Supreme Court upholds health insurance subsidies in federal exchanges

The Supreme Court on Thursday issued a much-anticipated decision in which it upheld the availability of premium tax credits under the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, when they are provided through health exchanges run by the federal government (King v. Burwell, No. 14-114 (U.S. 6/25/15)).

In a 6–3 opinion written by Chief Justice John Roberts, the Court found that, although the meaning of the term “established by the State” in Sec. 36B was ambiguous, when read in the context of the entire statutory scheme and its purpose of stabilizing the health insurance market, it is “implausible” that Congress intended to limit the availability of the premium tax credit in states with federal exchanges.

The Court did not use a Chevron analysis to determine whether the IRS’s interpretation of the ambiguous statute was reasonable. The Court said it would not defer to the IRS in interpreting the law because the IRS has no special expertise in health care policy: “This is not a case for the IRS” (slip op. at 8).

Instead, the Court looked at the purpose of the health care law, which it said was designed to solve a specific problem of spiraling health insurance costs that grew out of control in the United States in the 1990s. The chief justice wrote that without the subsidies made available through the premium tax credit, the health care law would undergo economic “death spirals” that would thwart the law’s purpose (slip op. at 15).

According to the Court, PPACA was enacted in response to many failed attempts to reform the health insurance market in the United States. To provide health insurance for more people, many states prohibited insurance companies from denying insurance to people because of preexisting conditions and prohibited the companies from charging more for sick people, which generally resulted in higher premiums. As a result, many people waited until they were sick to get insurance, which further raised premiums and also led to insurers’ leaving the insurance market in those states. These policies created an “economic ‘death spiral’” for the health insurance market in those states (slip op. at p. 2).

The federal health insurance law was designed to solve those problems by adding two things to the requirements that all people be covered and rates remain the same despite health. Based on the model in Massachusetts, the federal government added (1) the individual mandate that all people who can afford to pay must obtain coverage or pay a penalty, and (2) the premium tax credit to make the premiums affordable for low- and moderate-income people.

The premium tax credit is available under Sec. 36B to taxpayers with household income up to 400% of the federal poverty line, but the credit is available only to subsidize the cost of health insurance premiums paid under a health insurance exchange “established by [a] state.” While PPACA provided that states “shall” establish health insurance exchanges (42 U.S.C. §18031(b)(1)), it allowed the federal government to operate exchanges in states that failed to do so (42 U.S.C. §18041(c)(1)).

The Court examined the meaning of “an Exchange established by the state” in Sec. 36B and concluded that it was ambiguous. It noted numerous examples where the law, while referring to the tax credits, is clearly referring to both types of exchanges, state and federal. Finally, the Court explained that the law has many poorly drafted parts because it was written in haste without the normal committee review and passed in a way that limited opportunities for debate and amendment (slip op. at 14).

In the end, the Court decided that “we must interpret the Act in a way that is consistent with” the congressional intent to improve health insurance markets and avoid destroying them, and it upheld the Fourth Circuit’s decision that Sec. 36B allows tax credits for insurance purchased on a federal exchange.

In a dissenting opinion, Justice Antonin Scalia (joined by Justices Samuel Alito and Clarence Thomas), strongly objected to the majority opinion’s “unnatural” interpretation of the statute: “Today’s interpretation is not merely unnatural; it is unheard of” (dissenting op. at 3). According to Scalia, “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” (dissenting op. at 2–3).

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.