The US Supreme Court (the "Court") heard oral arguments today in King v. Burwell, a case that could significantly impact the viability of the Affordable Care Act (ACA). In this case, the Court is being asked to decide whether federal tax subsidies are available for use only on health insurance exchanges established by individual states, or if they also are available for use on exchanges established by the federal government. Created as a backstop to the state-based exchanges envisioned by the ACA, the majority of states have chosen to defer to the federal government to operate their exchange. In 2015, 37 states are deferring to HealthCare.gov, the federal exchange created and operated by the Department of Health and Human Services (HHS).

King threatens several of the reforms at the heart of the ACA:  the individual mandate, which requires most Americans to obtain health insurance or pay a tax penalty; the employer mandate, which requires large employers to offer their employees affordable insurance or face a tax penalty; the exchanges established by the ACA and the subsidies that the ACA created to make coverage under the ACA affordable. According to HHS, more than 85 percent of individuals who selected a qualified health plan (QHP) through the federal exchange for 2015 are eligible for subsidies.

King v. Burwell background

The ACA’s individual mandate requires individuals to obtain acceptable health insurance or to qualify for an exemption. Without qualifying for an exemption from the individual mandate, individuals who do not enroll in coverage must pay a tax penalty to the IRS. For individuals with modest incomes, QHP coverage is not likely to be considered “affordable” without the premium tax credit subsidies, and thus, such individuals will not be subject to the mandate.

The Petitioners in King are four Virginia residents opposed to the ACA’s individual mandate. Because Virginia has deferred to the federal exchange, Petitioners are, in essence, challenging their own ability to obtain subsidies. If the Court holds that subsidies are not available for use on the federal exchange, the Petitioners (with their modest incomes) would not be subject to the requirements of the individual mandate. Thus, they could remain uninsured without facing a penalty. If Petitioners are successful, this pattern could repeat in the 37 states deferring to the federal exchange this year. Moreover, a decision in favor of the Petitioners would render the employer mandate meaningless in federal exchange states, as the employer mandate penalties hinge on the availability of tax credits. Large employers will only face penalties for not offering their employees insurance if the uninsured employees receive QHP coverage with subsidies.

Key arguments

The crux of the lawsuit is whether the Internal Revenue Service (IRS) exceeded its authority as granted by Congress under the ACA by allowing premium tax credit subsidies to be used by QHP enrollees in both state-based exchanges and the federal exchange. Petitioners argue that allowing the tax subsidies to be used on the federal exchange contradicts Congress' clear intent for tax subsidies to be available only to taxpayers and their dependents who purchase insurance "through an Exchange established by the state." They also contend that Congress intentionally restricted the use of subsidies to state exchanges as a way to induce states to set up their own exchanges instead of relying on HHS.

The Obama Administration defends its position by pointing to section 1321 of the ACA, which provides that states may set up a state-based exchange or that HHS will "establish and operate such exchange within the state." The Administration argues that HHS may effectively act on behalf of the state in establishing an exchange and that the phrase, "such exchange," is a term of art meant to encompass both state-based exchanges and the federal exchange. The Administration also argues that accepting Petitioners’ rationale would actually prohibit individuals from enrolling in QHPs (regardless of subsidies) in the federal exchange. Under the ACA, only "qualified individuals" are eligible to purchase insurance through an exchange, and the law defines a qualified individual as an individual who "resides in the state that established the exchange." If the federal government established the exchange (as opposed to a state), no individual would be “qualified” to obtain coverage through such federal exchange.

The Administration argues that eliminating subsidies in certain states would undermine the ACA’s health insurance market reforms and the law’s “framework of cooperative federalism."  Alternatively, the Administration also argues that the Court must defer to the interpretation of agency experts— here, the IRS—under the principle of Chevron deference.

Impact of adverse ruling

While a ruling against the Administration would all but eliminate both the individual and employer mandates in federal exchange states, the Court is unlikely to modify the ACA's insurance market reforms, such as requiring insurers to cover all applicants regardless of pre-existing conditions. For any health insurance pool to function properly, there must be a sufficient balance between sick and healthy enrollees. This idea was the basis for the ACA’s insurance market reforms, combined with an individual and employer mandate to encourage enrollment and tax subsidies to reduce the cost of enrollment. An adverse ruling against the ACA could destabilize the health insurance market in each state using the federal exchange, causing healthier enrollees to drop coverage due to cost concerns, while only the sickest individuals fight to remain covered despite the added costs.

Next steps

The Supreme Court is expected to render its decision in late June, three years after holding the individual mandate to be constitutional. How the Court interprets the meaning of "established by the state" and deference to agency decisions will be vital to the future of the ACA. HHS Secretary Sylvia Burwell has stated that the Administration does not have any back-up plan if the Court rules against the Government’s position. The ACA prescribes multiple requirements for a state-based exchange and regulations promulgated by HHS outline how states may gain approval to run their own exchange. In states deferring to the federal government, political, technical or financial realities have prevented the creation of a state-based exchange. Many of these realities will remain regardless of the Court’s decision. While some Republicans in Congress and in the states have offered transitional plans to respond to a Court ruling against the Administration, the ultimate response by a Republican-controlled Congress with President Obama, or by political leaders in federal exchange states, is impossible to predict.