The Supreme Court’s highly anticipated decision in King v. Burwell, 576 U.S. __, ___(2015), confirms the availability of tax subsidies for individuals who purchase their health insurance on an exchange created by the federal government, continuing the ability of eligible individuals in 37 states to obtain subsidies despite the lack of a state exchange.

The question before the Supreme Court was whether Internal Revenue Service regulations could extend tax-credit subsidies to health insurance coverage purchased through exchanges established by the federal government when Section 36B(b)(2)(A) of the Internal Revenue Code appears to limit those subsidies to coverage purchased “through an Exchange established by the State[.]”

Concern that three-quarters of current exchanges might be unable to offer subsidies − and that more than six million individuals would lose subsidized insurance − prompted several groups to file amicus briefs in support of the IRS regulation, including briefs from 22 states (most of which have state exchanges), members of Congress, state legislatures and associations representing health insurers, physicians and hospitals. Because employer-mandate penalties apply only where an employee obtains a subsidy, a decision limiting subsidies to state exchanges would also have impacted potential ACA employer penalties.

The majority opinion, written by Chief Justice Roberts, showed deference to the congressional purpose of the ACA:

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. Id. (slip op., at p.21)

What Was in Dispute?

The ACA provides subsidies for people who buy their health insurance through an exchange. One provision of the ACA indicates that the subsidies are available only if you purchase your health insurance on an exchange “established by the State.” The plaintiffs in King v. Burwell argued that subsidies are not available if you purchase health insurance on the federally established health exchange, Healthcare.gov. The federal government argued that, if the ACA is taken in its entirety, it is clear that the subsidies are available to everyone who purchases insurance on an exchange, no matter who created it, because to read the legislation otherwise would end not just the subsidies but the entire system created by the ACA.

The Court Decision

In a 6-3 decision, the court affirmed that the law’s tax credits are available to individuals in states that have federal exchanges.

In his opinion for the majority, Chief Justice Roberts wrote that the ACA adopted reforms that are closely intertwined: guarantee issue and community rating, requiring coverage or payment to the Internal Revenue Service, and affordability. The tax credits make insurance more affordable by giving refundable tax credits to individuals with household incomes between 100 percent and 400 percent of the federal poverty level. The court found that pulling out the tax credit provision would create a “death spiral,” because if people did not have subsidies they would be exempt from coverage. Therefore, the only reform left would be guarantee issue and community rating, which on their own would not complete the overall intent of the ACA.

The majority opinion conceded that the challengers’ “arguments about the plain meaning of Section 36B are strong,” but ultimately concluded that “the context and structure of the Act compel us to depart from would otherwise be the most natural reading of the pertinent statutory phrase.” Id. (slip op at p.20)

Chief Justice Roberts acknowledged that the ACA “contains more than a few examples of inartful drafting. . . [and] does not reflect the type of care and deliberation that one might expect of such significant legislation.” Id. (slip op at p.14) Nonetheless, the majority concluded that the legislative language relating to the exchange established by the state is ambiguous because it could be read to mean either state exchanges or all exchanges. Citing a recent decision, Utility Air Regulatory Group v. EPA, 573 U.S. __(slip op at pp. 9-15), “under statutory construction words have to be read in their context and with a view to their place in the overall statutory scheme.” Therefore, the Supreme Court looked to the broader structure of the Act to determine what the Act’s provision related to the tax credit meant.

The Supreme Court said:

The upshot of all this is that the phrase “an Exchange established by the State under 42 USC 18031” is properly viewed as ambiguous. The phrase may be limited in its reach to State Exchanges. But it is also possible that the phrase refers to all Exchanges – both State and Federal – at least for purposes of the tax credits. King v. Burwell, 576 U.S. _, _ (2015) (slip op at p. 12).

The Supreme Court further stated that because the text is ambiguous, the court must turn to the broader structure of the Act to determine the meaning of the section of the ACA that permits tax credits. Quoting United SavAssn of Tex. v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 371 (1988), the court said, “A provision that may seem ambiguous in isolation is often clarified by the remainder of the statutory scheme … because only one of the permissible meanings produces a substantive effect that is compatible with the rest of the law.” Id. (slip op at p.15)

In this case, the court determined that the statutory scheme compelled them to reject the interpretation that tax credits applied only to exchanges established by individual states. To reject the broader interpretation would mean destabilizing the individual insurance market in any state with a federal exchange, creating a death spiral in the insurance market that Congress sought to avoid. The court also stated that the structure of Section 36B itself suggests that tax credits are not limited to state exchanges, because the section provides that tax credits shall be allowed for any applicable taxpayer and then it defines an applicable taxpayer. Together, these two provisions appear to make anyone in the specified income range eligible to receive a tax credit.

The Dissent

“Under all the usual rules of interpretation, in short, the Government should lose this case. But normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved.”

Justice Scalia dissented in an opinion joined by Justices Thomas and Alito, finding it “quite absurd” that an “‘Exchange established by the State’ ... means ‘Exchange established by the State or the Federal Government.’” King v. Burwell, 576 U.S. _,_ (slip op. dissent at p.1) The dissent rejects the majority’s view that ACA context justified its interpretation of Section 36B and excoriated the majority opinion for rewriting the ACA rather than interpreting it. Ultimately, the dissent notes “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.” Id.(slip op dissent at p. 21)

Implications

This represents another big win for the Administration and the ACA. The Supreme Court’s explanation and endorsement of ACA’s purpose will make future court attacks more difficult.

The decision avoids the risk that many employees of small employers and self-employed persons would cease to have health coverage if the subsidies were no longer available. Some analysts had predicted that the number of uninsured persons could rise  to more than 8 million persons by 2016 if the challengers succeeded in their claims. In addition, the decision has some less obvious implications.

The Supreme Court stated, as Chief Justice Roberts observed in oral argument, that it seems unlikely that Congress would have intended that an agency, rather than the court, resolve the ambiguous question of availability of tax credits on the federal exchange. This decision implies that a future Administration could not change the application of the tax credits simply by regulatory process. A change would require congressional action.

In order to change those sections of the law that provide the basis for health reform, Congress would have to unwind those reforms that the court found to be so intertwined that one could not stand without the others. This would make amending the law challenging and problematic. One can conclude that, in order to change the fundamental portion of the law that achieved health reform, Congress would have to do a wholesale replacement rather than make small changes.