By Danielle Capilla
Chief Com­pli­ance Offi­cer at Unit­ed Ben­e­fit Advisors

buildingThe Supreme Court issued its opin­ion in King v. Bur­well, hold­ing that the Inter­nal Rev­enue Ser­vice (IRS) may issue reg­u­la­tions to extend tax-cred­it sub­si­dies to cov­er­age pur­chased through Exchanges estab­lished by the fed­er­al gov­ern­ment under the Patient Pro­tec­tion and Afford­able Care Act (ACA). The six-to-three opin­ion was authored by Chief Jus­tice John Roberts, who was joined by Jus­tices Kennedy, Gins­burg, Brey­er, Sotomay­or, and Kagan. Jus­tice Scalia dis­sent­ed, and was joined by Jus­tices Thomas and Alito.


The case involved four Vir­ginia plain­tiffs who chal­lenged the IRS rul­ing that indi­vid­u­als are eli­gi­ble for the pre­mi­um sub­sidy regard­less of whether their state has a state-run or fed­er­al­ly-run Mar­ket­place or Exchange. The plain­tiffs did not wish to pur­chase health insur­ance, and would have been required to with the avail­abil­i­ty of pre­mi­um tax cred­its. They con­tend­ed that Sec­tion 36B, by its plain lan­guage, only allowed pre­mi­um sub­si­dies for insur­ance pur­chased on Exchanges cre­at­ed by “states.” Since Vir­ginia has a fed­er­al­ly-run Exchange, plain­tiffs claimed that they were not eli­gi­ble for pre­mi­um sub­si­dies, ren­der­ing insur­ance unaf­ford­able to them and exempt­ing them from the ACA’s require­ment to pur­chase coverage.

The Kaiser Fam­i­ly Foun­da­tion reports that cur­rent­ly there are 14 states with state-based Mar­ket­places, three with fed­er­al­ly sup­port­ed Mar­ket­places, sev­en with state-part­ner­ship Mar­ket­places, and 27 with a Fed­er­al­ly Facil­i­tat­ed Mar­ket­place (FFM).

Supreme Court ruling

Chief Jus­tice Roberts, writ­ing for the major­i­ty, boiled the case down to the ques­tion of “whether the Act’s tax cred­its are avail­able in States that have a Fed­er­al Exchange.” The opin­ion begins by describ­ing the ACA’s (or “the Act” as it is referred to in the opin­ion) three key reforms: (1) guar­an­teed cov­er­age and com­mu­ni­ty rat­ing; (2) the indi­vid­ual man­date or the require­ment for all Amer­i­cans to main­tain health insur­ance; and (3) mak­ing insur­ance afford­able by giv­ing refund­able tax cred­its to indi­vid­u­als with house­hold incomes between 100 per­cent and 400 per­cent of the fed­er­al pover­ty lev­el (FPL). “These three reforms are close­ly inter­twined,” and Con­gress was clear that the first reform’s suc­cess (guar­an­teed cov­er­age and com­mu­ni­ty rat­ing) was upheld by the cov­er­age require­ment, which in turn would only be suc­cess­ful with the tax cred­its. This is because with­out tax cred­its, the cost of buy­ing insur­ance would exceed 8 per­cent of income for a large num­ber of Amer­i­cans, exempt­ing them from the cov­er­age require­ment. The Court ruled that the inter­twined impor­tance of the three was under­scored by their uni­form effec­tive date of Jan­u­ary 1, 2014.

To reach its deci­sion, the Court declined to fol­low the two-step frame­work of Chevron USA v. Nat­ur­al Resources Defense Coun­cil, that pro­vides the Court a process to ana­lyze an agency’s (in this case, the IRS) inter­pre­ta­tion of a statute. Not­ing that this case falls under the excep­tion of “extra­or­di­nary cas­es” the Court instead tasked itself with deter­min­ing the cor­rect inter­pre­ta­tion of Sec­tion 36B. With that task in mind, Chief Jus­tice Roberts not­ed it was the Court’s duty to “con­strue statutes, not iso­lat­ed provisions.”

With a thor­ough look at the lan­guage in Sec­tion 18041 of the ACA, def­i­n­i­tions pro­vid­ed by the ACA, and lan­guage in Sec­tion 18031 of the ACA, the Court could not con­clude that the phrase “an Exchange estab­lished by the State” is unam­bigu­ous. As a result, the Court was forced to turn to the broad­er sec­tion of the ACA in order to deter­mine the mean­ing of Sec­tion 36B. In its review of the lan­guage, Chief Jus­tice Roberts wrote that “The Afford­able Care Act con­tains more than just a few exam­ples of inart­ful draft­ing” and pro­vid­ed the exam­ple that it con­tained three sep­a­rate sec­tion 1563s. Chief Jus­tice Roberts not­ed that Con­gress wrote key parts of the Act behind closed doors, rather than through a more tra­di­tion­al process, Con­gress used the rec­on­cil­i­a­tion process to lim­it oppor­tu­ni­ties for debate and amend­ment, and “as a result, the Act does not reflect the type of care and delib­er­a­tion that one might expect of such sig­nif­i­cant legislation.”

