The Supreme Court has spoken, and the Affordable Care Act (ACA) has survived yet another near-death experience. In a decisive opinion, written for six of the Court’s nine justices, Chief Justice Roberts upheld the Internal Revenue Service (IRS) rule that allows low- and moderate-income Americans access to tax credits, regardless of whether they live in states where the federal or state government operates the marketplace.
The Background
King v. Burwell is one of four cases that have been brought by ACA opponents asking the courts to invalidate an Internal Revenue Service rule that allows federally facilitated exchanges (FFEs, also called federally facilitated marketplaces) to make available advance premium tax credits to help Americans purchase health insurance.
The Affordable Care Act reformed health insurance underwriting to prohibit insurers from considering preexisting conditions in deciding whether to cover individuals and determining how much enrollees are charged in premiums. It also required individuals who could afford coverage to get coverage or pay a penalty. To ensure that insurance was affordable, the ACA offered premium tax credits to low- and moderate-income people.
These tax credits were offered through entities that were called “exchanges” in the legislation, and are now called marketplaces. The exchanges were intended to increase competition among insurers and augment the choices available to enrollees, but also to provide an access point through which tax credits could be made available to help pay premiums as they became due on a monthly basis.
The Senate version of the ACA—which was eventually adopted by both houses with modifications that could be made through the Health Care and Education Reconciliation Act—located the exchanges in the states. It provided, however, that if a state chose not to establish its own exchange, the Department of Health and Human Services would provide “such exchange” for the states. Dozens of provisions in the ACA indicate that the federally facilitated exchanges were supposed to function just like the state-operated exchanges. One provision of the law, however, which added section 36B to the IRS code to provide for the tax credits, twice refers to enrollment through an “Exchange established by the State” as a seeming condition of eligibility for tax credits.
In drafting rules implementing the ACA, the IRS concluded that Congress in fact meant for federally facilitated as well as state-operated exchanges to grant tax credits. The IRS decided that this was the most reasonable way of reading the statute as a whole and was consistent with overwhelming evidence of congressional intent. Four cases were subsequently filed, however, challenging this interpretation. Two were filed in Virginia and the District of Columbia by individuals, sponsored by the Competitive Enterprise Institute, and one each by the attorneys general of Oklahoma and Indiana.
The district courts in Virginia and the District of Columbia held the IRS rule valid, finding that it was clearly supported by the language of the statute. The Fourth Circuit affirmed the Virginia district court. One of the three judges agreed with the district court that this result was required by the clear wording of the ACA; the other two judges decided that the statute was not entirely clear, but that nevertheless the court should defer to the IRS’ interpretation of the statute since Congress charged that agency with interpreting section 36B.
A D.C. Circuit panel of judges, however, in a 2 to 1 decision, would have overturned the D.C. district court decision and invalidated the IRS rule. The D.C. Circuit panel concluded that the ACA permitted only state exchanges to issue premium tax credits. The D.C. Circuit panel judgment was set aside by the full D.C. Circuit, which agreed to rehear the appeal en banc.
A district court in Oklahoma would also have invalidated the rule. Its decision was appealed to the 10th Circuit.
In the interim, however, the Supreme Court agreed to hear an appeal from the Fourth Circuit’s decision in King v. Burwell. All action in the other three cases was halted awaiting the high court’s ruling.
The Supreme Court’s decision to hear the case provoked a great deal of involvement from interested parties. Over twenty amicus briefs were filed by supporters of the plaintiffs, including briefs from seven state attorneys general, Republican members of Congress, state legislators, law professors, and conservative and libertarian advocacy groups. Over thirty amicus briefs were filed in support of the government and the IRS rule, including briefs from attorneys general from twenty-two states and the District of Columbia, Democratic members of Congress, state legislators, insurer organizations, disease organizations, hospital organizations, physician organizations, and progressive advocacy organizations.
The Supreme Court’s Decision
Chief Justice Roberts’ opinion began with a lucid explanation of the ACA’s reforms and why they were necessary. He recognized that a central focus of the reform was to make health insurance available by prohibiting insurers from taking preexisting conditions into effect in offering coverage. He noted, however, that repeated attempts by the states to reform insurance markets had failed because markets collapsed once they were opened to unhealthy enrollees. As described above, the genius of the ACA, patterned after successful Massachusetts reforms, was to protect those markets by requiring individuals to purchase insurance and providing tax credits to make that coverage affordable. The tax credits were provided through the exchanges. The question before the Court was whether they were available though all exchanges or only through state-operated exchanges. The Fourth Circuit had held that they were.
