On March 4, 2015, the Supreme Court of the United States heard oral arguments in King v. Burwell, the highest profile challenge to the Affordable Care Act (ACA)  since the Supreme Court’s 2012 decision to uphold the law. The oral arguments featured sharp  questioning of both sides.  A decision is anticipated in June to determine whether the high court  will maintain the status quo with respect to the availability of premium tax credits to  lower-income exchange customers in all states.

The Issue

The plaintiffs in King seek to invalidate a May 2012 Internal Revenue Service (IRS) rule providing  that health insurance premium tax credits will be available to all taxpayers nationwide, regardless  of whether they obtain coverage through state-based exchanges or federally funded exchanges  (FFEs).i The plaintiffs argue that the plain language of the ACA limits the availability of premium  tax credits to health care insurance plans purchased through state exchanges. Only 13 states and  the District of Columbia have established state exchanges for 2015;ii the other 37 states will use  FFEs in 2015.iii The plaintiffs’ argument is based on statutory language providing that premium tax  credits are available only for health care plans that are “enrolled in through an Exchange  established by the State under section 1311 of the [ACA].”iv Case History

In 2013, two groups of individual  taxpayers brought lawsuits contending that the IRS rule violates  the plain language of the ACA. The government successfully defended the IRS rule before the U.S.  District Court for the District of Columbia (in Halbig v. Burwell) and the U.S. District Court for  the Eastern District of Virginia (in King) by asserting that the plaintiffs’ isolation of a phrase  in the statute was inconsistent with the legislative history, structure and purpose of the ACA. The  plaintiffs appealed both decisions to the U.S. Court of Appeals for the D.C. Circuit and the Fourth Circuit, respectively.   On July 22, 2014, in Halbig,v   a divided three-judge panel of the D.C. Circuit struck down the IRS rule and held that the plain  language of the ACA clearly restricted the availability of premium tax credits to consumers  purchasing insurance through state-based exchanges.   On that same day, a unanimous panel in the  Fourth Circuit upheld the same IRS rule in  King,vi concluding  that  it  must  defer  to  the  government’s reasonable interpretation of the ACA reflected in IRS rule under Chevron.vii Although the D.C.  Circuit agreed to rehear Halbig en banc, which potentially could have rectified the circuit split,  the Supreme Court granted the plaintiffs’ petition to hear King.

The Oral Argument at the Supreme Court

STANDING BRUSHED ASIDE

Although Justice Ginsburg raised the issue of standing within the first few seconds of the argument  by Michael Carvin, counsel for the plaintiffs, the issue was brushed aside by the other justices  and seems unlikely to be addressed by the Supreme Court. The government did not challenge the  plaintiffs’ standing in its brief, and on the record before the Supreme Court there is no question  that the challengers  have standing. Mr. Carvin, counsel for plaintiffs, represented that there had  been no factual change that would affect standing, and the Supreme Court appeared satisfied with his representation.

THE MERITS: QUESTIONS FOR PLAINTIFFS’ COUNSEL

The questions to Mr. Carvin primarily focused on two issues. First, Justices Breyer, Kagan,  Ginsburg and Sotomayor repeatedly questioned Mr. Carvin concerning other provisions in the ACA that  the government contends support its interpretation of the statute, read as a whole. In their  questions, those justices made clear that they supported the government’s interpretation of the  statute. Justice Breyer, in particular, outlined the statutory case in support of the government’s  interpretation, noting that Section 1321 of the ACA  required  the  federal  government  to   establish  “such Exchange within the state”viii in those states that did not do so—and that this language effectively meant that the back-up FFEs were “established by the State”  for purposes of the Act.

Second, Justices Sotomayor, Kagan and Kennedy asked whether  the   plaintiffs’   interpretation    necessarily   raised a serious constitutional question;  specifically,  they inquired whether the  ACA (so read) unconstitutionally coerced the states into establishing exchanges in view of the very  severe consequences flowing from their failure to do so. If so, that could implicate the doctrine  of constitutional avoidance, under which a court—if confronted with two plausible interpretations  of a statute—should choose the interpretation that would avoid the potential conflict with the U.S.  Constitution.

