By Srishti Miglani
In the Affordable Care Act’s (ACA) latest encounter with the U.S. Supreme Court, the ACA emerged victorious. On June 25, 2015, the Supreme Court held that federal tax credit discounts, provided by the Internal Revenue Code Section 36B (“IRS Rule”), are available to individuals purchasing health insurance plans on federally-facilitated exchanges (FFEs).
The plaintiffs in the case are four individuals who live in Virginia, which has an FFE. They argued that the FFE in Virginia does not qualify as “an Exchange established by the State under [42 U.S.C. § 18031],” and therefore, individuals purchasing insurance through that FFE cannot get federal tax credits discounts. As a result, the cost of buying insurance for the plaintiffs will be more than eight percent of their household income, thereby exempting them from the individual mandate under the ACA. Therefore, they will not be required to purchase health insurance as mandated by the ACA.
The federal court in Virginia upheld the IRS Rule and the Fourth Circuit Court of Appeals affirmed the decision. The Fourth Circuit found the text of the ACA ambiguous and deferred to the IRS’ interpretation under Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. The Supreme Court agreed to hear the appeal from the Fourth Circuit.
Chief Justice Roberts, writing for the six-justice majority, initially noted that the ACA was designed to expand health insurance in the individual market by (1) prohibiting insurers from denying coverage to those with pre-existing conditions, (2) requiring people to have coverage or pay a fine to the IRS (individual mandate), and (3) giving tax credits to people to make insurance more affordable. These three reforms are interconnected and one would not work without the others.
Before interpreting the meaning of the words at issue in this case, the court noted that there was no need to entertain the Chevron two-step framework that courts use when analyzing an agency’s interpretation of a statute. The Fourth Circuit in upholding the IRS Rule had used that Chevron framework —addressing whether the ACA was unambiguous, and if so, whether the IRS’ interpretation of the text of the ACA was reasonable. However, the Supreme Court noted that tax credits were “among the [ACA’s] key reforms” and their availability on FFEs was a question of “deep ‘economic and political significance’ that is central to the statutory scheme.” Therefore, Congress would not have left that question to an administrative agency. Justice Roberts held that it was the Court’s “task to determine the correct reading of Section 36B.”
The Court’s ruling on the Chevron issue is consistent with how the government briefed and argued the case. Because the Court itself interpreted the text of the ACA rather than deferring to an agency’s interpretation, a future administration will not be able to change the IRS Rule that allows FFEs to grant tax credits. Instead, Congress will have to amend the ACA itself if it wants to limit the tax credits to certain exchanges. This was the outcome the administration sought and this action by the Supreme Court will have a huge impact on the future of the ACA.
Relying on this premise, the Court proceeded to construe Section 36B de novo. First, the opinion addresses whether the language of that Section was ambiguous. It does so based on the text, context, and purpose of the ACA. The text of Section 36B allows an individual to purchase tax credits only if the person purchased a plan through “an Exchange established by the State under [42 U.S.C. §18031].” Justice Roberts then parsed this language one requirement at a time. First, the Court established that an FFE is “an Exchange” under Section 36B and found it to be the functional equivalent to Exchanges established by a state.
The Court then tackled the issue of whether an FFE is “established by the State.” First, the Court determined that the word “State” as used in Section 18031 is ambiguous when placed in the context of other provisions of the ACA. The Court relied on several different provisions of the ACA to show that other provisions seem to refer to the FFE when talking about an Exchange “established by the State.” While Section 18031 requires all exchanges to make health plans available to all qualified individuals, Section 18032 defines a qualified individual as “an individual who resides in the State that established the Exchange.” The ACA’s goal of having qualified individuals on all exchanges can only be accomplished if qualified individuals also existed in FFEs and not just on the state-operated exchanges. Because these provisions need to be reconciled with each other, the Court concluded that use of the phrase “established by the State” might also include FFEs.
In determining whether an FFE is established “under [42 U.S.C. § 18031],” the Court noted that, since Section 18031 lays out all the requirements for an Exchange, “it is sensible to regard all Exchanges as established under that provision.” Furthermore, if a State does not establish an Exchange, Section 18041 tells the Department of Health and Human Services (HHS) to establish “such Exchange.” The words “such Exchange” in Section 18031 indicate that State and Federal Exchanges should be the same.
Additionally, the Court looked at several other provisions of the ACA and concluded that if FFEs did not offer tax credits, those provisions would “make little sense.” Therefore, the Court acknowledged that the words, “established by the State,” were at least ambiguous.
Given the textual and contextual ambiguity, the Court looked to the “broader structure of the [ACA]” to decipher the meaning of Section 36B. The Court read the words of Section 36B through the lens of three reforms underlying the act—making insurance available to everyone regardless of preexisting condition, mandatory coverage, and affordability through tax credits—and noted that the ACA was not intended to operate differently in states with state-operated exchanges and in those with FFEs. If tax credits were not available to individuals purchasing insurance on FFEs, the cost of buying coverage could be prohibitive for some people. This would result in greater exemptions from the mandatory coverage requirement and, as a result, fewer people would purchase insurance. With unavailability of tax credits and weakened individual mandate, the insurance markets in those states would enter into a “death spiral.” And Congress did not intend for the ACA’s reforms to operate this way.
Lastly, the Court looked at the structure Section 36B for further support for its position. The opinion noted that if Congress intended to alter the entire regulatory scheme of the ACA—by restricting tax credits to State Exchanges—it would have done so in a clearer fashion and not in a “winding path of connect-the-dots provision about the amount of the [tax] credit.”
After accounting for the context and structure of the ACA, the Court concluded that the ACA should be interpreted in a way that aligns with Congress’ intent “to improve health insurance markets, not to destroy them.” It held that Section 36B allows tax credits for insurance purchased on any (and all) Exchanges created under the ACA.
Justice Scalia, writing for the three dissenting justices, accused the majority of not following normal rules of interpretation in an effort to save the ACA. The provisions that the majority saw as making little sense if FFEs are not “an Exchange established by the State” were seen by the dissent as mere oddities of the ACA. As for the three reforms underlying the ACA, the dissent saw the effect of unavailability of tax credits on the other reforms as a mere “flaw” in the ACA, and not an opportunity to reinterpret Section 36B to “mean the opposite of what it says.” Justice Scalia uses some colorful language to characterize the majority’s statutory interpretation calling it “applesauce” and “jiggery-pokery.” At the end of the dissent Justice Scalia suggests that the ACA should be renamed “SCOTUScare.”
Nevertheless, the Supreme Court, without any “jiggery-pokery,” followed well-recognized rules of statutory interpretation to reach the conclusion that tax credits are available on all Exchanges — state and federal. More importantly, this decision prevented the calamitous collapse of the individual insurance markets and preserved individuals’ ability to purchase health insurance coverage.