SCOTUS: Affordable Care Act Subsidies Apply to Federal Exchanges

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On June 25, 2015, in a 6-3 opinion written by Chief Justice John Roberts, the United States Supreme Court held that the subsidies available in the Affordable Care Act apply to participants in both state and federal healthcare exchanges. A key component of the Affordable Care Act (i.e., the part that helps make this insurance affordable) is tax subsidies for those who qualify under the income requirements stated in the Act. Language in this provision, according to the petitioners and the dissent, appeared to limit these subsidies to those who purchased their health insurance in “Exchanges established by the State.” The Internal Revenue Service, by regulation, has so far applied the subsidies broadly to include participants on the state and federal exchanges. The U.S. Court of Appeals for the Fourth Circuit held the provision was “ambiguous” and deferred to the IRS’s interpretation of the Act while a three-judge panel in the District of Columbia Circuit held, coincidentally on the same day, that the subsidies were limited to state-based exchanges.

Chief Justice Roberts agreed that the provision “Exchange established by the State” was ambiguous when comparing the language in context of the rest of the Act and its overall purpose. The court then analyzed other language surrounding the subsidies provision, including a provision requiring the Secretary of Health and Human Services to establish “such Exchange[s]” if the state did not establish its own. This additional language led the court to conclude that the State and Federal Exchanges “are equivalent—they must meet the same requirements, perform the same functions, and serve the same purposes. Although State and Federal Exchanges are established by different sovereigns, [the law does] not suggest that they differ in any meaningful way.”

The court also noted that the Act provides these subsidies for any “applicable taxpayer” and outlines the income requirements to qualify for subsidies. However, if the subsidies were only limited to state-based exchanges, “those provisions are an empty promise in States with a Federal Exchange.” In short, the court noted that while the argument limiting the subsidies to state-based exchanges was strong and “may seem plain ‘when viewed in isolation,’ that interpretation is “untenable in light of [the statute] as a whole. . . . In this instance, the context and structure of the Act compel us to depart from what would otherwise be the most natural reading of the pertinent statutory phrase.” King v. Burwell pg. 20. In contrast, the dissent focused on a strict reading of the phrase “established by the State” and concluded the language of the Act was clearly intendedto provide subsidies for participants in state-based exchanges.

This is one of several major challenges to the ACA and the second opinion on the law written by the Chief Justice. Unlike the last major ACA opinion, Burwell v. Hobby Lobby, which addressed questions of religious freedom and the ACA, this opinion could have represented a major setback for the ACA as fewer than 20 states have state-based exchanges. As a result, in the days running up to this decision, there has been a buzz of activity on multiple levels in an attempt to deal with any consequences that might arise in the event the court ruled the other way. For example, several states on the Federal exchange, including Pennsylvania, have been making emergency applications to the Federal Government to create a state-based exchange so as to protect those subsidies. It is unclear right now whether those states will continue along that course given the court’s opinion today.