THE MERITS: QUESTIONS FOR THE SOLICITOR GENERAL

Like the questioning of counsel for the plaintiffs, the justices’ questioning of Solicitor General  Donald Verrelli focused primarily on the meaning of the statute and whether the plaintiffs’  challenge implicated the doctrine of constitutional avoidance. As to the former, Justices Scalia,  Alito and Kennedy expressed—to varying degrees—skepticism regarding the government’s interpretation  of the statute. In particular, Justice Scalia repeatedly emphasized that it is not unusual for  Congress to enact a poorly designed statute that produces unfortunate results, and that a statute  should not be given an unreasonable interpretation in order to avoid unfortunate results.

As to whether plaintiffs’ interpretation triggered the doctrine of constitutional avoidance because  it resulted in the ACA coercing the states, Justice Alito observed that only six of the states that  do not have state-based exchanges had made that argument.    In  other  words,  if  the  ACA  were  coercive  by withholding tax subsidies from the residents of those states failing to establish exchanges, most  of the states so coerced were not complaining about it. Justice Kennedy, however, quite directly  stated that if plaintiffs’ argument is correct, the ACA coerces states to establish exchanges  because declining to do so “is just not a rational choice.” That in turn, he observed, would  trigger the doctrine of avoidance.

Finally, the solicitor general was questioned by the justices regarding the government’s  alternative argument that the IRS’s interpretation of the statute was entitled to deference under  the Chevron case, under which courts defer to reasonable agency interpretations of ambiguous  federal statutes. Justices Kennedy and Alito observed that applying Chevron deference here would  conflict with the Supreme Court’s cases holding that the tax code is to be construed narrowly  against tax credits and deductions. Chief Justice Roberts—in his only merits-related statement of  the entire argument—observed that, if Chevron applies here, the next presidential administration  presumably could reverse course and withdraw  tax  subsidies  for   health   plans   purchased   on  the FFEs.

Potential Impact of a Ruling for the Plaintiffs

The Supreme Court is anticipated to render its decision by late June. If the Supreme Court strikes  down the IRS rule as contrary to the ACA, that would have significant financial consequences for  millions of U.S. citizens receiving premium tax credits through the FFEs, which would reverberate  throughout the entire health insurance market.

POTENTIAL IMPACT IN 2015

The vast majority (87 percent) of individuals selecting health care plans in the 37 states using  the FFEs in 2015 qualify for premium tax credits.ix Insurers are concerned that a Supreme Court  ruling that such insureds are ineligible to receive premium tax credits, whether or not it goes  into immediate effect, may prompt consumers to drop their coverage mid-year. Insurers are already  locked into their rates for 2015 and it is unclear whether insurers would be allowed to withdraw  from the FFEs mid-year. During oral argument, Justice Alito noted that the Supreme Court could  mitigate some of the immediate impact of such a ruling by delaying its implementation so that the  states using the FFEs could set up exchanges, in order to preserve their citizens’ access to premium tax credits. 

POTENTIAL IMPACT BEYOND 2015

One study has concluded that, if the Supreme Court rules against the government, about 9.3 million  people living in FFE states would no longer receive subsidies by 2016.x That study also projects  that such a ruling would increase the number of uninsured people by 8.2 million, leaving only less-  healthy consumers in  the  individual insurance marketplace and driving up 2016 average premiums 35  percent, a so-called health insurance “death spiral.”xi

Because the Supreme Court will likely rule after insurers have made their regulatory filings for  their 2016 health plans, some insurers are contemplating proposing alternative plan offerings and  two different sets of rates—one for each potential outcome—with the intention to drop certain  offerings before they are finalized. The Department of Health and Human Services has not publicly  discussed any contingency plans. Three Republican senators pledged that they have a plan to provide  financial assistance for a transitional period to individuals who may lose subsidies.xii  Nevertheless, one can only speculate about what—if anything— Congress and the administration would do in that event.