HIGHLIGHTS:

  • The U.S. Supreme Court will hear an appeal of the Fourth Circuit's opinion in the case of King v. Burwell.
  • A decision to invalidate tax credits would impact millions of Americans and could pose a significant challenge to the Affordable Care Act's long-term viability.

On Nov. 7, 2014, the U.S. Supreme Court announced that it will hear the case of King v. Burwell, one of multiple challenges to the validity of the premium tax credits provided under the Affordable Care Act (ACA) to individuals in states with a federally facilitated health insurance exchange.

The premium tax credits subsidize the cost of health insurance plans purchased through an exchange and serve as a cornerstone to the ACA's expansion of access to health coverage. To date, these credits have been issued to approximately 8 million people, approximately 5 million of whom live in one of the 34 states with federally facilitated exchanges. This case therefore represents the latest Supreme Court battle over the continued viability of the ACA and could lead millions of Americans currently enrolled in a health plan through a federally facilitated exchange to lose billions in premium tax credits, forcing many to drop their health coverage altogether.

The Affordable Care Act, Health Exchanges and Premium Tax Credits

The ACA's primary objective in expanding access to health insurance coverage consists of two major components – generous federal matching funds to encourage the states to expand their Medicaid programs and expanded access to private insurance plans through the creation of health insurance exchanges. This second element has been described as resting on a three-legged stool consisting of insurance market reforms, the individual mandate, and the exchanges and premium tax credits.1 The ACA's various health insurance reforms expand access by prohibiting insurers from denying coverage or increasing premiums based on an individual's health status or preexisting conditions. To address the incentives for adverse selection that these reforms create, the individual mandate obligates nearly all Americans to enroll in a health insurance plan meeting certain minimum criteria. Recognizing that coverage may be financially infeasible for many, the premium tax credits subsidize the cost of insurance plans purchased through an exchange for individuals between 100 percent and 400 percent of the federal poverty level. In general, these individuals do not qualify for Medicaid but also cannot afford unsubsidized coverage. The ACA's expansion of access to health coverage is therefore only possible through the simultaneous operation of these three interrelated policies.

Section 1311 of the ACA mandates that each state shall establish its own exchange, which is described as "a governmental agency or nonprofit entity that is established by a State."2 However, since the federal government cannot compel states to act in this fashion, the ACA authorizes the U.S. Department of Health and Human Services (HHS) to "establish and operate such exchange within the state" if a given state elects not to establish its own exchange.3 Currently, 16 states and the District of Columbia operate their own exchanges, while 34 states have elected to have HHS operate a federally facilitated exchange.4

Section 1401 of the ACA sets forth the eligibility criteria for the premium tax credits, which are available to individuals who have enrolled in a health insurance plan "through an exchange established by the Stateunder section 1311."5 Thus, on its face, the ACA appears to authorize premium tax credits only for eligible individuals who have enrolled in a health plan through one of the state exchanges.

On May 23, 2012, the Internal Revenue Service (IRS) promulgated a regulation establishing that the tax credits would be made available to eligible individuals who enroll in a health plan through either a state or a federally facilitated exchange.6 The IRS explained that this policy was justified based on its interpretation of Section 1401 and other provisions of the ACA, and stated that "the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to state exchanges."7

Legal Challenges and Key Issues

To date, four suits have been filed by plaintiffs located in Indiana, Oklahoma, West Virginia, and Virginia (all states with federally facilitated exchanges) challenging the validity of the IRS's regulation.8 In each of these challenges, the plaintiffs have claimed that by making premium tax credits available to eligible individuals in states with federally facilitated exchanges, the IRS regulation constitutes an arbitrary and capricious interpretation of Section 1401, violating the Administrative Procedures Act (APA). These challenges therefore hinge on key issues of legal standing and statutory interpretation of the ACA.

On July 22, 2014, the Fourth Circuit Court of Appeals and the Court of Appeals for the D.C. Circuit simultaneously issued conflicting opinions in two of these cases, with the Fourth Circuit upholding the IRS regulation in King and the D.C. Circuit finding it invalid in Halbig v. Burwell.9

As an initial matter, both the D.C. and Fourth Circuit Courts considered whether plaintiffs had standing to challenge the IRS regulation. In order to have standing, a plaintiff must establish that, at a minimum, he or she has suffered a concrete injury, that the injury is fairly traceable to the defendant's alleged conduct and that the injury can be fairly redressed by the relief that the plaintiff seeks.10

Standing can be particularly difficult to establish in challenges to tax credits, since it is hard to show that receipt of tax credits constitutes a concrete injury for the recipient; however, plaintiffs in both King and Halbig established their standing based on a specific exemption from the individual mandate for individuals for whom the subsidized cost of the minimum health plan available on the applicable exchange exceeds 8 percent of their household incomes.11 In both cases, plaintiffs received sufficient premium tax credits to lower the subsidized cost of the minimum available health plan below the 8-percent threshold, thus subjecting them to the individual mandate and obligating them to pay either the subsidized cost of a health plan or a financial penalty. Although the subsidized costs for some plaintiffs were low (one of the plaintiffs in Halbig faced subsidized health plan costs of less than $21 per year), both the D.C. and Fourth Circuit Courts found this financial burden – created as a direct consequence of having received premium tax credits – sufficient to establish legal standing.12

