Back to the Supreme Court for the Affordable Care Act

The Supreme Court granted a petition for review of King v. Burwell. In that case, the U.S. Court of Appeals for the Fourth Circuit ruled in favor of the government, holding that health care subsidies are legal on both state exchanges and on the federally facilitated exchanges (FFEs), including partnership exchanges, which are operational in 36 states. Only the District of Columbia and 17 states operate their own exchanges.

In a related case, Halbig v. Burwell, the District Court ruled that subsidies are available nationwide but the Circuit Court reversed that decision, holding that subsidies are availably only on state exchanges. Although the Circuit Court initially agreed to rehear the matter on December 17th, it cancelled the rehearing pending the Supreme Court's decision in King v. Burwell. So why has the high court decided to review this case? Section 1401 of the Affordable Care Act (ACA) states that tax credits are available when insurance is purchased through an exchange “established by the State,” but most exchanges are FFEs. Over five million people have purchased insurance through the FFEs and close to 90 percent of them have received some level of subsidy. In fact, without the subsidies, also known as advanced premium tax credits (APTCs), many could not afford their coverage. The Supreme Court can grant review in the absence of a present split between circuits if the court believes that taking the case will allow it to address an important question of federal law that has not been settled but should be. As things stand, the court’s calendar does not permit arguments before early March, and a decision is unlikely before the end of the current term in late June or early July.

The issue of whether subsidies are available is not only important to helping individuals comply with the individual mandate to purchase insurance. The employer shared responsibility mandate generally requires large employers to offer health coverage to full-time employees or pay a penalty. However, an employer will risk a penalty only if one or more of its full-time employees purchases coverage on an exchange and receives a subsidy. If no full-time employees can receive a subsidy, the employer will not have a risk of a penalty.

Specifically the question raised in the petition for review is “whether the Internal Revenue Service may permissibly promulgate regulations to extend tax-credit subsidies to coverage purchased through exchanges established by the federal government under § 1321 of the ACA.” States operating under the partnership model perform their own plan management and/or consumer assistance functions while leaving the other essential functions of an exchange to the federal government. The term “federally facilitated exchange” is a bit of a misnomer since the “facilitating” involves the federal government creating and running these exchanges via healthcare.gov.

The DC Circuit ruled (2-1) that the ACA clearly prohibits subsidies for purchases on the FFE. The Fourth Circuit however unanimously ruled that because the law is unclear, the ambiguity should be resolved in favor of allowing subsidies to be provided to everyone. While there are two other challenges to this IRS rule awaiting decision in lower courts, they will be mooted by the Supreme Court’s ruling in King v. Burwell.

Predictions by some are that the same 5-4 majority that upheld the constitutionality of the ACA two years ago will decide this matter in favor of the administration’s position by relying on the ambiguity of this provision and interpreting it to allow subsidies nationwide. The American Hospital Association, the Federation of American Hospitals, the Catholic Health Association, the Association of American Medical Colleges, and America’s Essential Hospitals, among others, are likely to submit friend of the court briefs supporting subsidies, as they have done in Halbig v. Burwell.

If the court rules that subsidies are only available on State exchanges, a couple of possibilities might still save the subsidies, short of amendments passed by Congress. Seven states established state-federal partnerships, but also rely on healthcare.gov. It is possible that such states might not lose access to subsidies although the US Department of Health and Human Services has referred to these both as partnership exchanges and as federal exchanges. Furthermore, states that have completely deferred to healthcare.gov could theoretically take some action to technically “establish” a state exchange and then hand off some responsibilities to federal government so as to still access subsidies under the law. Establishing a state exchange in this scenario would likely require at least state executive, if not legislative authority, and some funding.

There are good arguments on both sides of the case. The challengers take a strict textual position arguing that the court cannot look beyond the words of the statute to delve into what the overall Congressional intent might have been. Those who seek to uphold the law argue that the statutory language is ambiguous, so the court must look to the purpose Congress had in mind as judged from the entire piece of legislation. Given the broad purpose of the legislation to make health insurance affordable for most Americans, it can be argued that Congress could not have intended to make the benefits of subsidies unavailable depending on what happened in one state or another. Proponents of the law will ask the Court to defer to the interpretation by the IRS which applies the subsidy program to all exchanges whether they are state exchanges, state partnership FFEs, or other FFEs.

It will be interesting to see whether the court will follow what Justice Scalia said just a few months ago in an unrelated case, describing as a “fundamental canon of statutory construction . . . that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme.” The several words at issue in this case require that subsidies be calculated based on premiums for individuals enrolled through an “Exchange established by the State under 1311.” Nationwide subsidies can still survive even if this section, ACA § 1401, is read literally. This is because ACA § 1321, which authorizes the federal exchanges, provides that if a State does not establish an Exchange under § 1311, the Department of Health and Human Services “shall . . . establish and operate such Exchange within the State.” In an interpretation which does not do violence to the text of the statute, the fact that HHS must establish “such Exchange” could well be read to refer to a § 1311 Exchange, i.e. a state exchange. The ACA could be read this way without the addition or deletion of any words.

Unlike the constitutional law challenge presented by the ACA’s last trip to the Supreme Court, this is a case where an agency interpretation is at issue and if the agency’s interpretation is reasonable it can be upheld. The classic principles of statutory construction which call for harmonizing various provisions within a statute auger in favor of upholding the IRS interpretation on this point. In a possible foreshadowing of what might come out of this case, it is interesting to note that the four dissenting judges in the 2012 Supreme Court decision on the ACA read the statute to include the availability of subsidies on federal exchanges.

For more information, please contact Sarah L. Fowles at (414) 277-5287 / sarah.fowles@quarles.com, Alyce Katayama at (414) 277-5823 / alyce.katayama@quarles.com, William J. Toman at (608) 283-2434 / william.toman@quarles.com, or your local Quarles & Brady attorney.