by Update: The Supreme Court upheld the provision of subsidies on the federal exchange in a 6-3 decision issued on June 25, 2015.
On March 4, 2015, the United States Supreme Court heard oral argument in King v. Burwell, a case that variously has been characterized as an attack on the ACA and the potential death knell of that complicated law. There is no question that the Supreme Court’s decision in this matter, which is expected to issue in late June 2015, will have immediate and significant ramifications for millions of individuals, their employers, and the health care industry. Specifically at issue is whether the approximately 6 million individuals who receive federal subsidies towards the purchase of health insurance on the “federally facilitated exchange” or “FFE,” also known as healthcare.gov, can continue receiving those subsidies, or whether the subsidies may only be awarded in the approximately 17 states, including California and the District of Columbia, that sponsor their own health exchanges. The impact of the King decision naturally will be largest in the approximately 34 states whose residents use the FFE, but its likely damage to the health insurance market as a whole will be felt in every state. It also will have a major impact on “applicable large employers” (“ALEs”) under the ACA (those employing, on average, 50 or more full-time employees, including full-time equivalents). That is because no employer “pay or play” penalty taxes apply to an ALE unless at least one of its full-time employees (30 or more hours/week) has qualified for premium tax credits on a health exchange.[1] Below we look at the facts of the case, the legal arguments on both sides, possible outcomes in the Supreme Court decision, and finally what might happen if the Court decides in favor of the King plaintiffs.
Facts Relevant to the Case
There are fairly few facts relevant to King v. Burwell because it is essentially a “test case” funded by a conservative think tank, the Competitive Enterprise Institute. The plaintiffs (technically, “Petitioners”) are several lower-income residents of Virginia, a state that did not establish its own exchange. Lead plaintiff David King is a limousine driver. The grievance that the plaintiffs have in common is that the Federally Facilitated Exchange that functions in Virginia gives them access to premium tax credits at www.healthcare.gov, which are received in the form of immediate subsidies towards coverage, then reconciled against actual household income each April. As a consequence of access to tax credits, individual health coverage is “affordable” to them (premiums do not exceed 8.1% of income). Because affordable coverage is available to them, effective January 1, 2014 they must either purchase the coverage or pay a penalty tax. If the premium tax credits were not available in Virginia, a non-state-exchange state, coverage would be unaffordable to them and they would not have to either buy coverage or pay a tax penalty. In essence they are arguing that access to premium tax credits in a non-exchange state exposes them to a tax they would not have to pay if there were no federally-run exchanges. This argument failed to succeed in federal district court and the 4th Circuit Court of Appeals affirmed that decision.
The Legal Arguments
King v. Burwell is materially different from the Supreme Court’s prior major ACA case, National Federation of Independent Business (NFIB) v. Sebelius, 567 U.S. ___ , 132 S. Ct. 2566, 183 L. Ed.2d 450 (2012). The NFIB case challenged the constitutionality of the individual mandate, which requires individuals to secure health insurance for themselves and their families, or pay a tax penalty. The challengers to the law characterized this as an overreach of Congress’ powers under the U.S. Constitution. In a 5 to 4 decision, the Supreme Court ruled that the individual mandate was within Congress’ powers to impose taxes on U.S. citizens.
In the King case, by contrast, the challengers are not claiming that the ACA violates the Constitution. They are instead looking at a few lines of text of the 906-page law that relate to how premium tax credits are calculated. The language, which is codified at Internal Revenue Code (“Code”) Section 36B(b)(2)(A), is as follows (italicized text):
(b) Premium assistance credit amount
For purposes of this section—
(1) In general
The term “premium assistance credit amount” means, with respect to any taxable year, the sum of the premium assistance amounts determined under paragraph (2) with respect to all coverage months of the taxpayer occurring during the taxable year.
(2) Premium assistance amount
The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—
(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act [. . . . ]
The challengers argue that Congress would not have defined the calculation of premium tax credits with specific reference to “State” exchanges unless it intended to limit access to premium tax credits to state-run exchanges.
The government argues that the ACA must be interpreted as a whole, and that other section of the law are meaningless or absurd if premium tax credits are limited to state-run exchanges. In particular they point to Section 1321 of the ACA which authorizes the Secretary of Health and Human Resources to establish an exchange on behalf of a state, and argue that a federally-run exchange would have no function or purpose if it did not award premium tax credits. The government also argues that, if the Court found the ACA to be ambiguous on this point, it must defer to the federal agency charged with interpreting the provision, and that agency, the IRS, had already issued final regulations under Code Section 36B stating that premium tax credits are equally available on state-run and federally-run exchanges.
Oral Argument in King v. Burwell
During approximately 90 minutes of oral argument on March 4, 2015, it became fairly clear that the four “liberal” Justices (Ginsburg, Breyer, Sotomayor and Kagan) favored the government’s arguments, and that the three “conservative” justices (Alito, Scalia and Thomas) favored the challengers’ position. The swing votes that will decide the outcome belong to Chief Justice John Roberts, who was almost silent during oral argument, and Justice Kennedy, whose line of questioning could be viewed as potentially sympathetic to the government’s position.
One issue that appeared to have traction with Justice Kennedy, and thus could possibly determine the outcome, was whether, under the challenger’s interpretation of the law, the ACA “coerced” states into starting their own exchanges by making them the only route to premium tax credits. Federal coercion of the states would present a serious Constitutional problem, in Justice Kennedy’s words. In fact, the Supreme Court held in its prior ACA decision that the federal government could not coerce states into expanding access to Medicaid by conditioning their access to all Medicaid money on their agreement to expand Medicaid.
