[IMGCAP(1)]The Supreme Court’s highly anticipated 6-3 decision Thursday in King v Burwell found that premium tax credits under Code Sec. 36B, also known as health insurance subsidies, are not limited solely to taxpayers who live in states that have established their own health insurance exchange but are also available to taxpayers residing in states that have a federal exchange.
The court, while acknowledging that the challengers' plain-meaning arguments were strong, found the statutory language ambiguous in light of the context and structure of Code Sec. 36B, as well as the role of the subsidies in the Affordable Care Act as a whole. With these considerations in mind, the court concluded that allowing the subsidies for insurance purchased on any exchange was consistent with the purpose of the ACA.
Background on ACA Provisions
The ACA's “individual mandate” requires non-exempt U.S. citizens and legal residents for tax years ending after Dec. 31, 2013 to maintain minimum essential health insurance coverage (for example, government-sponsored programs, eligible employer-sponsored plans, and plans purchased in the exchange) or pay a penalty. However, there are a number of situations in which individuals are exempt from the penalty, including where there is no affordable health insurance coverage option available.
The tax credit is designed to make health insurance affordable for taxpayers who meet certain qualifying requirements. It is available for individuals who purchase affordable coverage through exchanges.
States may establish and operate exchanges or the federal government may establish and operate an exchange in place of the state where a state has chosen not to do so.
Exchanges make premium assistance payments on the individual's behalf to health plans, based on information available at the time of enrollment; then, at return time, the individual reconciles the actual credit that he is due with the amount of the subsidy payments that were made.
In describing the premium assistance amount, Code Sec. 36B(b)(2)(A) refers to “the monthly premiums for...qualified health plans offered in the individual market...which were enrolled in through an Exchange established by the State” under §1311.
The issue is that in May 2012, the IRS issued regs that interpreted Code Sec. 36B to allow credits for insurance purchased on either a state or federally established exchange. Specifically, the regs provide that a taxpayer may receive a tax credit if he is enrolled in one or more qualified health plans through an exchange, which the IRS defined as an exchange serving the individual market for qualified individuals, regardless of whether the exchange is established and operated by a state (including a regional exchange or subsidiary exchange) or by the Department of Health and Human Services.
To date, only 13 states and the District of Columbia have actually created exchanges. By making the credits more widely available, the reg gives the individual and employer mandates—key provisions of the ACA—broader effect than they would have if credits were limited to state-established exchanges.
Taxpayers brought suit against IRS and HHS, arguing that Reg. § 1.36B-1(k) invalidly interpreted Code Sec. 36B(b)(2)(A). The taxpayers, who do not want to purchase health insurance, live in a state that has a federal exchange. If they did not receive the subsidies, their coverage would be considered unaffordable and they would be exempt from the individual mandate.
On Nov. 7, 2014, the Supreme Court agreed to resolve a Circuit split between the Fourth Circuit upholding the reg, and the D.C. Circuit invalidating the reg, by reviewing the Fourth Circuit case, King v. Burwell,
Supreme Court Upholds Subsidies
The Supreme Court, in a 6-3 decision, upheld the subsidies for health insurance purchased on a federal exchange (see Supreme Court Upholads ACA Subsidies and Serious Implications from the Supreme Court's ACA Decision). The majority opinion was delivered by Chief Justice John Roberts and joined by Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor, and Elena Kagan.
The majority began by providing a brief overview of the reforms adopted by the ACA in order to expand coverage in the individual health insurance market. According to the majority, the three primary reforms, which it described as “interlocking,” were: (i) barring insurers from taking a person's health into account when deciding whether to sell health insurance or how much to charge; (ii) requiring each person to maintain insurance coverage or make a payment to IRS; and (iii) giving tax credits to certain people to make insurance more affordable. The majority then framed the issue before it as “whether the Act's interlocking reforms apply equally in each state no matter who establishes the state's exchange.” Looking to a number of the health care shortcomings that the ACA was designed to address, and considering the consequences of a contrary ruling, the court found it “implausible” that Congress intended for the ACA to operate as the taxpayers argued.
