Justices rescue Obamacare, uphold exchange subsidies nationwide

June 25, 2015

Westlaw Journals ThumbFrom Westlaw Journal Health: The U.S. Supreme Court has upheld the nationwide insurance subsidies that form a key part of the Affordable Care Act, dismissing a challenge that could have crippled Obamacare by restricting the need-based tax credits to states that establish their own health care exchanges.

In a 6-3 ruling, the justices handed the Obama administration a major victory, rejecting the challengers’ suggestion that the law’s subsidies provision, 26 U.S.C.A. § 36B, made the credits available only in states that set up their own Obamacare health exchanges instead of relying on the federal HealthCare.gov marketplace.

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Thirty-four states left their insurance exchanges at least partly in federal hands, but the Internal Revenue Service adopted a rule, 45 CFR § 155.20, that applied the subsidies nationwide.

According to the petitioners, the IRS exceeded its authority under the Administrative Procedure Act, 5 U.S.C.A. § 500, by interpreting Obamacare with so little faith to its express terms.  The APA requires federal agencies to adopt reasonable readings of the laws they administer.

A six-justice majority disagreed.

Although the Affordable Care Act’s “inartful” language sowed confusion about the scope and availability of the subsidies, Chief Justice John Roberts acknowledged in his majority opinion, restricting the tax credits to just 16 states would contradict Obamacare’s express purpose and undermine the massive regulatory apparatus it created.

“Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them,” the chief justice wrote.  “If at all possible, we must interpret the act in a way that is consistent with the former, and avoids the latter.  Section 36B can fairly be read consistent with what we see as Congress’ plan, and that is the reading we adopt.”

(Click here to read the opinion on WestlawNext.)

Justice Antonin Scalia dissented, calling the decision “absurd” in an opinion joined by two of the court’s other conservative justices, Clarence Thomas and Samuel Alito.

The court’s four-member liberal bloc — Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan — and its pivotal “swing vote,” Justice Anthony Kennedy, joined the chief justice’s opinion.

The ruling is the second Chief Justice Roberts has authored upholding crucial Affordable Care Act provisions against a challenge striking at the law’s foundations.

The conservative chief justice surprised many observers three years ago by writing the landmark 5-4 majority opinion in National Federation of Independent Business v. Sebelius, 132 S. Ct. 2566 (2012), in which the high court upheld Obamacare’s controversial “individual mandate.”

A decision overturning the IRS rule could have driven nearly 10 million people out of the health care market, according to a widely cited Rand Corp. report.

‘Established by the State’

The central issue in the case was one of statutory construction: the proper reading of a four-word phrase in Section 36B, the subsidies clause.

Under that provision, any low-income American who obtains insurance through a health care exchange “established by the State” is eligible for the tax credits, which apply to insurance customers who earn less than four times the federal poverty rate.The law’s challengers argued throughout the litigation that Section 36B’s wording expressly denied subsidies to people who purchased insurance through HealthCare.gov instead of a state-run exchange.

The Obama administration, meanwhile, countered that limiting the subsidies to those 16 states would defeat the purpose of the Affordable Care Act by knocking out one major component of its “three-legged stool” approach to health care reform.

‘Three-legged stool’

The law’s three key features — the three “legs” of the “stool” — are minimum coverage rules for insurers, an “individual mandate” requiring most people to obtain insurance and subsidies for low-income Americans subject to the individual mandate.

Without access to the subsidies, many Americans already covered through Obamacare would see their health insurance costs skyrocket, according to the government and a slew of independent reports.  If those people dropped out of the health care market, insurance pools would become smaller and sicker.

To cope with the loss of healthy customers on federal subsidies, insurers would have to raise premiums for those who remained in the pool.  But those price hikes would drive more people out of the insurance market, forcing the companies to raise their premiums again, which would in turn shrink the pool even more.

That is the exact sort of insurance “death spiral” Congress passed the Affordable Care Act to avoid, the administration argued, saying the cascade of economic consequences would effectively nullify the law, making insurance unaffordable for the people who need it most.

Same-day circuit split

But according to the petitioners challenging the IRS rule, a death spiral is actually the stick Congress intentionally shook at the states when it dangled the carrot of federal subsidies.

Thirty-four states resisted that pressure, the challengers claimed, deliberately choosing to risk the collapse of their insurance marketplaces instead of participating in a system their leaders opposed on ideological grounds.

By offering the subsidies nationwide, the IRS ignored those policy choices, the petitioners said.

Federal district courts throughout the country have mostly rejected that argument in the past several years, but two appeals courts reached opposite conclusions about the issue the same day last July, delivering a ready-made circuit split to the Supreme Court’s doorstep.  King v. Burwell, 759 F.3d 358 (4th Cir. 2014); Halbig v. Burwell, 758 F.3d 390 (D.C. Cir. 2014).