Although the Supreme Court affirmed the decision of the Fourth Circuit, it relied on different grounds than the Fourth Circuit did. The Fourth Circuit held that the statute was ambiguous on the question of whether FFEs could grant tax credits, and that it should therefore defer to the interpretation of the statute by the IRS under the longstanding Chevron rule, which instructs the courts to defer to the reasonable interpretation of ambiguous statutes by administrative agencies. The Supreme Court held instead that the availability of tax credits was one of those “extraordinary cases,” of “deep “economic and political significance” and “central to this statutory scheme,” so that Congress would not have left the question to the administrative agency. Instead, the Chief Justice held, it is up to the Court to determine what the statute means in this regard.
Only Congress Will Be Able to Limit Tax Credits in The Future
This is not a trivial issue. As the Chief Justice had observed at the oral argument, had the Court simply deferred to the agency, a future administration could have changed the rule. The Court’s decision means that if Congress wants to limit tax credits to state-operated exchanges, Congress itself will have to amend the law.
The Court proceeded to determine itself what the statute meant. In doing so, the Chief Justice relied throughout on the text, context, and purpose of the ACA, not on legislative history or some abstract notion of congressional intent. He began by noting that language that seems clear on its face may be ambiguous when read in context. It is the Court’s duty “to construe statutes, not isolated provisions.” The Court then turned to section 36B of the Internal Revenue Code, the provision in dispute. Section 36B provides that to receive tax credits, an individual must 1) enroll in an insurance plan through an Exchange, 2) the Exchange must be “established by the State” and 3) the exchange must be established under 42 U.S.C. § 18031.
It was obvious to the Court that insurance bought through the FFE is coverage purchased through an exchange. The Court next confronted the hard question: Is the FFE an “Exchange established by the State”? The Court latched onto several provisions of the ACA that indicate that it could be. First, the ACA defines “qualified individuals,” that is individuals who can purchase insurance through an exchange, as residents of “the State that established the Exchange,” but Congress clearly meant for residents of all states to be qualified. Moreover, all exchanges are required to “make available qualified health plans to qualified individuals” which cannot happen if qualified individuals only exist in states with state-operated exchanges. The phrase “established by the State,” in the ACA does not, therefore, obviously include only state-operated exchanges.
It is clearer that an FFE meets the third test—it is an exchange established under 42 U.S.C. 18031. In fact, the ACA defines all exchanges, state operated and federally facilitated, to be 42 U.S.C. 18031 exchanges. Section 18031 is the section that details what an exchange is and does. It must, therefore, include all exchanges, including FFEs. Moreover, the ACA provides that if a state elects not to establish an exchange, HHS shall establish “such Exchange,” indicating that the FFE and a state-operated exchange are the same.
Considering this context, the Court concluded that the phrase “Exchange established by the state” was at least ambiguous. The Court supported this conclusion by citing several other provisions of the ACA that assume that tax credits are available everywhere, regardless of who operates the Exchange.
The Court acknowledged the challengers’ argument that the words “established by the State” are unnecessary if all exchanges can grant premium tax credits. The Chief Justice responded that the drafting of the ACA was done behind closed doors and was passed with limited opportunity for debate and amendment. The ACA is not a model of drafting, but it is nonetheless the Court’s job to make sense of it.
The Premium Subsidies in the Context Of the ACA’s Purpose and Structure
Given the Court’s conclusion that the term “established by the State,” is ambiguous, it turned to the broader structure of the Act to determine its meaning. Here it found ample evidence that reading the statute as the plaintiffs argued it would contravene the purpose of the ACA. It would destabilize insurance markets, creating the problem Congress adopted the law to avoid.
The ACA’s market reforms, which make insurance available to all regardless of preexisting conditions, necessitate the individual mandate and the premium tax credits to avoid massive adverse selection against insurance markets by those with health problems. But the challengers’ interpretation would not only mean that tax credits were not available in FFE states, it would also undermine the individual mandate in those states; individuals who would have been subject to the mandate were the tax credits available would be free from the mandate because insurance would be unaffordable without the tax credits.