Further, all of the Justices who commented seemed very conscious that a decision for the challengers could push individual insurance markets in the non-exchange states into a “death spiral” and eventual collapse. This is because the ACA’s three main components are insurance market reforms, such as prohibiting pre-existing condition exclusions, that increase insurers exposure to risk, the individual mandate, which brings young and healthy people into the individual insurance market to mitigate that risk, and finally the premium tax credits, which make individual coverage available to people who otherwise could not afford it. Without premium tax credits to attract younger, healthier people towards insurance, the argument goes, only the sickest individuals would purchase insurance and the health insurance industry would enter a “death spiral.” A similar phenomenon has occurred in the past in individual states that attempted aggressive market reforms without mitigating measures.
Most Supreme Court observers concluded that the government fared slightly better during oral argument than did the ACA challengers, but were quick to add that this has little predictive value with regard to the Court’s eventual written opinion.
Possible Outcomes from the Court
It is important to note that the Supreme Court did not need to hear the King v. Burwell case; it voluntarily agreed to review the 4th Circuit court decision against the challengers even though there was no direct conflict at the federal appeal court level. (ACA challengers had succeeded in the D.C. Circuit court in Halbig v. Burwell, a similar ACA challenge case, but that “panel” decision by the D.C. Circuit had been vacated so that all sitting judges could hear the case. The “en banc” hearing of Halbig is on hold pending decision in King v. Burwell. ) Thus it is fair to conclude that the Supreme Court is acutely aware of the case’s very high stakes for many newly-insured Americans, for the administration that championed the law, for applicable large employers, and for the insurance industry as a whole.
What that may mean is that, even if the Supreme Court upholds the ACA challenge, and prohibits premium tax credits from being awarded in non-exchange states, it may rule in such a way that protects stakeholders from the immediate withdrawal of premium tax credits. Here are a few of the possible ways the decision could fall:
- Majority Verdict for the Government: if Justice Kennedy or Chief Justice Roberts cast their vote for the government, the resulting decision will preserve the “status quo” under the Affordable Care Act as we know it. Healthcare.gov will continue to award premium tax credits in the non-exchange states and individual insurance markets in those states will remain intact. This outcome would make it harder for any alternatives to the ACA, which the Republican-controlled Congress is already proposing, to gain traction and succeed.
- Majority Verdict for the Challengers: If Justice Kennedy or Chief Justice Roberts sides with the more conservative faction of the Court, the operation of healthcare.gov in 34 states would grind to a halt and individual insurance markets in those states would soon become dysfunctional. In the non-exchange states, it is possible that individuals and families who must drop their now-unaffordable health insurance coverage will assail Governors’ mansions and the offices of Republican lawmakers with demands that they restore access to coverage, including life-saving cancer treatments and the like. Because applicable large employers in the non-exchange states will not be subject to pay or play penalty taxes, they may drop coverage they had only recently extended to employees working 30 or more hours per week. It is also possible that there will be business flight to the non-exchange states, for this reason. At the same time, non-exchange state residents may try to relocate in states that have their own exchanges, in order to receive subsidies. In essence, jobs and workers to fill them would be propelled in opposite directions.
- A Possible Third Way: Justice Alito, who almost certainly will vote for the ACA’s challengers, raised the possibility in oral argument of a verdict for the challengers, but one whose effect is delayed by a year in order to give non-exchange states time to develop an alternative to healthcare.gov. As this would be a voluntary process, it runs the risk that no alternative measures would be available in some states whose Governors and other elected representatives firmly oppose the ACA. Even in states that were willing to find alternatives, one year may not be enough time in which to do so. Supporters of the ACA would view this outcome as preferable, however, to a ruling for challengers that takes effect immediately. It is also possible that the justices could rule in favor of the challengers but interpret “state exchange” to include federal-state partnership exchanges, several of which already exist, and more of which are in the works already. This is consistent with the Supreme Court’s prior decision in NFIB v. Sebelius that Medicaid expansion was not something that the federal government could coerce the states into doing.
Legislative Resolutions to the Problem
In oral argument Justice Scalia asserted that Congress would take action to avert massive loss of coverage leading to a death spiral of the individual insurance market in non-exchange states. Arguing for the government, the Solicitor General’s comment was to pause and ask “this Congress…..? to wide laughter in the courtroom. And in fact, were Congress not so deeply divided over the ACA a simple legislative amendment would have resolve the supposed “drafting error” at the heart of King v. Burwell.
However, it is not at all impossible that members of Congress would view a Supreme Court decision for ACA challengers as a prime opportunity to gain political ground with voters by “rescuing” their health insurance, and access to subsidies, through legislation. In fact, some legislative proposals are already being drafted and considered in Congress, however only by traditionally anti-ACA factions. The official word from the Department of HHS is that it has no ready fix or alternative to shutting down healthcare.gov (but it is likely that the administration is considering workarounds nonetheless. While all eyes are on the Court and its likely late-June decision, those with political ground to gain will not be standing idle.
[1] The IRS postponed employer shared responsibility duties from 2014 to 2015 in Notice 2013-45. Under separate transition relief, generally only employers with 100 or more full-time employees (including full-time equivalents) in 2014 must offer coverage or pay the penalty for 2015, but all applicable large employers must do so in 2016 and subsequent. The transition relief is explained in Q&A 34 of this IRS FAQ.
E is for ERISA 
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