The U.S. Supreme Court in a 6-3 vote affirmed that subsidies may go to individuals in states with exchanges established by the federal government, and the statute did not restrict subsidies to only states that themselves ran exchanges. Such a reading of the statute was not in line with the intent of the Affordable Care Act, the majority ruled.
Employers expressed a certain relief that their ACA compliance efforts and health insurance markets would not be disrupted, while continuing to hope for targeted fixes of some of the act’s more burdensome requirements.
If the Supreme Court had struck down subsidies in the majority of states without their own exchanges, insurance markets in these states would have been destabilized for several months, because there were few if any contingency plans had the decision gone the other way.
Under the ruling, subsidies remain available in all 50 states, an outcome that supports the reform law’s guaranteed issue and community rating features, according to Chief Justice John Roberts’ majority opinion. This reading of the ACA was the only one that lined up with the law’s goal of pushing millions of previously uninsured lives into the individual market, while preventing the flight of young, healthy lives from that market’s risk pool, he explained.
Background
Four Virginia residents who did not want to buy health insurance argued that Virginia’s exchange does not qualify as “an Exchange established by the State,” so they should not receive any tax credits. That would have exempted them from the ACA’s coverage requirement, because coverage without a subsidy would cost them more than eight percent of their income.
They argued that the proper interpretation of the ACA was that subsidies should not be disbursed in states that allowed the U.S. Department of Health and Human Services to run their system.
The district court dismissed the suit, holding that the ACA made tax credits available to individuals enrolled through both federal and state-established exchanges. The 4th U.S. Circuit Court of Appeals affirmed, deferring to the Internal Revenue Service’s interpretation of the statute.
High Court Ruling
The controversy surrounded the phrase in the statute: “an Exchange established by the State.” The only way an individual can receive an ACA subsidy is to buy coverage on such an exchange.
The High Court majority read this phrase to be ambiguous, in that it could be taken to represent state exchanges only … or all exchanges, including ones run by the federal government. Therefore, the court decided to look at the ACA’s broader structure to determine whether one of the meanings produces an effect that is more compatible with the rest of the law.
A strict, literal reading in which subsidies flow only where the state itself set up the exchange would bifurcate the exchanges, dividing them into two, the majority opinion determined: One type of exchange would make insurance more affordable, while the other would dispense unaffordable policies subject to a upward spiral of increasing premium costs, where fewer and fewer health people are paying into the insurance pool.
The context of the rest of the law shows this was not intended, because it would likely create the very “death spirals” the ACA was designed to avoid, Roberts stated. “Credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid [a] calamitous result that Congress plainly meant to avoid.”
Roberts cited examples from the 1990s where states passed guaranteed issue and community rating without an individual mandate or subsidies to make coverage affordable. The result, Roberts said, was people waited until they got sick before buying coverage, and healthy people remained uncovered so they were not contributing to insurance pools. In the end, premiums skyrocketed and insurers quit markets.
Several parts of the ACA’s text suggest that tax credits are not limited to state-established exchanges, the majority added, such as a provision that all Americans, regardless of state of residence, are eligible for a subsidy to buy exchange-based coverage if they earn between 100 and 400 percent of the federal poverty limit.
Chevron Deference Rejected
Roberts opted against basing his conclusion on Chevron deference (see Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U. S. 837), which requires courts to defer to an agency interpretation of an ambiguous provision. He said the tax credits were too central to the statute to leave to the IRS because that agency had inadequate expertise in crafting health insurance policy.
By issuing its own interpretation of the disputed language (at Section 36B), the High Court majority effectively precluded another interpretation by a future administration, giving the ACA subsidies a more solid basis than a conclusion based on Chevron deference would have, according to MaryBeth Musumeci of the Kaiser Family Foundation.
Dissenting Opinion
In dissent, Justice Antonin Scalia argued that the majority had overstepped the bounds of statutory interpretation by rewriting the ACA to work better, rather than leaving Congress to decide whether to make subsidies available to all exchanges. “The Court’s insistence on making a choice that should be made by Congress both aggrandizes judicial power and encourages congressional lassitude,” he wrote.
Employers Spared Uncertainty
Some employers and health plan administrators expressed relief that their ongoing ACA compliance efforts will not be disrupted. “All the planning we’ve been doing had a purpose,” said Malcolm Slee, an attorney with Groom Law Group in Washington, D.C. “No one was sure what would have happened if the administration lost.”
For example, employers will not have to navigate a patchwork of state insurance markets, some with subsidies and some without, Slee said. They will be “spared from spending the next months trying to work out what to do if some states have one kind of exchange (with subsidies) and another doesn’t.” (Exchanges are discussed in The New Health Care Reform Law, Chapter 8.)
In the bigger picture, Slee added, “this may be a death knell for judicial challenges to the ACA, and it forces politicians and other opponents to work on a bipartisan basis to amend parts of the law that do not work.”
With this perhaps final, broad challenge out of the way, employers will resume focus on complying with (or changing problematic parts of) the ACA, including: (1) the Cadillac tax; (2) the expansion of the definition of large employer to companies with 51 to 100 employees; and (3) simplifying the tax reporting on coverage provided and offered to employees.
The ERISA Industry Committee welcomed the ruling as removing a source of potential instability, but urged ACA changes. “Upending the individual market would have had significant ripple effects on companies that provide coverage for their employees,” ERIC said in a June 25 release.
But ERIC President Annette Guarisco Fildes added: “With the legal case settled, Congress should use this opportunity to repeal the burdensome and unnecessary taxes, mandates and reporting requirements imposed by the ACA.”
James Klein, president of the American Benefits Council, agreed. “We caution Congress against concluding that it is ‘business as usual’ after this ruling and continuing partisan wrangling over the future of the Affordable Care Act,” he stated. “The long term fate of the law may be unclear, but employers are required to comply with it right now and several serious problems with the law need to be addressed.”