save the law:

Petitioners’ arguments about the plain meaning of Section 36B are strong. But while the meaning of the phrase “an Exchange established by the State under [42 U. S. C. §18031]” may seem plain “when viewed in isolation,” such a reading turns out to be “untenable in light of [the statute] as a whole.” Department of Revenue of Ore. v. ACF Industries, Inc., 510 U. S. 332, 343 (1994). In this instance, the context and structure of the Act compel us to depart from what would otherwise be the most natural reading of the pertinent statutory phrase.

And (emphasis mine):

Reliance on context and structure in statutory interpretation is a “subtle business, calling for great wariness lest what professes to be mere rendering becomes creation and attempted interpretation of legislation becomes legislation itself.” Palmer v. Massachusetts, 308 U. S. 79, 83 (1939). For the reasons we have given, however, such reliance is appropriate in this case, and leads us to conclude that Section 36B allows tax credits for insurance purchased on any Exchange created under the Act. Those credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid.

***

In a democracy, the power to make the law rests with those chosen by the people. Our role is more confined—“to say what the law is.” Marbury v. Madison, 1 Cranch 137, 177 (1803). That is easier in some cases than in others. But in every case we must respect the role of the Legislature, and take care not to undo what it has done. A fair reading of legislation demands a fair understanding of the legislative plan.

Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter. Section 36B can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt.

Justices Scalia, Thomas and Alito dissented.  Justice Scalia explains that this decision has little to do with statutory construction or the Court's role:

This case requires us to decide whether someone who buys insurance on a [federal exchange] gets tax credits. You would think the answer would be obvious—so obvious there would hardly be a need for the Supreme Court to hear a case about it. In order to receive any money under §36B, an individual must enroll in an insurance plan through an “Exchange established by the State.” The Secretary of Health and Human Services is not a State. So an Exchange established by the Secretary is not an Exchange established by the State—which means people who buy health insurance through such an Exchange get no money under §36B.

* * *

Words no longer have meaning if an Exchange that is not established by a State is “established by the State.” It is hard to come up with a clearer way to limit tax credits to state Exchanges than to use the words “established by the State.” And it is hard to come up with a reason to include the words “by the State” other than the purpose of limiting credits to state Exchanges.  * * * *  

Under all the usual rules of interpretation, in short, the Government should lose this case. But normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved. 

And it was, 6-3.