In a 6-3 opinion, (Chief Justice Roberts, Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan) with Chief Justice John Roberts writing for the Court, the U.S. Supreme Court in King v. Burwell held that subsidies are available at the Federal health insurance exchanges. Individuals who get health insurance through Federal health insurance exchanges remain eligible for tax subsidies. 

Since the case was heard by the Court, the country as a whole has been entangled in a plethora of political and logistical “what if” scenarios since a decision to the contrary would have proved chaotic for states without their own health care exchanges, and for Obamacare in general.  California and Colorado, unlike Arizona, would have been largely unaffected by such a decision since these states established their own exchanges — Covered California and Connect for Health Colorado — to provide qualifying plans to individuals and small businesses. The Court’s decision today clarifies the Federal Exchange subsidy issue and likely will have a chilling effect on remaining legal challenges to the health care reform law.

At issue in the case was whether the IRS may permissibly pass regulations to extend tax-credit subsidies to coverage purchased through exchanges established by the Federal Government under the Patient Protection and Affordable Care Act (ACA). The text of the ACA provides that individuals may qualify for subsidies at “an Exchange established by the State”   

The King petitioners (four individuals who live in Virginia) did not wish to purchase health insurance. Virginia did not establish its own state-based health insurance exchange, but rather relied on the Federal Government to do so, which it did through the Federal Exchange (www.healthcare.gov). Under the ACA’s individual mandate, most individuals are required to purchase insurance or pay a tax penalty. One of the exceptions to the individual mandate applies to individuals whose cost of coverage is more than 8% of their income. In the petitioners’ view, Virginia’s exchange does not qualify as “an Exchange established by the State” so they should not receive any tax credits. Without the credits, the cost of buying insurance would exceed 8% of petitioner’s income, thereby exempting them from the ACA’s coverage requirements. As a result of the IRS Rule, however, petitioners would receive tax credits that would make their cost of coverage less than 8%, subjecting them the ACA’s coverage requirements.    

The petitioners challenged the IRS rule in Federal District Court.  The District Court dismissed the suit, holding that the ACA made tax credits available to individuals through the Federal Exchange. The Court of Appeals for the Fourth Circuit upheld the District Court’s decision.  

Today, in its holding, the Supreme Court stated that the phrase “an Exchange established by the State” is properly viewed as ambiguous and that the Court must look at the “broader structure” of the ACA to determine the meaning of this phrase. 

The statutory scheme compels the Court to reject the petitioners’ interpretation because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very “death spirals” that Congress designed the Act [ACA] to avoid.  Under petitioners’ reading, the Act would not work in a State with a Federal Exchange.  As they see it, one of the Act’s three major reforms –the tax credits—would not apply.  And a second major reform—the coverage requirement—would not apply in a meaningful way, because so many individuals would be exempt from the requirement [individual mandate] without tax credits. 

The Court explained that structure of the ACA itself suggests that tax credits are not limited to State Exchanges. The law allows tax credits for any “applicable taxpayer,” and the law defines that term as someone with a household income between 100 percent and 400 percent of the federal poverty line.  The law, according to the Court, appears to make anyone in this income range eligible for a tax credit. The Court rejected the petitioners’ argument that these provisions are an “empty promise in States with a Federal Exchange.” Additionally, the Court was not persuaded by the petitioners’ argument that an individual in a state with a Federal Exchange would be eligible for a tax credit, but the amount of the tax credit would always be zero because of, “two provisions buried deep within the Tax code.” 

The Court admitted that the petitioners’ plain-meaning arguments were strong.   Ultimately though, the Court held the ACA’s context and structure compel the conclusion that the law allows tax credits for insurance purchased on any Exchange created under the ACA because the 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.” Justice Antonin Scalia dissented in an opinion joined by Justices Clarence Thomas and Samuel Alito.  Justice Scalia called the majority decision “absurd” and complained that “words no longer have meaning if an Exchange that is not established by the State is ‘established by the State.’”  Justice Scalia sums up his opinion by stating that the precedent set by the majority opinion changes the rules of statutory interpretation for the sake of the ACA. 

The end result of King v. Burwell is that the subsidies will continue, the Court has maintained the status quo, and any opponents of the ACA must focus their efforts to repeal the law by retaining Republican control of Congress and seeking to retake the White House in 2016. 

For more information, please contact Jon Alexander at (949) 885-2330.