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ACA and Healthcare Reform

U.S. High Court Agrees To Decide Availability Of Subsidies In State Insurance Exchanges

WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court on Nov. 7 agreed to decide whether the Patient Protection and Affordable Care Act (ACA) authorizes tax subsidies for individuals who enroll in insurance through state exchanges (David King, et al. v. Sylvia Mathew Burwell, et al., No. 14-114, U.S. Sup.). 

(Order available.  Document #93-141126-008R.) 

The case was originally distributed for conference on Oct. 31 but was relisted Nov. 4. 

Virginia residents David King, Douglas Hurst, Brenda Levy and Rose Luck sued Kathleen Sebelius, secretary of Health and Human Services; the Department of Health and Human Services (DHHS); Jacob Lew, secretary of the Treasury; the Department of Treasury; Daniel Werfrel, acting commissioner of the Internal Revenue Service; and the IRS in the U.S. District Court for the Eastern District of Virginia, saying the IRS improperly interpreted the ACA to allow tax credits to offset premium costs for individuals who obtain insurance through federal exchanges, which the plaintiffs claim contravenes the express intent of the ACA and ignores the clear limitations that Congress imposed on the availability of the federal subsidies.  Further, the IRS promulgated the regulation without any reasoned effort to reconcile it with the contrary provisions of the statute, the plaintiffs say. 

Sebelius resigned and was replaced by Sylvia Mathews Burwell. 

The plaintiffs allege that the ACA includes provisions for the creation of state health insurance exchanges, which are mechanisms "for organizing the health insurance marketplace to help consumers and small businesses shop for coverage in a way that permits easy comparison of available plan options based on price, benefits and services, and quality."  The ACA required each state to establish an exchange by Jan. 1, 2014, but also provided that if a state opts out of the exchange, the federal government would establish and operate an exchange within the state. 


The ACA encourages states to establish exchanges with a variety of incentives, chiefly the premium-assistance subsidy for state residents purchasing individual health insurance through state-established exchanges.  Thirty-four states declined to establish exchanges, making the federal government responsible for establishing exchanges in those states. 

To address this issue, the IRS promulgated regulations expanding the availability of subsidies.  The IRS rule states that subsidies shall be available to anyone “enrolled in one or more qualified health plans through an Exchange” and defines “exchange” to mean “a State Exchange, a regional Exchange, subsidiary Exchange, and Federally-facilitated Exchange.”  The rule means that premium-assistance subsidies are available in all states, including those states that declined to establish their own exchanges. 

Virginia opted not to establish its own insurance exchange.  The plaintiffs are not eligible for employer- or government-sponsored health coverage that satisfies the individual mandate.  Absent the IRS ruling, the plaintiffs would be entitled to a certificate of exemption from the individual mandate penalty for 2014 because the cheapest bronze plan approved for sale to them on the federal exchange in Virginia would cost more than 8 percent of their individual household incomes.  But because the IRS rule makes them eligible for a subsidy that would reduce their out-of-pocket cost to below that figure, they will be disqualified from that otherwise-applicable exemption and subject to the individual mandate penalty.  As a result, they say, they will be forced to pay a penalty or purchase more insurance than they want.  The plaintiffs say they are injured by the IRS rule because it has the effect of subjecting them to monetary sanctions or requiring them to alter their behavior to avoid those sanctions.  Either way, the plaintiffs say, their financial strength and fiscal planning are immediately and directly affected by the exposure and/or liabilities. 

Rulings Below

Judge James R. Spencer held that the plaintiffs have standing because their economic injury is real and traceable to the IRS rule.  However, he rejected their claims, saying courts have a duty to construe statutes as a whole and that the plaintiffs’ reading of ACA Section 36B grows weak when other sections of the ACA are taken into account. 

The plaintiffs appealed. 

A Fourth Circuit U.S. Court of Appeals panel found that the plaintiffs had suffered economic injury sufficiently traceable to the IRS rule.  Turning to the merits, however, the panel said that though there is “a certain sense to the plaintiffs’ position,” the government has “the stronger position, although only slightly.” 


In July 2014, the plaintiffs filed a petition for writ of certiorari with the U.S. Supreme Court, arguing that withholding tax credits from states that relied upon the federal exchanges was simply one of “a variety of ‘carrots’ and ‘sticks’” Congress hoped would urge states to voluntarily establish exchanges.  

The plaintiffs argue that 26 U.S. Code Section 36(a) and 26(b)(1) provide for credits based on the number of coverage months while Section 36B(c)(2)(A)(i) requires the calculation of credits based on enrollment in an “exchange established by the state.”  The interplay of 26 U.S. Code Section 36B(a) and Section 26(b)(1) means that absent enrollment through a state exchange, there can be no calculation of “coverage months” and thus no subsidy, the plaintiffs argue.  Further, under Section 1311 of the ACA, codified at Section 36B(b)(2)(A), the credit is based the premium for coverage received through an exchange “established by the state,” the plaintiffs argue. 


In response, the government argues that the grant of en banc rehearing in Halbig v. Burwell (758 F.3d 390 [D.C. Cir. 2014]) [enhanced opinion available to subscribers] eliminates the conflicting rulings at the heart of the plaintiffs’ petition. 

“Petitioners identify no sound reason for this court to depart from its usual practice by taking up the question presented in the absence of a disagreement among the courts of appeals and while the D.C. Circuit’s en banc proceedings remain pending,” the government argues. 

In addition, the plaintiffs’ formulation of the subsidies would result in fewer buyers and sellers in the exchanges, crippling the exchanges, the government argues. 

The language and structure of the ACA is intended to give states the opportunity to establish an exchange while also protecting residents in states that choose not to establish an exchange, the government argues.  This is the true nature and intent and proper interpretation of the ACA language, the government argues.

 ‘Superfluities, Absurdities’

“Petitioners’ reading, in contrast, would transform the Act into a hash of superfluities, absurdities, and internal contradictions.  It would obstruct the Act’s express purpose by denying affordable insurance to millions of Americans,” the government argues. 

A proper, full and in-context reading of the ACA confirms the IRS’s interpretation that subsidies remain available when the federal government steps into the shoes of the state to provide an exchange, the government argues. 

Michael A. Carvin, Jonathan Berry, Walter D. Kelley Jr. and Jacob M. Roth of Jones Day in Washington represent the plaintiffs.  Solicitor General Donald B. Verrilli Jr., Acting Assistant Attorney General Joyce R. Branda and attorneys Mark B. Stern and Alisa B. Klein of the Department of Justice in Washington represent the government. 

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