When turn­ing to the broad­er struc­ture of the Act, the Court held “the statu­to­ry scheme com­pels us to reject petitioner’s inter­pre­ta­tion because it would desta­bi­lize the indi­vid­ual insur­ance mar­ket in any State with a Fed­er­al Exchange and like­ly cre­ate the very ‘death spi­rals’ that Con­gress designed the Act to avoid.” To fol­low the petitioner’s (or plaintiff’s) inter­pre­ta­tion would lead to the removal of tax cred­its, which would then ren­der the cov­er­age require­ment mean­ing­less. With 87 per­cent of indi­vid­u­als pur­chas­ing insur­ance on the Exchange with help from sub­si­dies, the impact would not be small. Cit­ing Jus­tice Scalia’s dis­sent in the cor­ner­stone ACA case Nation­al Fed­er­a­tion of Inde­pen­dent Busi­ness v. Sebe­lius, the Court held it was implau­si­ble for Con­gress to oper­ate the ACA in this man­ner, as “with­out fed­er­al sub­si­dies… the exchange would not oper­ate as Con­gress intend­ed and may not oper­ate at all.”

The Court also con­sid­ered, but reject­ed, the plaintiff’s argu­ment that Con­gress was “not wor­ried” about the effects of with­hold­ing tax sub­si­dies from states who chose not to oper­ate an Exchange because “Con­gress evi­dent­ly believed it was offer­ing the states a deal they would not refuse.” The Court dis­agreed, hold­ing that by set­ting up a fed­er­al fall­back in case a state opt­ed out of oper­at­ing its own Exchange, “it express­ly addressed what would hap­pen if a state did refuse the deal.”

Final­ly, the Court held that the struc­ture of Sec­tion 36B sug­gests that tax cred­its are not lim­it­ed to state Exchanges due to its def­i­n­i­tion of “applic­a­ble tax­pay­er.” Rely­ing on a pre­vi­ous hold­ing that Con­gress “does not alter the fun­da­men­tal details of a reg­u­la­to­ry scheme in vague terms or ancil­lary pro­vi­sions,” the Court con­clud­ed that Con­gress “would not have used such a wind­ing path of con­nect-the-dots pro­vi­sions about the amount of the credit.”

Affirm­ing the 4th Circuit’s deci­sion, the Court held that “Con­gress passed the Afford­able Care Act to improve health insur­ance mar­kets, not 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.”


Jus­tice Scalia authored the dis­sent­ing opin­ion, lead­ing with “The Court holds that when the Patient Pro­tec­tion and Afford­able Care Act says ‘Exchange estab­lished by the State’ it means “Exchange estab­lished by the State or the Fed­er­al Gov­ern­ment.’ That of course is quite absurd and the Court’s 21 pages of expla­na­tion make it no less so.”

Find­ing that “words no longer have mean­ing if an Exchange that is not estab­lished by the State is ‘estab­lished by the State’,” Jus­tice Scalia went on to find that “the nor­mal rules of inter­pre­ta­tion seem always to yield to the over­rid­ing prin­ci­ple of the present Court: The Afford­able Care Act must be saved.”

Hold­ing that Con­gress knew how to equate two dif­fer­ent types of Exchanges when it want­ed to do so, and accus­ing the major­i­ty of engag­ing in “inter­pre­tive jig­gery-pok­ery” Jus­tice Scalia writes that although it might not make sense to only allow tax cred­its to those on state Exchanges, the result would be odd, not ambiguous.

Rec­og­niz­ing that mis­match­es often occur when law­mak­ers draft a sin­gle pro­vi­sion to cov­er diverse or dif­fer­ent types of sit­u­a­tions, Jus­tice Scalia fur­ther dis­agreed that the struc­ture of Sec­tion 36B pro­vides sup­port for tax cred­its for those on the fed­er­al Exchange, not­ing that many indi­vid­u­als are eli­gi­ble for var­i­ous tax cred­its at the out­set only to lat­er be pro­vid­ed a cred­it amount of zero due to income thresh­olds. Jus­tice Scalia cit­ed the child tax cred­it, the earned-income tax cred­it, and the first-time home­buy­er tax cred­it as examples.

Jus­tice Scalia argues that the Court is wrong in both its deci­sion to con­sult statu­to­ry pur­pose and its analy­sis of it. Find­ing that the ambigu­ous lan­guage at issue was used in oth­er parts of the law, Jus­tice Scalia argues that this was not “a slip of the pen,” but pur­pose­ful by Con­gress. Jus­tice Scalia argued that if Con­gress val­ued the ACA’s applic­a­bil­i­ty to all, it had the pow­er to make tax cred­its avail­able on all Exchanges.

Again reject­ing the Court’s rea­son­ing in the ear­li­er case (in which he dis­sent­ed) Nation­al Fed­er­a­tion of Inde­pen­dent Busi­ness v Sebe­lius, Jus­tice Scalia not­ed “we should start call­ing this law SCO­TUS­care,” and in con­clu­sion held that the major­i­ty opin­ion shows the “dis­cour­ag­ing truth that the Supreme Court of the Unit­ed States favors some laws over oth­ers, and is pre­pared to do what­ev­er it takes to uphold and assist its favorites.”

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