supreme court iStock_000000865139_LargeThe U.S. Supreme Court in King v. Burwell, upheld the availability of subsidies to individuals who purchase health insurance on either a state or federal Exchange. While the Court’s 6-3 decision is being hailed politically as a major victory for the Obama Administration and the continuation of the Affordable Care Act (ACA), the legal implications are far reaching as well. Refusing to rely on the Chevron deference doctrine, Chief Justice John Roberts, writing for the majority, and joined by Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan, concluded that the legislative intent of the statute held the answer to the legal question posed and that “it is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.”

The Court reasoned that “Congress passed the Affordable Care Act to improve health insurance markets, not destroy them,” and therefore could not have intended, as the petitioners alleged, to restrict tax credits to only those individuals who purchased health insurance on “an Exchange established by the State.” Thus, the context of the statute, legislative history, intent and a holistic reading of the law won the day.
The Court’s decision was predicated on an analysis of three pillars of reform foundational to the ACA:

1. The guaranteed issue and community rating requirement that prohibit the use of pre-existing health conditions as a means to deny coverage;

2. The individual mandate, requiring individuals to maintain health insurance coverage or pay a “penalty” unless the cost of buying coverage would exceed eight percent of their income; and

3. The provision of tax credits and subsides to certain individuals to make health insurance coverage more affordable.

The ACA also requires the creation of “Exchanges” (online marketplaces to purchase insurance) by the state or the federal government, if a state declines to establish its own Exchange.

The issue in King v. Burwell involved whether the ACA’s tax credits are available to individuals who purchase coverage in states with a federal Exchange. Such tax credits depend, in part, on whether the taxpayer has enrolled in an insurance plan through “an Exchange established by the State under section 1311” of the ACA.

The ACA generally requires most Americans to obtain health insurance coverage. Certain low income individuals are exempt from the Act’s requirements if the cost of health insurance coverage exceeds eight percent of their net income. To make coverage more affordable, the ACA provides tax credits for such individuals on an “Exchange established by the State.” The IRS promulgated a rule that made the tax credit subsidies available on both the state and federal Exchanges. The petitioners in King, are four individuals residing in Virginia, a state that did not establish its own Exchange.

The petitioners did not wish to purchase insurance nor did they want the tax credits arguing that the ACA provides tax credits only to individuals who purchase health insurance coverage on an “Exchange established by the State,” an option utilized in only 16 states.

During its journey to the U.S. Supreme Court, the suit was dismissed by the district court holding that the ACA unambiguously made tax credits available to individuals enrolled through a federal Exchange, asserting that “the federal government acts on behalf of the state when it establishes its own Exchange” and therefore, federal exchanges would be considered “established by the State.” The Court of Appeals for the Fourth Circuit affirmed, finding the language ambiguous but using Chevron deference to conclude that the IRS’s interpretation is reasonable. The Chevron case is binding precedent used in administrative disputes when challenging an agency interpretation of a statute and, generally, provides latitude to an agency’s reasonable interpretation of an ambiguous statute.

However, Justice Roberts, citing court precedent, explained that it need not use Chevron precedent. Although it is generally found that “a statute’s ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps … In extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation.” Finding this case to be “one of those cases,” the Chief Justice rationalized that the issue is “of deep “economic and political significance” and “especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.” Had the Court relied on Chevron deference, it would have allowed for the possibility that a future administration could reverse such interpretation.

Consequently, the Court analyzed whether a federal Exchange would fit within the plain meaning of the statute by breaking the text down into three elements:

• An Exchange;
• Established by the State;
• Under § 1311 of the ACA [Section 18031].

Easily finding that a federal Exchange qualifies as “an Exchange,” the Court struggled with the second element. Justice Roberts conceded that it may initially appear that a federal Exchange cannot be “established by the State,” a term defined as “each of the 50 States and the District of Columbia.” However, citing ambiguity in the use of other statutorily defined terms, the Chief Justice concluded that it is not so clear when “read in context, “with a view to [its] place in the overall statutory scheme.” Similarly, the Court reasoned that since “all of the requirements that an Exchange must meet are in Section 18031, so it is sensible to regard all Exchanges as established under that provision.”