The full District of Columbia U.S. Circuit Court of Appeals overruled the Halbig decision two months later, siding with the government and undoing the circuit split, but the justices agreed to review the issue anyway.  Halbig v. Burwell, No. 14-5018, 2014 WL 4627181 (D.C. Cir. Sept. 4, 2014).

Context matters

In its opinion upholding the IRS rule, the six-justice high court majority rejected the petitioners’ suggestion that any reading of the four-word phrase at the heart of the case should begin and end with its “plain meaning.”

Although the canons of statutory construction direct courts not to read ambiguity into a law that is clear on its face, Chief Justice Roberts said, determining whether a law’s wording is vague enough for judicial intervention is a context-specific exercise.

“[T]he act may not always use the phrase ‘established by the State’ in its most natural sense,” the chief justice wrote, noting that applying the challengers’ interpretation to other sections of the law would render some of them meaningless or nonsensical.

“Thus, the meaning of that phrase may not be as clear as it appears when read out of context,” he added.

Given the subsidies’ place in the Affordable Care Act’s overall regulatory scheme, the most important question is whether a particular reading of the phrase “established by the State” brings Section 36B into conflict or harmony with the law’s larger purpose and structure, the majority said.

“The combination of no tax credits and an ineffective coverage requirement could well push a state’s individual insurance market into a death spiral,” Chief Justice Roberts wrote, noting that lawmakers passed Obamacare specifically to avoid that scenario.  “It is implausible that Congress meant the act to operate in this manner.”

‘Inartful drafting’

The petitioners challenging the law also argued that the IRS rule should not stand because the agency’s interpretation of Section 36B rendered the phrase “established by the State” redundant — a theme Justice Scalia likewise sounded in his dissent.

“It is hard to come up with a clearer way to limit tax credits to state exchanges than to use the words ‘established by the State,’” Justice Scalia wrote.  “And it is hard to come up with a reason to include the words ‘by the State’ other than the purpose of limiting credits to state exchanges.”

But the majority rejected that reasoning.  Imputing that level of semantic precision to a process as famously messy as the passage of the Affordable Care Act is simply unrealistic, Chief Justice Roberts said.

“Our preference for avoiding surplusage constructions is not absolute,” the chief justice wrote, quoting Lamie v. U.S. Trustee, 540 U. S. 526, 536 (2004).  “And specifically with respect to this act, rigorous application of the canon does not seem a particularly useful guide to a fair construction of the statute.

“The Affordable Care Act contains more than a few examples of inartful drafting,” he added.

‘Words no longer have meaning’

In a scathing dissent, Justice Scalia ripped the majority for “rewriting” Section 36B, saying the court’s job is to say what laws mean, not to fix poorly drafted statutes by editing Congress’ work.

“I wholeheartedly agree with the court that … [c]ontext always matters,” he wrote.  “Let us not forget, however, why context matters: It is a tool for understanding the terms of the law, not an excuse for rewriting them.”

According to the dissent, the Affordable Care Act uses the phrase “established by the State” seven times, and the majority’s ruling effectively crosses it out in each place.

As other parts of Obamacare show, Congress knew how to distinguish between the state-level exchanges and HealthCare.gov and how to treat them equally, since the law uses different language in different places, Justice Scalia wrote.

The majority overstepped its proper role by assuming lawmakers made a drafting error based simply on the fact that the Affordable Care Act, as written, would not work very well, he said.

“This case requires us to decide whether someone who buys insurance on an exchange established by the [U.S. Department of Health and Human Services] secretary gets tax credits,” Justice Scalia wrote.  “You would think the answer would be obvious — so obvious there would hardly be a need for the Supreme Court to hear a case about it.

“The secretary of Health and Human Services is not a state,” he added.  “Words no longer have meaning if an exchange that is not established by a State is ‘established by the State.’”

‘Connect the dots’

But the majority said it would have been beyond strange for Congress to have buried a suicide switch in an obscure Obamacare provision for the sole purpose of destroying the law from the inside.

The canons of statutory construction are mostly about uncovering what lawmakers actually intended, Chief Justice Roberts noted.  No matter how fractured or dysfunctional Congress was when it passed the Affordable Care Act, lawmakers could not have meant for a single phrase in an obscure statutory subsection to undermine nearly 3,000 pages of legislation, he said.

“We have held that Congress ‘does not alter the fundamental details of a regulatory scheme in vague terms or ancillary provisions,’” the chief justice wrote, quoting Whitman v. American Trucking Associations Inc., 531 U. S. 457, 468 (2001).  “But in petitioners’ view, Congress made the viability of the entire Affordable Care Act turn on the ultimate ancillary provision: a sub-sub-sub section of the Tax Code.

“We doubt that is what Congress meant to do,” the chief justice added.  “Had Congress meant to limit tax credits to state exchanges, it … would not have used such a winding path of connect-the-dots provisions.”

King et al. v. Burwell et al., No. 14-114, 2015 WL 2473448 (U.S. June 25, 2015).