Supreme Court Preserves ACA’s Insurance Subsidies for Federal Exchange Enrollees

The United States Supreme Court issued its ruling in King v. Burwell, maintaining income-based subsidies that allow millions of Americans to purchase individual health insurance policies from the federal healthcare.gov insurance exchange. In a 6-3 decision, authored by U.S. Chief Justice John G. Roberts, Jr., the Court deferred to the legislative intent of Congress when it drafted and passed the Affordable Care Act more than five years ago.

What's in dispute
The case centered around one sentence in the law suggesting that subsidies should only be offered through health insurance exchanges established by individual states. Four individuals challenged that provision because they didn't want to be eligible for the subsidies. If they received the subsidy, they'd be obligated to obtain coverage because the cost of health insurance wouldn't be more than eight percent of their income. Without the subsidy, insurance would cost them more than eight percent of their income and they would fall within an exemption. So they argued that individuals in their home state of Virginia, which had a Federal Exchange, didn't qualify for the tax subsidies because the language in the statute provided tax credits to anyone who enrolled in an Exchange "established by the State."

How the court interpreted the law
Declaring that sentence ambiguous, the Court said it must look to the "broader structure of the Act" to interpret its meaning—noting its job is to interpret statutes, not just "isolated provisions." In doing so, the Court found interpreting the language to exclude subsidies for individuals enrolling in a federal exchange would "destabilize" state insurance markets and "likely create the very 'death spirals' that Congress designed the Act to avoid." Additionally, it wasn't in keeping with the intent of the Act to treat state and federal exchanges differently—making coverage more affordable for individuals accessing a state exchange but not for those accessing a federal exchange. The Court rejected the argument that the legislature's express use of the phrase "established by the State" would be superfluous if it didn't limit tax credits to state exchanges. While acknowledging that the Court's usual "preference" is to avoid "'surplusage constructions,'" that wasn't warranted in this case it said, in particular because the Act "contains more than a few examples of inartful drafting."

For example, the Court found it "implausible" that the legislature intended the tax credit and two other reforms to be applicable only in states with a state exchange but not those relying on the federal exchange. Explaining the purpose of the legislation, the Court noted that there were three reforms, based on Massachusetts health care reform: guaranteed health insurance coverage for all individuals who apply in a state for coverage, an insurance coverage requirement mandating individuals purchase health insurance or make a payment to the IRS, and finally, tax credits to help finance that mandatory purchase. The court found these three reforms were "closely intertwined" and the legislation couldn't work without all three.

The problem arises, the Court explained, from the legislation's language which "initially provides that tax credits 'shall be allowed' for any 'applicable taxpayer.' 26 U. S. C. §36B(a)" but then later "provides that the amount of the tax credit depends in part on whether the taxpayer has enrolled in an insurance plan through 'an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act [hereinafter 42 U. S. C. §18031].' 26 U. S. C. §§36B(b)– (c) (emphasis added)." IRS regulations provide, however, that the tax credits are available to anyone who enrolls in an exchange created by a state or by the Department of Health and Human Services. So it's the IRS rule that the plaintiffs challenged, arguing it conflicts with the language in the Act that says subsidies are for those enrolled in an exchange "established by the State."

The Court broke down the eligibility for subsidies into three requirements: the individual be enrolled in an exchange, the exchange be established by the State, and established under section 42 U.S.C. 18031. The Court observed that the legislation requires all exchanges to provide coverage to all qualified individuals but then defines qualified individuals to be those who reside in the state that established the exchange. If taken literally, the Court explained, that would mean the Federal Exchanges would have no qualified individuals entitled to the coverage guarantee—"But the Act clearly contemplates that there will be qualified individuals on every Exchange."

Therefore, the Court concluded the tax credits apply to both State and Federal Exchanges: "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. Section 36B can fairly be read consistent with what we see as Congress's plan, and that is the reading we adopt."

Reaction to the Court's decision
Not surprisingly there is mixed reaction to the Court's interpretation. Justices Samuel Alito, Clarence Thomas and Antonin Scalia cast the dissenting votes in the case. Scalia read his dissent from the bench after the decision was announced, suggesting his deep disagreement over the decision, which he called the result of "interpretative somersaults" and ultimately "absurd." He argued: "Words no longer have meaning if an Exchange that is not established by a State is 'established by the State.' It is hard to come up with a clearer way to limit tax credits to state Exchanges than to use the words 'established by the State.' And it is hard to come up with a reason to include the words 'by the State' other than the purpose of limiting credits to state Exchanges." Thus, he argued the Majority was rewriting the law in order to preserve the Affordable Care Act. To support his interpretation, Scalia pointed out that excluding subsidies for the Federal Exchange provides motivation for States to establish State Exchanges. As possible support for this argument, note that Pennsylvania's governor announced the state would withdraw its plan to set up a state exchange, a contingency plan put in motion in case the subsidies were ruled inapplicable to Federal Exchange enrollees. Scalia further argued the express reference to subsidies for exchanges established by the State was deliberate and was used several times in the Act. The American Center for Law and Justice, similarly criticized the Court for rewriting the law rather than adhering to its constitutionally provided role of interpreting the law. However, not surprisingly, many other organizations—particularly within the health care industry—as well as state and federal government representatives, issued statements praising the decision preserving the subsidies.

Impact on laboratories
Roughly two-thirds of states rely on the federal exchange for individual health insurance policies. A study released last year by the Urban Institute concluded that an adverse ruling in King v. Burwell would have eliminated subsidies worth $28.8 billion to 9.3 million people, likely causing many to give up their coverage. That loss of coverage could have a significant impact on the laboratory sector, as some larger laboratory ventures have reported moderate volume increases connected to the Affordable Care Act—though a significant amount of those increases have been connected to the expansion of Medicaid eligibility in many states.

Takeaway: A major legal challenge to the ACA has failed, protecting health insurance coverage subsidies for residents of states without a State Exchange.