In a landmark decision, the U.S. Supreme Court interpreted the Affordable Care Act (ACA) to allow tax credits for individuals who purchase their health insurance through the federally-run insurance Exchange. Employers and health industry businesses have been closely watching four cases challenging whether federal subsidies could be used to reduce costs to consumers for health insurance purchased on an ACA Exchange run by the federal government, and not by some state instrumentality or state-based nonprofit. Two federal courts ruled that the ACA clearly and unambiguously authorized subsidies only when health insurance is purchased on state-based Exchanges, but the Fourth Circuit Court of Appeals in King v. Burwell sided with the Obama Administration last summer in what was characterized as a close call. With the split in authority, the U.S. Supreme Court accepted King v. Burwell for review. Now, after oral arguments heard in March and an increasing flurry of public and private sector concerns as to the potential effects of a Supreme Court decision supporting the King plaintiffs’ arguments, the Court ruled yesterday to affirm the Fourth Circuit’s finding that tax subsidies are appropriately available to individuals purchasing health insurance through the federal Exchange.
The Opinion acknowledged the ambiguity of section 36B of the ACA that only addresses the availability of health insurance tax credits through Exchanges established by a state, but, somewhat surprisingly, did not base its decision on this limited wording. Instead, the Court stressed 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 Court emphasized that the purpose and intent of the ACA, to improve the individual health insurance market, across all of the United States, by implementing three fundamental reforms, is in fact crystal clear. These ACA reforms, designed to reduce the number of uninsured, as conceptualized in Massachusetts’ health reform as well, are: (1) guaranteed issue coverage required to be offered by health insurers; (2) a mandate for individuals to purchase health insurance coverage or pay a tax penalty; and (3) the availability of government subsidies to make health insurance more affordable and to incentivize individuals to purchase coverage in lieu of paying penalty. The majority Opinion found that the ACA’s context and structure compelled the conclusion that “Section 36B allows tax credits for insurance purchased on any Exchange created under the Act. Those credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid.”
The ACA established that, with certain exceptions, all Americans must maintain minimum essential health coverage or pay a tax penalty, commonly referred to as the ACA’s “individual mandate.” Similarly, large employers, generally those with 50 or more full-time employees, can expect tax penalties if their full-time employees are not offered affordable, comprehensive coverage in the workplace and, instead, obtain subsidized insurance coverage through an ACA Exchange. These employer “pay or play” provisions, often referred to as the “employer mandate,” are a means to incentivize employers to offer health coverage that will ultimately disqualify employees from receiving federal subsidies for alternative coverage purchased on an ACA Exchange – thus, saving the federal government money and increasing the number of individuals who have comprehensive coverage.
The ACA individual mandate is paired with federal tax subsidies so that health insurance individuals must purchase under ACA becomes more affordable by reducing premium costs and out-of-pocket spending for individuals with qualifying incomes.
Notably, the Supreme Court dismissed the reasoning of the Fourth Circuit in King v. Burwell – that the federal subsidies could be upheld on the basis of the Chevron doctrine by, in the case of an ambiguous statute, deferring to the IRS’s interpretation of the ACA – but affirmed the Fourth Circuit’s judgment in a 6-3 decision nonetheless. The majority of the Supreme Court chose to interpret the ACA in a consistent (not ambiguous) manner, thus alleviating the need to rely on the Chevron doctrine which would likely have provided a temporary fix for the federal tax subsidies at issue.
The bottom line: The Supreme Court determined that the ACA, as a whole, had a consistent intent, even if ambiguous provisions and inartful drafting can be found within the text of the statute. In closing, the majority opinion held that:
“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. Section 36B can fairly be read consistent with what we see as Congress’s plan, and that is the reading we adopt.”
Tax subsidies will continue to be available through all ACA Exchanges, and the individual mandate and employer mandate remain in place in all states, at least while the dust settles in Congress. The King decision did not tip the ACA dominoes, but other actions challenging specific provisions parts of the ACA surely lie ahead.
For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.