Which Will be Healthier, State or Federal Exchanges: The Looming Implications of King v. Burwell

BY ANDREA NICKERSON — Although the Supreme Court upheld the constitutionality of the Patient Protection and Affordable Care Act (“ACA”) and related statutes in National Federation of Independent Business, it will undoubtedly continue to address issues associated with the actual implementation of the statute. On November 7, the Court granted certiorari for King v. Burwell, and will hear arguments on March 4. King presents the latest ACA issue for the Court—whether the IRS may grant tax-credit subsidies to healthcare coverage purchased through federal—as opposed to only state—health insurance exchanges.

Although the ACA provides that “Each State shall . . . establish an American Health Benefit Exchange,” Constitutional federalism constraints prohibit Congress from actually compelling the states to do so. Therefore, Congress included a provision requiring the Department of Health and Human Services to “establish and operate such Exchange within the State,” if the state failed to establish one by January 1, 2014, or had not taken the steps necessary to fulfill the statutory requirements.

According to the plaintiffs—Virginia residents who received subsidies as part of a federally-administered exchange—the ACA explicitly granted subsidies to eligible participants of state exchanges, creating the negative inference that federal exchanges could not receive such subsidies. Specifically, their brief cites Section 36B of the Internal Revenue Code, enacted as part of the ACA, which provides federal subsidies for health insurance purchased through an “Exchange established by the State under section 1311” of the ACA.

The plaintiffs claim that Congress intended the subsidies as a “carrot” for the states to create their own exchanges. They cite legislative history indicating that the House of Representatives initially enacted a bill whereby the federal government would create a national exchange, but still allow the states to enact individual programs. This idea was struck down in the Senate, which viewed state dominance in creating exchanges as vital to avoiding a single-payer plan, and ultimately, to the ACA’s success. Given the Constitutional constraints on compelling state exchanges, the legislature could only offer robust incentives to induce the creation of such programs. Jonathan Gruber, the MIT professor often referred to as the “architect” of the ACA, believed that the tax credits would be a strong enough political incentive for states to act.

The government argues that Congress included the provisions regarding subsidies as a means of expanding coverage to all Americans. The IRS interpreted the statute consistent with this argument, and in 2012 promulgated regulations which offered tax relief to eligible participants on both state and federal exchanges. As a result of receiving the subsidy, the plaintiffs no longer met the ACA’s income exemption, which lifts the penalty if the cost of purchasing coverage—minus any tax credits—exceeds eight percent of household income. As a result, the plaintiffs either had to purchase a healthcare policy or pay the statutory penalty.

The Fourth Circuit Court of Appeals held that under step one of the famed Chevron v. Natural Resource Defense Council analysis, Congress had not “directly spoken to the precise question at issue.” Although the court agreed that Congress’ reference to state exchanges, in isolation, indicated an intent to limit the subsidies to those exchanges, it found that in context, Congress’ intent was actually ambiguous. Specifically, because the ACA requires the Department of Health and Human Services to establish exchanges where states fail to do so, the court found it unclear as to whether the legislature intended the subsidies to apply to federal exchanges created in place of state exchanges. Moving to the second step of Chevron, the court unanimously held that the agency’s action was based on a reasonable interpretation of the Act. Review under the second step is “highly deferential with a presumption in favor of finding the agency action valid.”

Those favoring the subsidies point out that if the Supreme Court strikes down federal exchange subsidies, 87 percent of the 3.4 million Americans that enrolled in federal exchanges on HealthCare.gov would likely be unable to afford insurance. According to the Department of Health and Human Services, 87 percent of new enrollees in the federal exchange received financial assistance. Without the subsidy, it is unlikely that these enrollees could continue to afford insurance. Even if a portion of these enrollees were able to afford some level of insurance, eliminating affordability for the rest would undermine the program’s underlying objective of enrolling healthy participants to pay for the healthcare needs of unhealthy participants.

The Supreme Court will undoubtedly be influenced by the D.C. Circuit’s decision in Halbig v. Burwell on the same issue. Unlike the Fourth Circuit, the D.C. Circuit—generally recognized as the preeminent administrative law court—found that the subsidies were in fact limited to state exchanges. It held that “applying the statute’s plain meaning . . . section 36B unambiguously forecloses the interpretation embodied in the IRS Rule . . . .” The D.C. Circuit granted a hearing en banc, but the case is now in abeyance pending the outcome of King. A federal district court also agreed with the D.C. Circuit in Oklahoma v. Burwell, holding that the IRS’s interpretation would “lead[] us down a path toward Alice’s Wonderland, where up is down and down is up, and words mean anything.”

However, some argue that a ruling against the government interpretation would have little practical impact because states would quickly succumb to political pressure and organize their own exchanges. On the other hand, states may not be able to react as quickly as needed to respond to a decision holding that federal subsidies were not intended—those on federal exchanges that become unable to pay the full cost of healthcare could lose coverage as soon as 30 days after a missed payment. In addition, 36 states still have elected not to independently operate an exchange, and only 10 of those states have taken minimal initiative with either a federally-supported or federal partnership exchange.

If the Court strikes down the federal subsidies, studies indicate that nearly 5 million participants would undergo a premium increase of 76 percent. Eliminating the tax relief would result in average premiums of $346 per month. Additionally, states using federal exchanges generally have higher rates of uninsured residents, which means that without federal subsidies, the divergence between states operating their own exchanges and states using the federal exchange states will increase.

Undoubtedly, the Supreme Court’s ruling in King  will have significant implications for the implementation of the ACA. The Court will have to balance federalism concerns, administrative law doctrine, as well as the political pressure associated with one of the nation’s most significant legislations in recent years.

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