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ACA and Healthcare Reform

U.S. Supreme Court Hears Arguments Over ACA Federal Exchange Subsidy Availability

WASHINGTON, D.C. — (Mealey’s) Both sides faced critical questioning from Justice Anthony Kennedy during oral arguments March 4 in the case challenging the availability of subsidies in the Patient Protection and Affordable Care Act (ACA) federal exchange (David King, et al. v. Sylvia Mathew Burwell, et al., No. 14-114, U.S. Sup.[ subscribers may access Supreme Court briefs for this case]).

(Transcript available.  Document #93-150325-002T.) 

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 IRS; 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 people 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 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. 

Judge James R. Spencer rejected the plaintiffs’ 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. 

‘A Certain Sense’

The plaintiffs appealed, and a Fourth Circuit U.S. Court of Appeals panel found “a certain sense to the plaintiffs’ position,” but that the government has “the stronger position, although only slightly.”  

The plaintiffs appealed, and the U.S. Supreme Court agreed to hear the case. 


Arguing for the plaintiffs, Michael A. Carvin said the case presents the straightforward issue of statutory construction and that Section 1311 says “in the strongest possible terms we want states to run these exchanges.”  Unconditional subsidies give states no incentive to create exchanges, Carvin argues. 

Justice Elena Kagan asked whether it was the whole structure and context of the law, and not four or five words, that were important.  Carvin responded that the plaintiffs’ argument becomes stronger when those words are read in context of the ACA as a whole.  Justice Stephen Breyer suggested that when read in context, the plaintiffs’ argument actually gets weaker because absent the subsidies, the federal exchange collapses and employers do not pay penalties.  But Carvin said language that a state must establish for a subsidy to exist simply cannot mean HHS may establish the exchange.  Congress knew how to differentiate between states and HHS and could have made them equivalent had it intended to, Carvin argued. 

Death Spirals

Raising concerns about death spirals, Justice Sonia Sotomayor asked whether it was unconstitutionally coercive of the federal government to force states to create an exchange or face an unworkable insurance market.  Carvin responded that the federal government isn’t doing anything coercive or taking anything away, but simply conditioning billions in federal funds on the creation of an exchange.  There is nothing in the legislative history that suggests that absent subsidies, death spirals will result, Carvin said. 

Justice Kennedy also expressed concern that accepting plaintiffs’ argument essentially represented a “serious constitutional question” by forcing states to choose between creating an exchange or facing sky-high insurance rates and an insurance market death spiral.  Carvin responded that the government never made the coercion argument and that if this was unconstitutional, a federal statute like No Child Left Behind that asks states to do something in return for federal funding would also be unconstitutional. 

“It may well be that you’re correct as to these words, and there’s nothing we can do.  I understand that,” Justice Kennedy said. 

‘Harmonious Whole’

Solicitor General Donald B. Verrilli Jr. argued that you don’t read statutory provisions in isolation but in context and attempt to make sure the statute “operates as a harmonious whole.”  In cases where a reasonable reading creates conflict with the statutory scheme, you try to read it in a way that saves the statute, Verrilli said. 

“You have clear irresolvable conflicts so that the statute can’t work if you read it Mr. Carvin’s way,” Verrilli said. 


Justice Kennedy asked whether ambiguity existed, and whether if ambiguity existed, it was proper to allow the IRS to make a determination governing billions in federal dollars under Chevron U.S.A., Inc. v. Natural Resources Defense Council Inc. (467 U.S. 837 [1984] [enhanced opinion available to subscribers]). 

Verrilli said Chevron was not necessary to the government’s case but fully supports it.  Section 36B(g) clearly gives the IRS the power over decisions about how to implement the subsidies, Verrilli said. 

In response to a question from Justice Samuel Alito, Verrilli argued that there would in fact be harm if the court adopted the plaintiffs’ position.  While courts could decide to create exchanges in response to such a ruling, the subsidies for those currently enrolled would be immediately cut off, Verrilli argued. 

Justice Kennedy asked whether making subsidies available only for those enrolling in state exchanges might have been a method for states to express concern about the “wisdom and the workability” of the ACA.  Verrilli said he believed federalism principles required the court to adopt the government’s interpretation of the ACA. 

Justice Kennedy asked whether by referring to Section 1311, the ACA really intended to refer to Sections 1311 and 1321 and that “that seems to me to go in the wrong direction.”  Verrilli said that in cases where the ACA uses the term “by the state,” it is referring to work done for the state, rather than the act in general, where the ACA specifically refers to “the act.”  Further, Congress cannot impose an obligation that a state create an exchange, so here HHS will do the work of the state should a state choose not to create an exchange, Verrilli said. 


In rebuttal and responding to Justice Kennedy’s federalism question, Carvin said that under the government’s reading, the federal government imposes on states a requirement that states insure their own individuals through the employer mandate.  “The states are absolutely helpless to stop this federal intervention into their most basic personnel practices,” Carvin said.  

Carvin, Jonathan Berry and Yaakov M. Roth of Jones Day in Washington represent the plaintiffs.  Verrilli, 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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