The absence of the tax credits and the weakened individual mandate could push insurers into a death spiral, something Congress certainly didn’t mean to happen. The challengers responded that Congress expected all states to operate their own exchanges, but the Court observed that this theory is inconsistent with the ACA establishing a federal fallback exchange.
Finally, the Court noted that the structure of Section 36B itself supports the IRS interpretation. The section says any “applicable taxpayer” is eligible for a subsidy, and the “established by the State” language is buried in the formula for calculating tax credits. If Congress meant to limit tax credits to state exchanges, “it would not have used such a winding path of connect-the-dots provisions about the amount of the credit.”
In conclusion, the Court acknowledged the strength of the challengers’ reading of the statute, but emphasized again that it must rely on the context and structure of the statute to discern its meaning. The Chief Justice concluded:
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.” 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.
The Dissent
The dissent, written by Justice Scalia for himself and Justices Alito and Thomas, is scathing. He refers to the majority opinion as “interpretive jiggery-pokery” and “pure applesauce.”
He dismisses all of the arguments of the majority and cites approvingly all of the arguments of the challengers. He accuses the majority (presumably the Chief Justice) of having rewritten the ACA to save it in the earlier NFIB case and of doing it again here. He asserts that we should start calling the ACA “SCOTUScare.”
He concludes:
Perhaps the Patient Protection and Affordable Care Act will attain the enduring status of the Social Security Act or the Taft-Hartley Act; perhaps not. But this Court’s two decisions on the Act will surely be remembered through the years. The somersaults of statutory interpretation they have performed (“penalty” means tax, “further [Medicaid] payments to the State” means only incremental Medicaid payments to the State, “established by the State” means not established by the State) will be cited by litigants endlessly, to the confusion of honest jurisprudence. And the cases will publish forever the discouraging truth that the Supreme Court of the United States favors some laws over others, and is prepared to do whatever it takes to uphold and assist its favorites.
But Justice Scalia wrote for a three-judge dissent, not the six-judge majority.
Looking Forward
The Supreme Court’s decision finally settles the question of whether federally facilitated exchanges can grant premium tax credits. It averts the disaster that would have befallen health insurance consumers, health insurers, and health care providers had the court invalidated the rule, ending tax credits in two thirds of the states. Low- and moderate-income Americans will continue to have access to affordable health insurance—and to health care, since the cost-sharing reduction payments would likely have ended as well—no matter where they live.
The court’s decision is also likely to send a message to the lower courts that it is time to bring the curtain down on ACA litigation. Dozens of cases have been filed over the half-decade that the ACA has been in force, challenging the constitutionality of the ACA itself as well as the way in which it has been implemented. Few of these cases have succeeded, although while the 2012 Supreme Court’s decision in NFIB v. Sebelius rejected the plaintiffs’ primary claim that the individual responsibility provision was unconstitutional, the Court crippled the ACA’s Medicaid expansion in almost half of the states.
In fact, the appellate courts have dismissed a series of ACA challenges over the past year, mostly on the ground that the individuals bringing the cases had not been personally injured by the ACA. Given the Court’s admonition in King v. Burwell that courts should interpret the ACA to promote Congress’ intention to improve insurance markets and not destroy them, litigation against the ACA is likely to fare no better in the future.
The court’s decision is also likely to encourage some states that have had trouble operating state exchanges to either abandon their state exchange altogether, or more likely to move to a “supported state exchange,” using the healthcare.gov website to carry out eligibility and enrollment functions while maintaining a state exchange for other functions. The Supreme Court’s judgment leaves the decision as to whether to have a state or federally facilitated exchange with the states—where Congress intended it to reside.
Congressional Republicans have in recent months offered a host of proposals to amend, or even to repeal, the ACA. In their 2016 budget proposal they laid the groundwork for budget reconciliation legislation intended to change the ACA.
But with the Court upholding the administration’s interpretation of the law, the Obama administration has little reason to accede to Republican proposals. The Court’s decision effectively puts the future of the ACA on hold until the 2016 elections, when the people will decide whether to stay the course or to chart a very different path.
Editor’s note: This post is being cross-posted at the Health Affairs Blog. For more coverage of King v. Burwell, see additional responses at Health Affairs Blog and To the Point, the Commonwealth Fund's blog.
