U.S. Supreme Court Upholds Subsidies for Health Insurance Purchased on Either a State or Federal Exchange

Insurance Law Alert

A primary goal of the Patient Protection and Affordable Care Act (ACA) is to provide access to affordable health care to all Americans. Indeed, the critical component of the ACA which facilitates  the affordability of healthcare coverage is the tax subsidies for those who qualify under certain income requirements stated in the Act. The controversy underlying the King v. Burwell case (No. 14-114, 576 U.S.__(2015)) centered  on this very provision. In its decision, announced June 25th, the U.S Supreme Court upheld the Internal Revenue Service’s (IRS) rule which grants subsidies, in the form of tax credits, to individuals who purchase health insurance on either a state or federal Exchange.

The ACA generally requires individuals to maintain health insurance coverage or pay a tax penalty to the IRS, unless the individual’s cost of coverage would exceed 8% of that individual’s income. See 26 U.S.C. § 5000A.  The ACA makes purchasing coverage more affordable, and brings a larger percentage of the population under the 8% threshold, by providing tax credits for the purchase of health insurance to individuals with household income between 100% and 400% of the federal poverty line. 26 U.S.C. § 36B. The ACA also requires creation of an “Exchange” in each state to provide a marketplace to enable individuals to compare and purchase insurance coverage. Id.  While the ACA affords each state the opportunity to establish its own Exchange, it empowers the federal government to do so if the state does not.  See 42 U.S.C.  §§ 18031, 18041.  The ACA also provides  that tax credits “shall be allowed” for “any applicable taxpayer,” but only if the taxpayer has enrolled in an insurance plan through “an Exchange established by the State under 42 U.S.C § 18031.” 26 U.S.C. § 36B.

According to the petitioners and the dissenting opinion  in King (Justices Scalia, Thomas and Alito) Section 36B limits tax subsidies to those individuals who purchased their health insurance through “Exchanges established by the State.” The IRS, by regulation, has so far applied the subsidies broadly to include purchasers on the state and federal exchanges. Hearing the King petitioners’ argument that the statutory language of the ACA precludes the IRS from offering tax credits to individual who purchase through the federal, rather than a state, exchange, the U.S. Court of Appeals for the Fourth Circuit held that the statutory provision in question was “ambiguous” and deferred to the IRS’s interpretation of the Act. Coincidentally, on the same day, the U.S. Court of Appeals for the District of Columbia Circuit held that the subsidies must be limited to those persons who purchase through state-based exchanges. Halbig, et al. v. Burwell, 758 F.3d 390 (D.C. Cir. 2014). This immediately gave rise to a direct “circuit split,” and the Supreme Court granted certiorari on the King matter on November 7, 2014, in a clear sign the Court intended to resolve the split.

Chief Justice Roberts’s majority opinion upholds the subsidy as applied to purchasers on state and federal exchanges. “[The provision] allows tax credits for insurance purchased on any Exchange created under the Act,” Roberts wrote. “Those credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid.” King, 576 U.S. ___ (2015). Roberts’ ruling is premised upon achievement of the public policy goals underlying health insurance reform and the ACA specifically.  “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.

In writing for the majority, Chief Justice Roberts side-stepped a traditional Chevron-style deference to the administrative agency (the IRS) charged with implementing the statute in question (the ACA). While a Chevron analysis would have required judicial deference to the IRS’s interpretation of ambiguous terms within the ACA (unless the interpretation was unreasonable), the majority opinion concludes that eligibility for tax credits was not an issue which Congress intended to leave open to the IRS’s interpretation, and therefore the IRS’s interpretation is not controlling per Chevron. Instead, both the majority opinion and the dissent agree that the Court’s developing so-called “Chevron Step Zero” analysis takes interpretation of the subsidy provision of the ACA outside the hands of the IRS, and requires the Court to reach a conclusion as to its meaning.

Where the Roberts-authored majority opinion and the Scalia-authored dissent sharply diverge is over the question of whether the language “an Exchange established by the State,” is, in fact, ambiguous. The majority opinion finds ambiguity and concludes that the IRS interpretation is consistent was true Congressional intent.  In reaching this conclusion, the majority opinion places the language in question in context with the rest of the ACA and its overall purpose. The majority analyzed other language surrounding the subsidies provision, including a provision requiring the Secretary of Health and Human Services to establish “such Exchange[s]” if the state did not establish its own. This additional language led the Court to conclude that the State and Federal Exchanges “are equivalent—they must meet the same requirements, perform the same functions, and serve the same purposes. Although State and Federal Exchanges are established by different sovereigns, [the law does] not suggest that they differ in any meaningful way.” King, 576 U.S. __ (2015).

The structure of Court’s opinion may help avoid a continuous battle over interpretation of the subsidy provision of the ACA by signaling that a future presidential administration may well be without authority to reverse the current IRS rule which uniformly grants tax credits to purchases on state and federal exchanges. If the Court had concluded that Congress left ambiguities in its statutory language subject to administrative interpretation, and applied Chevron analysis and deference, then the Court would have sent a clear message that a subsequent administration could well reverse the IRS’s interpretation of the ACA’s subsidy provision. Such a decision would have permitted the executive branch to place the ACA in a “death spiral” which the majority reasoned that Congress generally intends to avoid.

The King decision unquestionably solidifies the Supreme Court’s support for the ACA. The tax credit subsidies are critical to affordability of health coverage and hence reform efforts. Had the Court ruled against their application to purchasers on the Federal Exchange,  given that over two thirds (36) of the  states have elected not to host an Exchange, the fundamental goals underlying the ACA would have been irrevocably thwarted, thereby assuring  the Act’s speedy demise.  

For more information, please contact Cynthia J. Borrelli or Michael J. Morris.