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On Thursday, June 25th, the Supreme Court voted 6-3 to uphold the availability of the Affordable Care Act’s (ACA) premium tax credits on the federal Exchanges.
The ACA provides that the amount of the tax credit depends in part on whether the individual has enrolled in a health plan through “an Exchange established by the State.” An IRS Rule allows individuals to be eligible for the tax credit if the individual enrolls in a health plan through an Exchange, regardless of whether the Exchange is established and operated by a State or the federal government. Petitioners challenged the IRS Rule in the case King v. Burwell.
Petitioners are four individuals who live in Virginia and they do not want to purchase a health plan. Virginia has a federal Exchange, therefore in their view, Virginia’s Exchange does not qualify as “an Exchange established by the State,” which means they should not receive any tax credits. If the petitioners do not receive any tax credits, the cost of buying a health plan would be more than eight percent of their income, which would exempt them from the Individual Mandate. Under the IRS Rule, however, petitioners would be eligible to receive tax credits. The tax credits would make the cost of buying a health plan less than eight percent of petitioners’ income, which would then subject them to the Individual Mandate. The question then presented to the Court was whether the ACA’s tax credits are available in states that have a federal Exchange.
The Opinion of the Court, delivered by Justice Roberts, was that “while the meaning of the phrase ‘an Exchange established by the State… may seem plain ‘when viewed in isolation,’ such a reading turns out to be ‘untenable in light of [the statute] as a whole.” The Court stated that Congress based the ACA on three major reforms: first, the guaranteed issue and community rating requirements; second, a requirement that individuals maintain health insurance coverage; and third, the tax credits. Together, these reforms “minimize… adverse selection and broaden the health insurance risk pool to include healthy individuals, which will lower health insurance premiums.” The Court determined that, “Congress made the guaranteed issue and community rating requirements applicable in every State in the Nation. But those requirements only work when combined with the coverage requirement and the tax credits. So it stands to reason that Congress meant for those provisions to apply in every state as well.”
The Court explained that, “under the petitioners’ reading… one of the Act’s three major reforms – the tax credits – would not apply. And a second major reform – the coverage requirement – would not apply in a meaningful way… The combination of no tax credits and an ineffective coverage requirement could well push a State’s individual insurance market into a death spiral… It is implausible that Congress meant the Act to operate in this manner.” Cleverly, Justice Roberts quoted the dissenting opinion in the first Supreme Court case challenging the ACA, “Without the federal subsidies… the exchanges would not operate as Congress intended and may not operate at all.” The Court concluded in this case 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.”
Petitioners also claimed that, “Congress was not worried about the effects of withholding tax credits from States with Federal Exchanges because ‘Congress evidently believed it was offering states a deal they would not refuse.’” The Court stated that a section of the ACA “provides that, if a State elects not to establish an Exchange, the Secretary ‘shall… establish and operate such Exchange within the State.’” As such, “Contrary to petitioners’ argument, Congress did not believe it was offering States a deal they would not refuse – it expressly addressed what would happen if a State did refuse the deal.”
There’s another critical aspect to the Court’s decision. When a statute is ambiguous and the regulatory agency’s interpretation is reasonable, the Court defers to the agency’s interpretation. “This approach ‘is premised on the theory that a statute’s ambiguity constitutes an implicit delegation from Congress to the agency to fill in the statutory gaps.’” In this case, however, the Court found that Congress did not intend to delegate interpretive authority to the IRS on this issue. Therefore, it was instead the task of the Court to determine the correct reading of the statute. This is a critical aspect of the decision, because it would preclude a future administration from drafting differing regulation from the current interpretation.
The Urban Institute estimated that a victory for the petitioner “would increase the number of uninsured by 8.2 million people and eliminate $28.8 billion in tax credits and cost-sharing reductions in 2016 ($340 billion over 10 years) for 9.3 million people. With lower-cost individuals leaving the market, average non-group premiums in 34 states would increase by 35 percent, affecting those purchasing inside and outside those Marketplaces.” In addition, there would be an impact on the enforcement of the Large Employer Mandate, because an employee’s receipt of a tax credit triggers an employer’s penalty for non-compliance. These consequences, however, have been avoided because of the Supreme Court’s decision to uphold the availability of the ACA’s premium tax credits on federal Exchanges. This decision does not directly affect California, because California has a state-based Exchange.
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