The court found that the typical framework for analyzing an agency's interpretation of a statute (i.e., a Chevron analysis, which entails a two-part inquiry as to whether the statute is ambiguous and, if so, whether the agency's interpretation is reasonable) was predicated on the notion that when a statute is ambiguous, such reflects an intent on the part of Congress for the relevant agency to resolve the ambiguities. The court noted that “[i]n extraordinary cases, however, there may be reason to hesitate before concluding that Congress has intended such an implicit delegation.”
In this case, the tax credits are one of the key ACA reforms, costing billions of dollars and affecting the price of health insurance for millions of people, and the Court found it unlikely that Congress intended to assign to an agency the decision of whether the credits are available on federal exchanges—and even less likely that this decision would intentionally be delegated to the IRS. Accordingly, the majority stated that, since the Chevron analysis was inappropriate under these circumstances, it was “instead the Court's task to determine the correct reading” of Code Sec. 36B, and whether one of Code Sec. 36B's “permissible meanings produces a substantive effect that is compatible with the rest of the law.”
The majority then analyzed the relevant statutory language in the context of the ACA as a whole and found that Code Sec. 36B is ambiguous—namely, that the phrase “established by the State,” as used in various contexts throughout the ACA, is not as clear as it initially seems. Thus, the Court concluded that while the phrase may be limited in its reach to state exchanges, it's also possible that it refers to all exchanges—“at least for purposes of the tax credits.” This position found further support in other provisions that operate under the assumption that the tax credits will be available on both types of exchanges.
The court also dismissed the argument that the words “established by the State” would be unnecessary if the intent was to include both types of exchanges. Although the “canon against surplusage” doctrine generally gives effect to each word in an statute so as to not render any part of it “mere surplusage,” the court noted that this rule is not absolute. The majority also observed that the ACA “contains more than a few examples of inartful drafting,” and that a number of circumstances relating to its passage contributed to the fact that it “does not reflect the type of care and deliberation that one might expect of such significant legislation.”
Given its conclusion that Code Sec. 36B is ambiguous, the majority turned to the “broader structure” of the ACA to determine its meaning and easily concluded that the tax credits were intended to apply to insurance purchased on any exchange. In rejecting the taxpayers' contrary argument, the majority cited Whitman v. American Trucking Assns., Inc., (Sup Ct 2001) 531 U.S. 457, for the proposition that Congress “does not alter the fundamental details of a regulatory scheme in vague terms of ancillary provisions,” noting that it seems highly unlikely that Congress would intend for the viability of the ACA to turn on a “sub-sub-sub section of the Tax Code.”
The court further cited its decision in New York State Dept. of Social Servs. v. Dublino, (Sup Ct 1973) 413 U.S. 405, in which it stated that “[w]e cannot interpret federal statutes to negate their own stated purposes.” To this end, the majority stated that “Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them,” and upheld the subsidies—a critical part of the ACA.
The scathing dissent, written by Justice Scalia and joined by Justices Thomas and Alito, found that the language “Exchange established by the State” was clear and unambiguous, that buying health insurance on such a state-established exchange is a prerequisite to receiving health insurance subsidies, and that the subsidies are thus not available to taxpayers who purchase health insurance on federal exchanges. Justice Scalia criticized the majority's position as “absurd” and wrote that “normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved.” He later stated that the ACA should instead be referred to as “SCOTUScare.”
The dissent stated its agreement that context matters, but stated that context is “a tool for understanding the terms of the law, not an excuse for rewriting them.” The dissent also noted that the phrase “by the State” was used not just once in the ACA, but seven times in connection with tax credits.
The dissent also took issue with the majority's justification for its decision in terms of the ACA's insurance reforms and overall purpose. It stated that, even if the ACA would be significantly less effective without the tax credits, such wouldn't “show that the statute means the opposite of what it says” but would instead show that the statutory scheme is flawed. It further rejected the majority's “inartful drafting” reasoning, noting that Code Sec. 36B is not obviously and unequivocally a mistake but could be, for instance, a means to encourage states to establish their own exchanges.
The Obama administration described the Supreme Court's decision as “up[holding] one of the most critical parts of health reform—the part that has made it easier for Americans to afford health insurance, no matter where you live.”
Catherine Murray is a tax analyst with the Tax & Accounting business of Thomson Reuters.
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