Millions of Americans who have suffered from unaffordable health care for decades find a reason to celebrate today. The Supreme Court (6-3), through King v. Burwell, affirmed that refundable tax credits for health insurance coverage purchased are available to those individuals with household incomes between 100 percent and 400 percent of the federal poverty line, regardless of whether they enroll in an insurance plan through a Federal or a State Exchange.This decision preserves one main tenet of Obamacare, which helps millions of poor and middle-class people buy affordable health insurance.
I. The Patient Protection and Affordable Care Act (the “Affordable Care Act” or the “ACA”) has adopted three interlocking reforms.
The majority started its opinion by explaining the background and purposes of the ACA because this case is closely related to whether the Congress intended the ACA’s three interlocking reforms to equally apply in each State regardless of who establishes the State’s Exchange. In general, the ACA adopts the three key reforms that made the Massachusetts health system successful.
The first reform consists of the guaranteed issue and community rating requirements. These two requirements bar insurers from denying coverage to anyone because of their health (the guaranteed issue requirement) and from charging a person higher premiums because of their health conditions (the community rating requirement) to ensure that everyone has equal access to health insurance coverage. However, these two requirements created an unintended “adverse selection” consequence: people do not want to purchase health insurance until they become sick. As a result, insurers are forced to increase overall premiums to account for the fact that only those who are already sick rather than healthy buy insurance, which in turn creates an economic “death spiral”—as premiums become higher, the number of people buying insurance sinks, and the uninsured number dramatically increases.
Years after Massachusetts adopted only these two requirements to its state health insurance system and experienced the death spiral, the second and the third reforms were added to its health system – coverage and subsidizing requirements –and the ACA also adopts them. Under the coverage requirement, each individual is required to maintain health insurance coverage or make a payment to the IRS. Given healthy people are required to purchase health insurance, health insurance premiums may become lower. Also, low-income individuals are exempt from the coverage requirements when they have to spend more than eight percent of their income on health insurance. Yet, to avoid adverse selection or death spiral caused by exemptions, refundable tax credits are available to subsidize individuals with household incomes between 100 percent and 400 percent of the federal poverty line. Accordingly, these three reforms are interlocking with each other and closely intertwined. When interpreting ambiguous phrases under the ACA, the Supreme Court emphasizes consideration of whether the purposes of these requirements may be served.
II. The issue before the Court: Is the phrase, “an Exchange established by the State” under Section 36B of the Internal Revenue Code ambiguous?
In addition to the three reforms, the ACA also requires the creation of an “Exchange” in each state. An Exchange is a marketplace where people can compare and buy different types of health insurance. The ACA gives each state the opportunity to establish its own State Exchange but provides that the federal government must establish the Federal Exchange in the state if the state chooses not to establish one. The issue before the Supreme Court was whether tax credits could be available in the states that have a Federal Exchange rather than a State Exchange. In other words, the question is whether “Federal Exchanges” are included under Section 36B of the Internal Revenue Code, a critical component of the ACA, even when Section 36B provides that refundable tax credits are subsidized to those who enroll in health plans through “an Exchange established by the State under Section 1311 of the ACA.” See 26 U.S.C. §36B(b)(2)(A). The IRS promulgated a new rule that makes tax credits available regarding both State and Federal Exchanges.
Four petitioners currently living in Virginia who could only enroll in a health plan through a Federal Exchange challenged the IRS’s rule and argued that they should not receive any tax credits because Federal Exchanges are not “established by the State.” Without the tax credits, the petitioners argued, they would be exempt from the ACA’s coverage because their cost of buying health insurance would exceed eight percent of their income. See26 U.S.C. §5000A(e)(1). Both the District Court and the Fourth Circuit deferred to the rule and interpretation made by the IRS. The Supreme Court granted certiorari and affirmed the Fourth’s Circuit’s decision on different grounds.
The High Court denied deferring to the IRS’s new rule and interpretation and held it was unlikely that Congress would have delegated the IRS to determine the issue of tax credit availability, given this should be a question of deep “economic and political significance.” Therefore, the Court reasoned that it should determine the correct reading of Section 36B. In assessing the ambiguity of a statute, the Court first decided whether the language is plain by reading the words “in their context and with a view to their place in the overall statutory scheme.” Evaluating the term “Exchanges” used in different provisions under the ACA, the Court held that the meaning of the phrase “established by the State” is ambiguous in context and rejected petitioners’ arguments to adopt the plain meaning of the phrase. For example, assuming this phrase excludes the Federal Exchanges, nobody purchasing insurance through Federal Exchanges would be qualified for tax credits – seemingly an interpretation contrary to the ACA’s expectation that State Exchanges and Federal Exchanges are equivalent.
Given that the phrase was ambiguous, the Court further decided “Federal Exchanges” must be included in Section 36B to avoid creating the “death spirals” that the Congress enacted the ACA to prevent. The rationale is simple: If tax credits are not available to Federal Exchanges, excessive numbers of exemptions will destroy the coverage requirement, and adverse selection will appear. Justice Roberts emphasized that Congress “passed the Affordable Care Act to improve health insurance markets, not to destroy them.”
Obamacare also mandates employers with 50 or more employees to offer their full-time employees health insurance coverage. (Full-time employees are defined as those who work 30 hours or more per week).
Today Bryan Schwartz Law, P.C. celebrates this important step forward for American access to affordable health care.
Chief Justice Roberts wrote the majority opinion and was joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor and Kagan. Justice Scalia filed a dissenting opinion, in which Justices Thomas and Alito joined.
 At this point, 16 States and the District of Columbia have established their own State Exchanges, whereas the remaining 34 States have elected not to establish their own Exchanges and relied on the Federal Exchanges established and operated by the Secretary of Health and Human Services.
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