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Published 4/1/2015
Elizabeth Fassbender

Supreme Court to Determine ACA’s Future

On March 4, 2015, the Supreme Court of the United States (SCOTUS) heard arguments in the case of King v. Burwell, which could threaten the future of the Affordable Care Act (ACA). Specifically, the Justices will be deciding the meaning of a section of the statute that stipulates subsidies are available through an exchange “established by the State.” According to the petitioners, the literal interpretation of the text means the Internal Revenue Service (IRS) can only provide subsidies to individuals in states that established their own exchanges. The government is arguing that the section refers to any exchange set up by the state, including an exchange run for the state by the federal government. A ruling is expected in late June.

Under the ACA, states had the option to either implement a state run health insurance exchange or let the federal government run the exchange instead. States running their own exchange are responsible for performing all functions of that exchange, including establishing procedures for enrolling individuals in health insurance and determining subsidy eligibility. In states that opt for a federally run exchange, the Department of Health and Human Services (HHS) performs all such functions, and individuals enroll through the
healthcare.gov website.

Subsidies provided by the ACA were designed to enable middle- and lower-income individuals with no coverage through their jobs and who did not qualify for Medicare or Medicaid to afford health insurance. The IRS, in implementing the ACA, authorized subsidies for individuals who purchased coverage on any exchange, regardless of whether the exchange was state-based or federally run.

Sometimes referred to as the “third leg” of the legislation, these subsidies—together with the guaranteed issue provisions and the individual mandate—are key elements of the ACA. They were included to help prevent the effects of adverse selection, in which only those who are most in need of health care are likely to purchase insurance, leading to higher average premiums and a general disruption of the insurance market.

After the law was passed, 13 states and the District of Columbia established their own exchanges; ten states opted for a federally supported state-based exchange, or a state-partnership exchange, and the remaining 27 states elected to use the federally facilitated marketplace. Many states emphasized cost, inflexibility, lack of guidelines, or general opposition to the law as their reasons for deferring to the federal government.

The arguments against
The four individuals who are contesting the law are from Virginia, a state with a federal exchange. They argue that the subsidies subject them to the law’s requirement that they either comply with the individual mandate or pay the associated tax. Their lawyer urged the Court to strike down the IRS regulation making subsidies available to individuals who purchase through federal exchanges, based on their interpretation of the text that “established by the State” means subsidies are available only in states with their own exchanges. Based on this interpretation, the language of the statute is plain and unambiguous; there is no room for the Court to consider intent or context.

“This is a straightforward case of statutory construction where the plain language of the statute dictates the result,” stated the plaintiff’s counsel. “The only provision in the Act which either authorizes or limits subsidies says, in plain English, that the subsidies are only available through an exchange established by the State under Section 1311.”

Prior to oral arguments, the legal “standing” of the petitioners had been questioned. The lead plaintiff appears to qualify for veterans’ medical coverage, which would raise questions about his ability to challenge the law. However the petitioners insisted they have a clear injury. Because one or more of the other plaintiffs had standing, and SCOTUS has not yet ordered a supplemental briefing on the question, this does not appear to be an issue.

The federal argument
The federal government argued that the IRS regulation should be upheld because an exchange “established by the State” includes those established by HHS as a surrogate for the state. Supporters of the government’s position also advocated for a broader interpretation of the text, looking to other provisions of the law, the overall context of the ACA, and the original congressional intent, which they say clearly points to providing subsidies to people in all states so that as many individuals as possible can obtain insurance.

Despite the ambiguous wording, argued the government, SCOTUS should defer to the IRS’s interpretation of the statute under the legal doctrine known as “Chevron deference,” which holds that courts should defer to agency interpretations of statutes that mandate action by the agency unless they are unreasonable. However, Chief Justice John Roberts, who authored the earlier ACA opinion yet was uncharacteristically quiet during arguments this time around, appeared skeptical that Chevron deference would apply.

Previous lower court decisions held that Congress intended that subsidies be available to individuals through any exchange. However, the petitioners argued that Congress intentionally decided to limit subsidies only to states that established their own exchanges as an incentive for states to do so. But several justices took issue with this argument, pointing out that such an action would amount to unconstitutional state coercion.

What happens next?
If SCOTUS decides that subsidies are only available for state-based exchanges, the subsidies would end in affected states within 25 days of the decision. This would affect more than 85 percent of the nearly 8 million people who signed up for coverage in states using the federal marketplace.

If the subsidies end, those individuals could see an average increase of 255 percent in their required premium contributions, according to one analysis. Nearly all would be unable to afford health insurance, and premium revenues would be insufficient to cover the healthcare expenses of the remaining enrollees. Even healthy enrollees might not be able to afford the new rates and could drop coverage.

Some states may attempt to modify their exchanges to qualify for ongoing subsidies. Seven states, operating marketplaces in partnership with the federal government, are already performing some of the necessary functions. Others could move forward by an executive order from the governor or state legislative action. Oregon, New Mexico, and Nevada are currently operating as state-based exchanges, although the subsidy eligibility and enrollment are handled through the federal website. Other states might follow their example. However, establishing a state exchange could take several years.

Alternatively, Congress could step in to provide some relief, although it may require that the Obama administration give up the employer or individual mandates as part of a compromise. Several Republican legislators have advanced repeal plans that would address the problem, although there is no clear agreement on a single path forward.

The chair of the House Energy and Commerce Committee, Rep. Fred Upton, is also working on a transition plan and hopes to have something in place before the ruling is released. But many observers believe it will be hard for any Republican plan to pass through Congress and be signed by the president.

The administration, on the other hand, is confident the Supreme Court will allow the subsidies to continue. “We believe the court will rule in the position that we have,” said HHS Secretary Sylvia Burwell, admitting that the agency has no back-up plan in the event that SCOTUS rules for the plaintiffs.

Elizabeth Fassbender is the communications specialist in the AAOS office of government relations. She can be reached at fassbender@aaos.org