On June 25, 2015, the Supreme Court of the United States ruled in King v. Burwell that the Affordable Care Act (ACA) requires premium tax credits to be made available in states that use a federal exchange. The case challenged an Internal Revenue Service (IRS) regulation allowing tax credits in federal exchanges. The Supreme Court upheld the regulation as consistent with the statute.

The ruling emphatically endorsed the idea that ACA needs to be read so that its different pieces work together. The Supreme Court was concerned about the practical impact of its ruling—and the possibility of a “death spiral” of higher prices and declining enrollment in the individual insurance markets in states that did not establish exchanges. 

Chief Justice Roberts authored the opinion. The chief justice also wrote the majority opinion in the 2012 ACA case upholding the individual mandate. The chief justice was joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor and Kagan. 

Court Declines to Apply Chevron Analysis to IRS Regulation

The Supreme Court found that ACA is ambiguous with respect to whether subsidies could be made available through the federal exchanges. Despite this ambiguity, the Supreme Court chose not to apply Chevron analysis to determine whether the IRS regulation was a permissible interpretation of the statute. 

Rather, the Supreme Court ruled that Congress did not delegate to the IRS the authority to determine whether ACA allows subsidies in federal exchanges. The Supreme Court reasoned that the question of subsidy availability is “a question of deep ‘economic and political significance’ that is central to the statutory scheme,” and such a delegation is unlikely to have been Congress’ intent given that the IRS “has no expertise in crafting health insurance policy of this sort.”

By not deferring to the IRS under Chevron, the Supreme Court’s ruling makes it difficult for a subsequent administration to change course.

Decision Turned on the Effects on Insurance Markets

Rather than employing Chevron, the Supreme Court looked to the “broader structure of the Act” to determine which interpretation “produces a substantive effect that is compatible with the rest of the law.” The Supreme Court explained that there are three main pillars upon which the ACA’s insurance market reforms are built:

  • Guaranteed issue and community rating standards to make coverage available
  • Subsidies to make coverage more affordable
  • The individual mandate to induce healthier individuals to purchase coverage 

The Supreme Court concluded that a ruling that subsidies are only available in state exchanges would eliminate the second pillar in states with a federal exchange. It would also have the effect of eliminating the third pillar because coverage would become unaffordable for many uninsured individuals in the absence of subsidies (i.e., cost more than 8 percent of individuals’ income). As a result, a ruling against subsidies in federal exchanges would mean “only one of the Act’s three major reforms would apply in States with a Federal Exchange.”

The decision cites to studies that predicted there would be significant premium increases and corresponding decreases in enrollment if subsidies were lost. The majority opinion even quotes the dissent from the 2012 decision upholding the individual mandate in which Justices Scalia, Kennedy, Thomas and Alito acknowledged that “[w]ithout the federal subsidies ... the exchanges would not operate as Congress intended and may not operate at all.” The Supreme Court concluded that Congress’ intent was “to improve health insurance markets, not to destroy them,” so even though “the most natural reading of the pertinent statutory phrase” would be to limit subsidies to state exchanges, Congress could not have intended a reading that would produce such catastrophic results.

Practical Effects of the Ruling

The most obvious effect of the ruling for the government is that it preserves the status quo in the individual insurance markets in states that use a federal exchange. Looking ahead, however, the fact that the Supreme Court’s ruling interpreted the statute itself—rather than the IRS regulation—has significant implications for future administrations, as it cements the subsidies in federal exchanges and means a subsequent administration cannot use the regulatory process to limit subsidies to state exchanges. 

Notwithstanding the Supreme Court’s affirmation and buttressing, ACA continues to be on shaky political footing. Republican congressional leaders have vowed throughout 2015 to press for full repeal, and many of those leaders will recommit themselves to that goal today. Congress has set itself on a course to consider repeal legislation through expedited procedures later in 2015, making it likely that Congress will send the president either full or partial repeal legislation before year’s end. The president undoubtedly would veto any measure that undermines the foundations of the ACA, but this administration now has only 18 months left.

Moreover, King will not be the last legal challenge to ACA. Other cases—some focusing on discrete aspects of the law, others attempting different approaches to a frontal assault—are working their way through federal courts.