Health Highlights

June 25, 2015

SCOTUS Upholds Subsidies in King v. Burwell: A Look at the Ruling and Its Implications

Authors: Joel Ario, Managing Director, Manatt Health Solutions | Melinda Dutton, Partner, Healthcare Industry | Michael Kolber, Associate, Healthcare Industry

In a 6-3 decision today, the Supreme Court ruled that individuals who enroll in health insurance through the federally facilitated marketplace (FFM) may continue to receive federal tax subsidies to help pay for their coverage. The decision in King v. Burwell preserves affordable coverage for the 6.4 million people whose premium tax credits were at risk, and the stability of the individual health insurance market in the 34 FFM states threatened by the prospect of a “death spiral” of higher rates and smaller and sicker enrollment. Approximately 87 percent of marketplace enrollees in FFM states receive subsidies.

The Ruling

The ruling in King is a decisive victory for Affordable Care Act (ACA) supporters. The case hinged on competing theories of statutory interpretation. While the Court could have delivered a partial victory to the government by deferring to the agency’s interpretation of the statute (under the oft-cited Chevron precedent), it instead went the extra step of finding that the statute must be read to make tax subsidies available in FFM states. The practical impact is that future administrations will be bound to the Court’s interpretation of the statute.

The decision hinged on the Court’s contextual analysis of the ACA, finding that it would make no sense for Congress to apply market reforms of guaranteed issue and community rating to FFM states, but not extend the subsidies that would enable those reforms to work. Speaking for the Court, Chief Justice John Roberts wrote, “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.” Justice Antonin Scalia, joined by Justices Clarence Thomas and Samuel Alito, dissented.

The Reasoning

At issue in King was the interpretation of a four-word phrase which appears in the Internal Revenue Code as part of the ACA. Under the ACA, many individuals who do not have other sources of affordable health coverage may enroll in a health plan through a state or federal Exchange. If their household income is less than four times the federal poverty level, they can receive tax credits to help them pay their insurance premiums.

But the ACA says that in order to qualify for the tax credits, an individual must enroll through “an Exchange established by the State.” While states were encouraged to establish their own Exchanges, they were not required to do so and most chose not to do so. The ACA instructed the federal government to establish Exchanges in states that did not do so, resulting in 34 states using the federally facilitated Exchange. The plaintiffs in King argued that these states do not have an “Exchange established by the State.” The Supreme Court rejected that argument.

The Court’s analysis has three steps:

First, the Court noted that, given the magnitude of the consequences, it was unreasonable to conclude that Congress intended to delegate the decision of whether to extend subsidies to federal Exchange states to the IRS, and so the Court did not need to give particular deference to the IRS’s conclusion that such tax credits were available in the federal Exchange states. The Court then turned to interpreting the meaning of the statute itself.
Second, the Court acknowledged that, read in isolation, the phrase “an Exchange established by the State” was ambiguous, but noted that if read literally to exclude Exchanges established by the federal government, it would render other provisions of the ACA incomprehensible. The Court concluded that while “inartful” and potentially superfluous, the meaning of these words could not be understood without an appreciation of their context. In particular, the Court notes that the process by which the ACA was enacted “does not reflect the type of care and deliberation that one might expect of such significant legislation,” making it particularly important to focus on the overall purpose of the legislation in interpreting particular phrases.
Finally, the Court concluded that, despite the ambiguity of these four words, the remainder of the ACA makes clear that Congress intended subsidies to be available through both state and federal Exchanges. After recounting the ill effects that are predicted from a decision to eliminate the subsidies in federal Exchange states—premiums up as much as 47 percent and enrollment down as much as 70 percent—the Court concluded that a ruling for the plaintiffs would create exactly the premium “death spirals” that the ACA was designed to avoid.

As a matter of legal doctrine, the King decision reinforces the well-established canon that, in interpreting a statute, the Courts are to attempt to discern and enforce Congress’s intent. Here, that required the Court both to read the statute as a whole and understand the economic context—specifically the dynamics of the health insurance market—within which Congress was legislating.

The Implications

So, where do we go from here? This appears to be the final judicial word on the major elements of the ACA, leaving it to states and the federal government to move ahead on implementation of the law. As a practical matter, the decision preserves the status quo, and in the immediate term states are unlikely to take action. Pennsylvania and Delaware recently received conditional approval to establish a state-based Exchange in anticipation of a King decision—Pennsylvania’s governor announced that it would withdraw its application, and Delaware has indicated it is considering its options for moving forward.

However, after the dust settles, state leaders are likely to refocus on their own role in managing coverage and overseeing markets in their states. States that have deferred to the federal government the traditional areas of state regulation of their insurance markets and related consumer protection activities are likely to reassert their oversight role by adopting or strengthening state-based Exchanges or active partnerships with the federal government. They may also look to partner with the federal government on reforming the delivery system, increasing affordability, expanding access to coverage and care, and improving the quality of care. States that have not yet expanded Medicaid may choose to revisit their decisions and work with the federal government to develop state-specific approaches. With state innovation waivers available beginning in 2017, states will be looking for ways to modify key elements of the ACA to reflect their local priorities and needs, including ways to integrate them with Medicaid. Finally, debate will undoubtedly continue about specific provisions of the law. For example, focus may turn to the changes the ACA may bring employer-sponsored coverage, including the “Cadillac” tax on high-cost employer-sponsored plans, the mandate for large employers to offer health coverage, and the expansion of the small-group health insurance reforms to employers with 51-100 employees.