King vs. Burwell – A Plain Language Argument that may cause a Death-Spiral for the Affordable Care Act

Written by:
Attorney Jennifer Knudson

On March 4, 2015, the United States Supreme Court heard oral arguments in King v. Burwell. The case challenges whether it is permissible for the Internal Revenue Service to regulate and provide tax credit subsidies for health insurance purchased by taxpayers through the federal health care Exchanges. The decision of the justices is highly anticipated as it could have the effect of impacting millions of Americans under the Affordable Care Act (ACA) who depend on the tax-credit subsidy to make their health insurance affordable. Although there are significant implications hinging on this decision, the arguments in the case are fairly simple and straightforward. The arguments rest on a simple plain language argument – does the Affordable Care Act mean what it actually says or should more be read into the language of the statute? That is, are subsidies properly available for coverage for those individuals “enrolled in an Exchange established by the State under section 1311”? 26 U.S.C. § 36B(c)(2)(A)(i)[1].

This case involves four petitioners from the state of Virginia who oppose the obligation to purchase health insurance under the ACA. The petitioners in King sought certiorari by the United States Supreme Court over a July 22, 2014 unanimous decision from the U.S. Court of Appeals for the Fourth Circuit. This Fourth Circuit decision upheld the validity of the Internal Revenue Services’ (IRS) establishment of tax-credit subsidies for certain individual health insurance policies purchased through the ACA’s Exchanges, regardless of whether the Exchange was established by a state or the federal government. King v. Burwell, 759 F.3d 358 (4th Cir. 2014). The Fourth Circuit Court of Appeal’s decision found that the statutory language relied upon by the plaintiffs for their argument was ambiguous and the IRS’s interpretation was reasonable and entitled to deference under Cheveron U.S.A., Inc. v. Natural Res. Def. Council, Inc, 467 U.S. 837 (1984)[2].

On the same day as the Fourth Circuit Court of Appeal’s decision in King v. Burwell, the U.S. Court of Appeals for the D.C. Circuit, by a 2-1 vote, decided in favor of a challenge to the same IRS rule. Halbig v. Burwell, 758 F. 3d 390 (D.C. Cir. 2014)[3]. The D.C. Circuit found that the IRS rule did conflict with the ACA’S plain language, and that the ACA limited the receipt of subsidies to those individuals who purchase coverage through a state-established Exchange. On the Government’s motion, the D.C. Circuit ordered an en banc rehearing. See 2014 U.S. App. LEXIS 17099 (D.C. Cir. Sept. 4, 2014).

Another court, the Eastern District of Oklahoma, in Oklahoma ex rel. Pruitt v. Burwell[4], utilized the same Chevron analysis and also found the IRS rule to be invalid based on a plain language interpretation of the ACA statute. Oklahoma ex re. Pruitt v. Burwell, 2014 U.S. Dist. LEXIS 139501 (E.D. Okla. 2014). This case was appealed to the Tenth Circuit Court of Appeals.

Given the D.C. Circuit’s order for an en banc rehearing and the fact that the Oklahoma case had yet to be heard by the Tenth Circuit, the United States Supreme Court surprised many by granting certiorari in King on November 7, 2014. In essence, King v. Burwell advanced to the front of the line when no technical split existed in lower courts on the issue of whether the IRS rule was enforceable. Following the Supreme Court’s granting of certiorari in King, the D.C. Court ordered Halbig to be held in abeyance on November 12, 2014. Likewise, the federal government requested abeyance by the Tenth Circuit Court of Appeals on November 17, 2014, in the Oklahoma case.

