Millions of
Americans who have suffered from unaffordable health care for decades find a reason to celebrate today. The Supreme Court (6-3)[1],
through King v. Burwell, affirmed that refundable tax credits for health insurance coverage purchased are available to
those individuals with household incomes between 100 percent and 400 percent of
the federal poverty line, regardless of whether they enroll in an insurance
plan through a Federal or a State Exchange.[2]
This decision preserves one main tenet of Obamacare, which helps millions of
poor and middle-class people buy affordable health insurance.
I.
The Patient Protection and Affordable Care
Act (the “Affordable Care Act” or the “ACA”) has adopted three interlocking
reforms.
The majority started its opinion by
explaining the background and purposes of the ACA because this case is closely
related to whether the Congress intended the ACA’s three interlocking reforms
to equally apply in each State regardless of who establishes the State’s
Exchange. In general, the ACA adopts the
three key reforms that made the Massachusetts health system successful.
The first reform consists of the
guaranteed issue and community rating requirements. These two requirements bar
insurers from denying coverage to anyone because of their health (the guaranteed
issue requirement) and from charging a person higher premiums because of their
health conditions (the community rating requirement) to ensure that everyone
has equal access to health insurance coverage. However, these two requirements created
an unintended “adverse selection” consequence: people do not want to purchase
health insurance until they become sick. As a result, insurers are forced to
increase overall premiums to account for the fact that only those who are
already sick rather than healthy buy insurance, which in turn creates an economic
“death spiral”—as premiums become higher, the number of people buying insurance
sinks, and the uninsured number dramatically increases.
Years after Massachusetts
adopted only these two requirements to its state health insurance system and
experienced the death spiral, the second and the third reforms were added to its
health system – coverage and subsidizing requirements –and the ACA also adopts
them. Under the coverage requirement, each individual is required to maintain
health insurance coverage or make a payment to the IRS. Given healthy people
are required to purchase health insurance, health insurance premiums may become
lower. Also, low-income individuals are exempt from the coverage requirements
when they have to spend more than eight percent of their income on health
insurance. Yet, to avoid adverse selection or death spiral caused by exemptions,
refundable tax credits are available to subsidize individuals with household
incomes between 100 percent and 400 percent of the federal poverty line. Accordingly,
these three reforms are interlocking with each other and closely intertwined. When
interpreting ambiguous phrases under the ACA, the Supreme Court emphasizes consideration of whether the purposes of these requirements may be served.
II.
The issue before the Court: Is the phrase,
“an Exchange established by the State” under Section 36B of the Internal
Revenue Code ambiguous?
In addition to
the three reforms, the ACA also requires the creation of an “Exchange” in each state.
An Exchange is a marketplace where people can compare and buy different types
of health insurance. The ACA gives each state the opportunity to establish its
own State Exchange but provides that the federal government must establish the
Federal Exchange in the state if the state chooses not to establish one. The issue before the Supreme Court was whether tax credits could be available in
the states that have a Federal Exchange rather than a State Exchange. In other
words, the question is whether “Federal Exchanges” are included under Section
36B of the Internal Revenue Code, a critical component of the ACA, even when
Section 36B provides that refundable tax credits are subsidized to those who
enroll in health plans through “an Exchange established
by the State under Section 1311 of the ACA.” See 26 U.S.C. §36B(b)(2)(A). The IRS promulgated a new rule that makes
tax credits available regarding both State and Federal Exchanges.
Four petitioners
currently living in Virginia who could only enroll in a health plan through a
Federal Exchange challenged the IRS’s rule and argued that they should not
receive any tax credits because Federal Exchanges are not “established by the
State.” Without the tax credits, the petitioners argued, they would be
exempt from the ACA’s coverage because their cost of buying health insurance
would exceed eight percent of their income. See
26 U.S.C. §5000A(e)(1). Both the District Court and the Fourth Circuit deferred
to the rule and interpretation made by the IRS. The Supreme Court granted
certiorari and affirmed the Fourth’s Circuit’s decision on different
grounds.
The High Court denied deferring to
the IRS’s new rule and interpretation and held it was unlikely
that Congress would have delegated the IRS to determine the issue of tax credit
availability, given this should be a question of deep “economic and political
significance.” Therefore, the Court reasoned that it should determine the correct
reading of Section 36B. In assessing the ambiguity of a statute, the
Court first decided whether the language is plain by reading the
words “in their context and with a view to their place in the overall statutory
scheme.” Evaluating the term “Exchanges” used in different provisions under the
ACA, the Court held that the meaning of the phrase “established by the State”
is ambiguous in context and rejected petitioners’ arguments to adopt the plain
meaning of the phrase. For example,
assuming this phrase excludes the Federal Exchanges, nobody purchasing
insurance through Federal Exchanges would be qualified for tax credits - seemingly an interpretation contrary to the ACA’s expectation that State
Exchanges and Federal Exchanges are equivalent.
Given that the phrase
was ambiguous, the Court further decided “Federal Exchanges” must be included
in Section 36B to avoid creating the “death spirals” that the Congress enacted
the ACA to prevent. The rationale is simple: If tax credits are not available
to Federal Exchanges, excessive numbers of exemptions will destroy the coverage
requirement, and adverse selection will appear. Justice Roberts emphasized that Congress “passed
the Affordable Care Act to improve health insurance markets, not to destroy
them.”
Obamacare also mandates employers
with 50 or more employees to offer their full-time employees health insurance
coverage. (Full-time employees are defined as those who work 30 hours or more
per week).
Today Bryan Schwartz Law celebrates this important step forward for American access to affordable health care.
[1]
Chief Justice Roberts wrote the majority opinion and was joined by Justices
Kennedy, Ginsburg, Breyer, Sotomayor and Kagan. Justice Scalia filed a
dissenting opinion, in which Justices Thomas and Alito joined.
[2] At
this point, 16 States and the District of Columbia have established their own
State Exchanges, whereas the remaining 34 States have elected not to establish
their own Exchanges and relied on the Federal Exchanges established and
operated by the Secretary of Health and Human Services.
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