To find otherwise, the Court explained, would mean none of the ACA’s requirements would apply to the federal Exchanges. Therefore, the Court found that the language is ambiguous enough to allow for the interpretation that the phrase “an Exchange established by the State under § 1311” refers to both state and federal exchanges, at least for purposes of the tax credits. It is in this reasoning that the Chief Justice acknowledged and chided Congress that the ACA contains “more than a few examples of inartful drafting,” which the Court attributes, in part, to the unorthodox passage of the legislation.

Given the ambiguity of the text in question, the Court looked to the broader structure of the Act to determine its meaning. Justice Roberts’ opinion relies heavily on what the Court sees as legislative intent, reasoning that “A fair reading of the legislation demands a fair understanding of the legislative plan.” The Court explained that “the statutory scheme compels us to reject petitioners’ 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.” It is “implausible,” the Court concluded, “that Congress meant the Act to operate in this manner.”

The Court found it implausible that the viability of the entire ACA turned on the “ultimate ancillary provision: a sub-sub-sub section of the Tax Code … We doubt that is what Congress meant to do. Had Congress meant to limit tax credits to State Exchanges, it likely would have done so in the definition of ‘applicable taxpayer’ or in some other prominent manner. It would not have used such a winding path of connect-the-dots provisions about the amount of the credit.”

Thus, the Court concluded that the context and structure of the statute compelled a departure from what would otherwise be “the most natural” reading of the pertinent statutory phrase. Instead, the Court, chose to “respect the role of the Legislature, and take care not to undo what it has done” by adopting a reading of 36B that is “consistent with what we see as Congress’s plan.”

In contrast to the contextual arguments that won the day for the government, Justice Scalia, joined by Justices Alito and Thomas, wrote a scathing dissent:

Under all the usual rules of interpretation … 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.

He credits “the Court’s “somersaults of statutory interpretation” for upholding the ACA in both of its challenges before the Supreme Court.

With missives that are certain to make their way into the political realm, Justice Scalia suggests the law be renamed “SCOTUScare,” and argues that “words no longer have meaning if an Exchange that is not established by the State is ‘established by the State.’ … Impossible possibility, thy name is an opinion on the Affordable Care Act!”

In pointing to other parts of the ACA that sharply distinguish between the establishment of an Exchange by a state vs. the federal government, including the separation of the authority and funding provisions for state and federal Exchanges, Justice Scalia chides the Court’s conclusion that federal Exchanges count as state Exchanges only “for purpose of the tax credits” because “equating establishment ‘by the State’ with establishment by the Federal Government makes nonsense of other parts of the Act.”

Justice Scalia described the Court’s arguments that presuppose the availability of tax credits on both federal and state Exchanges as “interpretive jiggery-pokery.” Similarly, Justice Scalia described the Court’s attempt to support its argument with the definition of “qualified individual” as “pure applesauce.”

In discussing the potential “death spiral,” the dissent offered “if true, these projections would show only that the statutory scheme contains a flaw; they would not show that the statute means the opposite of what it says….If Congress enacted into law something different from what it intended, then it should amend the statute to conform to its intent.” Justice Scalia’s dissent embodies the philosophical approach of strict constructionists and he most acutely warned that this case will be used as precedent “to the confusion of honest jurisprudence.”

While King v. Burwell provided significant assurance to the health industry and insurance markets, the political and legal fallout seems far from over. However, what is clear from the Supreme Court’s ruling is that the ACA now lives to fight another day.

If you have any questions about this alert, please contact Susan Feigin Harris at or 713.646.1307; Summer D. Swallow at or 713.646.1306; or any member of BakerHostetler’s Healthcare Industry team.