The main issue in King v. Burwell focuses on whether the federal tax subsidy established by the IRS is available to individuals in those states who declined or failed to establish their own Exchanges and where instead, the federal government has established such an Exchange on a state’s behalf. The legal arguments in the case focus on the application of the Chevron doctrine to the ACA’s language establishing the Exchanges. Chevron U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984). The Chevron case involved a two-part analysis for courts to determine how federal legislation delegating authority to federal agencies should be interpreted. First step is to determine whether or not Congress’ intent was clear and whether it spoke to the precise question at issue. Chevron, 467 U.S. 837, 842-843. If the intent of Congress is clear, that is the end of the matter for the Court and it must give “effect to the unambiguous express intent of Congress” Id. If the Court finds ambiguity or if the statute is silent on the issue, the court cannot impose its own construction on the statute; rather, the agency is given greater discretion in interpreting the legislation. Id. The Petitioners in King argued that the statute establishing the tax subsidies should be interpreted based on the plain language of the statute while the Respondents argue that the tax subsidy statute is ambiguous and the IRS should be given discretion in its interpretation.

Section 1311(b)(1) of the ACA provides that “Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange … for the State.” 42 U.S.C. § 18031(b)(1)[5]. An “Exchange” under the ACA is a mechanism established to help individuals and small businesses shop for and compare health insurance plans based on coverage, prices, and benefits.

Although the federal government strongly encouraged each state to establish their own Exchange, the ACA recognized that the federal government could not compel the states to do so under the Constitution if a state either chose or failed not to do so. 42 U.S.C. § 18041(c)(1)[6]. In such a circumstance, the ACA provided that the “Secretary [of Department of Health and Human Services (HHS)] shall … establish and operate such Exchange within the state and the Secretary shall take such actions as are necessary to implement such other requirements.” 42 U.S.C. § 18041(c)(1)(B)(i)(II). In other words, the obligation to establish a health insurance Exchange fell on HHS in those states that declined or failed to establish their own Exchanges. Virginia, the Petitioners’ home state, was one of the 36 states that declined or failed to establish its own state-run health insurance Exchange under the ACA in time for 2014 and is instead served by the federal government’s Exchange.

As an incentive to states to establish their own state-run Exchanges, the ACA’s statutory language provided for subsidies in the form of refundable tax credits for individual health insurance coverage purchased through the state-established Exchanges. See 26 U.S.C. §§ 36B(a), 36B(b), and 36B(c)(2)(A)(i)[7]. The IRS, however, through regulations promulgated in 2012, extended the subsidies for purchases through all Exchanges, not just those Exchanges established by a state. 26 C.F.R. § 1.36B-2(a)[8]; 45 C.F.R. § 155.20[9].

Practical Implications of a Decision in Favor of the Petitioners

The implication for whether or not a federal tax subsidy should exist in those states with federal Exchanges is overwhelmingly significant and could place the ACA into a death spiral. If the Supreme Court favors the Petitioners’ plain language arguments and determines that Section 1311(b)(1) of the ACA means what it says – that is, subsidies are only available in those states who establish their own state-run Exchanges, and not federally-run Exchanges – individuals in 36 states would be denied tax subsidies if nothing further is done by Congress.

Moreover, without the subsidies, many of the individuals would be unable to afford to purchase health insurance and therefore, would not be subject to the ACA’s individual mandate to obtain insurance or its associated penalties for failure to do so. The ACA provides that any individual who fail to obtain to health insurance coverage beginning in 2014 are subject to a penalty (“Penalty”). 26 U.S.C. §5000A(a) and (b)[10]. This Penalty, however, does not apply to those individuals who cannot afford coverage or would suffer a hardship if required to buy it. 26 U.S.C. §5000A(e)(1) and (5)[11].

Additionally, since employers in those 36 states would not have employees purchasing through an Exchange using federal subsidies, the employers would not be subject to the employer mandate (and associated penalty for failure to provide coverage). 26 U.S.C. § 4980H[12]. Large employers are subject to an “assessable payment” if it fails to offer full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. 26 U.S.C. § 4980H(a)(1)[13]. This assessable payment, however, is only triggered if at least one full-time employee is enrolled in a plan in which an “applicable premium tax credit … is allowed or paid” to the employee. 26 U.S.C. § 4980H(a)(2)[14].