On the merits, because the challenges to the IRS regulation focus on whether it is a valid interpretation of the ACA, both the D.C. and Fourth Circuit Courts applied the traditional two-step analysis established in Chevron USA v. NRDC.First, is the plain meaning of the statutory language clear, and if so, is the regulation a reasonable interpretation of that plain meaning? Second, if the statute is ambiguous or unclear, is the regulation a "permissible construction of the statute"?13

In Halbig, the D.C. Circuit found that the plain meaning of Section 1401 that provides premium tax credits to individuals who enrolled in a health plan "through an exchange established by the State" is clear and does not authorize the IRS to offer credits to individuals who enroll through federally facilitated exchanges. "Applying the statute's plain meaning," the D.C. Circuit held that the ACA "unambiguously forecloses the interpretation embodied in the IRS rule and instead limits the availability of premium tax credits to state-established exchanges."14

In contrast, the Fourth Circuit in King found that the plain meaning of Section 1401 was ambiguous and that the IRS's regulation was a permissible interpretation of that ambiguous language. Acknowledging "that there is a certain sense to the plaintiffs' position," the Fourth Circuit ultimately held that, in the broader context of the ACA's relevant statutory provisions, the statutory language was sufficiently ambiguous to allow for multiple interpretations.15 Under step two of its Chevron analysis, the Fourth Circuit determined that the IRS regulation was permissible in light of the ACA's overarching policy goals. "It is therefore clear that widely available tax credits are essential to fulfilling the Act's primary goals and that Congress was aware of their importance when drafting the bill."16

When these decisions were issued, it was widely anticipated that the split between the D.C. and Fourth Circuits would eventually be resolved by the Supreme Court, and plaintiffs in King emphasized the split in their petition for certiorari to the court.17 This split appeared to have been resolved, however, when the D.C. Circuit granted rehearing en banc of Halbig,18 and the Supreme Court was not expected to take King until after the D.C. Circuit's rehearing on Dec. 17, 2014. The timing of the Supreme Court's announcement on Nov. 7 has therefore been interpreted as an indication that, without a clear circuit split, at least four justices disagree with the merits of the Fourth Circuit's decision.19

The Affordable Care Act Without Premium Tax Credits

A decision by the Supreme Court that the IRS regulation is invalid and that premium tax credits are only available to individuals who enroll in a health plan through a state exchange would have significant consequences for millions of individuals, as well as the continued viability of the ACA itself.

The Robert Wood Johnson Foundation has estimated that by 2016, 7.3 million individuals would lose out on over $36 billion in premium tax credits.20 The loss of premium tax credits would force these individuals to either pay dramatically higher, unsubsidized premiums or lose coverage altogether. Additionally, some of these individuals would remain subject to the individual mandate, which would not be affected by the loss of tax credits, and would therefore face the added burden of having to pay a penalty in addition to losing coverage. The loss of premium tax penalties would therefore impose significant costs and tax penalties on millions of low- to moderate-income individuals.

Moreover, the withdrawal of so many people from the exchange health plans could dismantle the ACA's current and future success in reducing the number of uninsured Americans. Of those who lose premium tax credits, younger and healthier individuals would be more likely to drop their coverage (even if doing so obligates them to pay the individual mandate penalty), and only individuals most in need of coverage (and therefore the most expensive to cover) will elect to purchase health coverage at unsubsidized rates. This adverse selection "death spiral" could jeopardize the viability of the federally facilitated exchange risk pools, potentially putting them at significant risk of collapse. Many of the ACA's insurance reforms could also be impacted, including its annual and lifetime guaranteed health benefits and its protections against denial or termination of coverage for preexisting conditions, as plans would have to offset their added costs and still keep premiums affordable.

A number of potential solutions are hypothetically possible, but none are clearly feasible in the current political atmosphere. At the federal level, Congress could amend the ACA to extend premium tax credits to individuals enrolled in federally facilitated exchanges; however, it is highly unlikely such a measure would be supported by the Republican majorities in the Congress.

States that currently have federally facilitated exchanges could elect to develop and operate their own state exchanges. Alternatively, these states could develop a hybrid exchange that would be established and operated by the state but would utilize technology from the federal government. Oregon and Nevada, for example, already operate state exchanges that utilize federal technology. Either option would restore premium tax credits to eligible individuals in the state; yet, neither are clearly politically feasible in states with Republican governors or Republican-controlled state houses, which are not expected to take any steps that could be perceived as supporting the ACA or endorsing "Obamacare."

Ultimately, a decision by the Supreme Court to invalidate premium tax credits issued through federally facilitated exchanges could pose significant long-term challenges to the continued viability of the ACA but would have more immediate impacts on millions of individuals who cannot afford unsubsidized health coverage. Whether these impacts will be sufficient to motivate a political solution at either the state or federal level, however, remains to be seen.

What Happens Next?

Oral arguments before the Supreme Court in King are not expected to take place until March 2015, and the Court's opinion will likely not be issued until the end of its current term in June. In the meantime, premium tax credits will continue to be issued under the terms set forth in the ACA and the current IRS regulation.