Employee Benefits Compliance, Exchanges / Marketplaces / Subsidies

Supreme Court Rules in Favor of ACA on Subsidies

aca subsidies

The US Supreme Court ruled (6-3) today that federal tax subsidies under the Affordable Care Act are available to people who purchase individual health policies in both federal and state exchanges.   The majority opinion said “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.” 

The case is King v Burwell.   Issued June 25, 2015, 47 pages.

The majority opinion was written by Chief Justice John Roberts, and joined by justices Anthony Kennedy, Elena Kagan, Sonia Sotomayor, Stephen Breyer, and Ruth Bader Ginsburg.   As expected, the dissenters were conservative justices Antonin Scalia, Clarence Thomas and Samuel Alito.

Today’s Supreme Court ruling is the second major win for the Affordable Care Act before the Supreme Court.  In 2012, the Court ruled 5-4 that the ACA’s individual mandate was constitutional.

The Court heard arguments in this case in March of this year, and ACA proponents and opponents have been awaiting this important decision since then.

Ramifications The Court’s decision has significant ramifications, since only 13 states and the District of Columbia have established state exchanges, while 37 states have federal exchanges (although some of these are hybrid state-federal exchanges). Had the Supreme Court ruled that tax subsidies apply only in state exchanges, it is estimated that at least 6.4 million enrollees in the federal exchange would have  lost their subsidies.  See prior Leavitt articles on this case that discuss various ramifications if Supreme Court ruled against the subsidies, and report when the Supreme Court heard oral arguments in King v Burwell in March 2015.

The Issue Internal Revenue Code Section 36B (added by the ACA) provides that tax credits are available only on health insurance exchanges “established by the State.”  The Administration argued that the overall intent of the ACA is clearly to provide tax credits in both federal and state exchanges, and others have argued that a Supreme Court ruling against the subsidies would put the individual insurance market into a death spiral.  The Petitioners argued that the plain meaning of the language is clear, and that subsidies should be available only in State Exchanges.

Supreme Court’s Reasoning

The Supreme Court’s reasoning was:

1-     The Court did not defer to prior IRS guidance that interpreted the ACA to require subsidies in the federal exchange as well as in state exchanges.  Instead, the Court said it is up to the Court to determine the correct reading of the language at issue, because the determination has deep “economic and political significance.”   Since the decision is based on the Court’s statutory interpretation, it is less susceptible to change by a future (Republican) administration.

2-     If statutory language is ambiguous, the Court will decide what Congress intended.  In this case, the Court said the language “an Exchange established by the State” is ambiguous when read in the context of the ACA overall.

3-     The Court looked to the broader structure of the ACA and found that the subsidy provisions were an interlocking part of the law’s primary provisions, saying:  “Congress made the guaranteed issue and community rating requirements applicable in every State in the Nation, but those requirements only work when combined with the coverage requirement and tax credits.  It thus stands to reason that Congress meant for those provisions to apply in every State as well.”   Holding otherwise, said the Court, “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.”

4-     The Court also noted that “Section 36B itself also suggests that tax credits are not limited to State Exchanges.”  Interpreting Section 36B to allow subsidies only in State exchanges would mean that low-income taxpayers in federal exchanges could be eligible for subsidies under the law, but the amount of the subsidies would be zero.

5-     The Court also noted that “petitioners’ plain-meaning arguments are strong,” but the ACA’s “context and structure compel the conclusion that Section 36B allows tax credits for insurance purchased on any Exchange created under the Act.