Finally, the insurers in those 36 states would also be affected. Those insurers actuarially determined their products and rates based on the fact that significant numbers of individuals will enroll in their plans. Without the individual and employer mandates requiring and subsidies supporting the purchase of health insurance, a much smaller population of individuals will actually compete a purchase. If the populations of individuals purchasing health insurance in these states significantly decrease or evaporate, insurers are unlikely to continue to offer the same levels of coverage that it offered at the same prices as pre-King. In essence, the insurance market in these 36 states could disappear or dwindle significantly.

Conclusion

Oral arguments in the case were heard on March 4, 2015, and an opinion from the Court is expected sometime during June 2015. Depending on how the decision plays out, the next question will be whether or not an adverse decision could be remediated. Would Congress be willing to clear up any ambiguity by amending the subsidy provision of the ACA to make clear that it applies to both state and federally-established Exchanges? Given the current climate in Congress, this option is unlikely. Would states that previously declined to establish their own Exchanges reconsider and proceed to do so in light of the impact on its own citizens? Again, in the author’s opinion, this option is also unlikely. Perhaps, the Supreme Court will stay its mandate to invalidate the IRS rule to give the states and the federal government time to respond to the ruling as suggested by the justices in oral argument. If no action is taken, as is likely the case, a decision against the government could simply create a death-spiral for the ACA.

 

[1] See: http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapA-partIV-subpartC-sec36B.pdf.

[2] See: https://www.law.cornell.edu/supremecourt/text/467/837.

[3] See: https://scholar.google.com/scholar_case?case=15333446924860763904&hl=en&as_sdt=6&as_vis=1&oi=scholarr.

[4] See: http://www.google.com/url?url=http://www.ok.gov/oag/documents/Oklahoma%2520v%2520Burwell%2520ruling.pdf&rct=j&frm=1&q=&esrc=s&sa=U&ei=pO1HVZyMD8S4ogTV7YC4BQ&ved=0CBQQFjAA&usg=AFQjCNEKUuYTsNc_dnnNR40RK1bv210ciQ .

[5] See: http://www.google.com/url?url=http://www.gpo.gov/fdsys/pkg/USCODE-2011-title42/pdf/USCODE-2011-title42-chap157-subchapIII-partB-sec18031.pdf&rct=j&frm=1&q=&esrc=s&sa=U&ei=Hu5HVZ6OOsvyoAS09oGgDQ&ved=0CBoQFjAB&usg=AFQjCNGKA2oJA4jeTkt5_uEABl1ST530kQ.

[6] See: http://www.google.com/url?url=http://www.gpo.gov/fdsys/pkg/USCODE-2010-title42/pdf/USCODE-2010-title42-chap157-subchapIII-partC-sec18041.pdf&rct=j&frm=1&q=&esrc=s&sa=U&ei=X-5HVb6ILMTEogT24oHABg&ved=0CBoQFjAB&usg=AFQjCNH0FXWXEe-ajOQdfWfaKTTo9-vxzg.

[7] See: http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapA-partIV-subpartC-sec36B.pdf.

[8] See: http://www.gpo.gov/fdsys/pkg/CFR-2013-title26-vol1/pdf/CFR-2013-title26-vol1-sec1-36B-2.pdf.

[9] See: http://www.ecfr.gov/cgi-bin/text-idx?SID=5122599e459bcb5068beb07185692403&node=se45.1.155_120&rgn=div8 .

[10] See: http://www.gpo.gov/fdsys/granule/USCODE-2011-title26/USCODE-2011-title26-subtitleD-chap48-sec5000A.

[11] Id.

[12] See: http://www.google.com/url?url=http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleD-chap43-sec4980H.pdf&rct=j&frm=1&q=&esrc=s&sa=U&ei=GO9HVcbaGMrHogTUhYDAAw&ved=0CBoQFjAB&usg=AFQjCNGK5AXu0AQ2uy10xLGXKopsYfChVw.

[13] Id.

[14] Id.