In an important victory for proponents of the Patient Protection and Affordable Care Act (“ACA”), the Supreme Court recently ruled in King v. Burwell that individuals may receive subsidies, through tax credits, for health insurance purchased on the federal exchange. 1 Approximately seven million people received subsidized coverage through the federal exchange, so the ramifications of this decision are significant. If the Supreme Court had agreed with plaintiff’s position, then those individuals would no longer receive tax credits resulting in the likely closure of the federal exchange with serious consequences for the individuals receiving the subsidies and for the insurers providing coverage through the federal exchange. Additionally, large employers in states relying on the federal exchange would not have been penalized if they failed to offer coverage since the penalties were based on uncovered employees receiving subsidies through the federal exchange.
At issue in King v. Burwell was Congress’ intent in providing that tax credits are available to individuals that purchase health insurance through “an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.” The Internal Revenue Service (“IRS”) interpreted the ACA to permit tax credits through federal exchanges and the plaintiffs in the litigation filed suit alleging that tax credits should only be permitted in state-run exchanges. The plaintiffs averred that the relevant statutory language was clear on its face and that the plain meaning of the statute should prevail. They also contended that the IRS exceeded in its authority when it allowed individuals to receive tax credits for coverage purchased through the federal exchange.
The Supreme Court, in a 6-3 ruling, concluded that if the meaning of the statutory language is plain, then the Court must enforce the language according to its meaning. The Court, however, also noted that “often times the ‘meaning—or ambiguity—of certain words or phrases may only become evident when placed in context.’” After reviewing how the ACA uses the term exchanges throughout the statutes, the Court concluded the phrase ‘an Exchange established by the State’ is “properly viewed as ambiguous. The phrase may be limited in its reach to State Exchanges. But it is also possible that phrase refers to all Exchanges—both State and Federal—at least for purposes of the tax credits.” The Court stated that the ambiguity of the phrase is supported by several provisions of the ACA which suggest that tax credits should be available on the federal exchanges. The Court also noted that the ACA “contains more than a few examples of inartful drafting.”
Finding that the statutory language was ambiguous, the Court concluded that it must read the words in context and “with a view to their place in the overall statutory scheme.” The Court examined the ACA’s structure for tax credits. The Court noted that the tax credits were available for any applicable taxpayers, who are defined as individuals with a household income between 100 and 400 percent of the federal poverty level. The Court concluded that these provisions suggest that tax credits are available to all applicable taxpayers regardless of whether the individual resides in a state with State or Federal exchange.
More importantly, the Court reviewed the words in the overall statutory context of the three major pillars of the ACA: 1) insurance market reforms, including guarantee issue and community rating; 2) the individual mandate; and 3) tax credits to make coverage more affordable for those at certain income levels. The Court concluded if a state had the first two pillars without the tax credits, the ACA would operate differently in states depending upon what type of exchange was available to the residents of the state and that without the tax credits the other components of the ACA could “push a State’s individual insurance market into a death spiral.” In the words of the Court, “it is implausible that Congress meant the Act to operate in this manner.” As a result, the Court concluded that the ACA had to be read to permit tax credits for coverage purchased through the Federal Exchange.
This decision provides substantial stability to the health insurance marketplace. Insurers now have much clearer direction as to how the marketplace will operate post-ACA. However, there remains at least one more court case that could significantly impact the health insurance marketplace. The House of Representatives, in House v. Burwell, has challenged the administration’s ability to provide cost-sharing reduction payments under the ACA without an explicit appropriation of funds from Congress for the payments. Over 50 percent of individuals enrolled through exchanges receive cost-sharing reduction payments. If the House prevails in its suit it will significantly impact the receipt and payment of health care under exchange plans.
Although the stakes are real, it seems unlikely that the House will ultimately prevail. First, there is the issue of whether the House has standing to bring the suit. The House must show that its members were harmed by the administration’s action. Based on earlier Supreme Court precedent, this should be a difficult test to meet. Even if it is determined that the House has standing, the House must also overcome the argument that by creating the cost-sharing payment reductions under the ACA, and by directing the federal government to make these payments to the insurance industry, Congress did in fact appropriate these funds even if there was not an explicit appropriation.
Assuming this case makes it to the Supreme Court, it seems unlikely that the House will prevail given the Supreme Court’s recent history of interpreting the ACA in manner that favors implementing the statute. Once this case is decided, insurers should have a fairly clear understanding of the rules of the post-ACA health insurance market—at least until the 2016 elections!
Chris Petersen is a partner in the firm’s Insurance and Reinsurance Practice where he concentrates on legal and compliance services relating to the Health Insurance Portability and Accountability Act (HIPAA), privacy, state small group and individual insurance reform regulation and the interaction between state and federal law. Mr. Petersen received his bachelor’s degree from Washington University in St. Louis, Mo. and his law degree from Georgetown University School of Law.
1 The federal regulators refer to the exchanges as marketplaces; however, since the relevant language of the ACA, as well as the Supreme Court’s decision, refers to exchanges that term is used in this article.