Supreme Court Upholds Obamacare Health Care Tax Subsidies

Volume 14, Issue 12
June 25, 2015

Earlier today, in King v. Burwell, the United States Supreme Court upheld the nationwide scope of the tax subsidies provided under the Patient Protection and Affordable Care Act (ACA). In a 6-3 ruling, the Court determined that the subsidies are available to all qualifying individuals buying health care coverage through public exchanges regardless of whether the exchange is run by a state or the federal government.

One of the key components of the ACA is the so-called "individual mandate" set forth in 26 U.S.C. §5000A, which requires all Americans to maintain health insurance coverage or face a tax penalty. The individual mandate guarantees participation of healthy individuals who offset the risks to insurers of providing lower priced health insurance coverage to sick individuals. However, anyone who has to spend more than eight-percent (8%) of their income on health insurance is exempt from the individual mandate. To make health care coverage more affordable for low income individuals (those with household incomes between 100% and 400% of the federal poverty line) who do not qualify for Medicaid, the ACA provides refundable tax subsidies, which, in turn, increase the total number of individuals subject to the individual mandate.

David King and three other Virginia residents (ACA opponents) filed the current lawsuit challenging the federal government's interpretation of who is eligible to receive the ACA tax subsidies, asserting that such tax subsidies are only available to individuals using state established exchanges and not to anyone using a federally-facilitated exchange (FFE). They focused on the language of 26 U.S.C §36B(b)(2)(A) and (c)(2)(A)(i), which provides that the tax subsidies are for applicable taxpayers who enrolled in a health insurance plan through "an Exchange established by the State." As Virginia uses an FFE instead of its own state established exchange, the ACA opponents argued they should not be entitled to the tax subsidies because their receipt of such subsidies has the effect of forcing them to buy unwanted health insurance at the risk of paying a penalty for violating the individual mandate and denies them from otherwise qualifying for the individual mandate exemption.

The majority of Supreme Court Justices found the meaning of the phrase "an Exchange established by the State" to be ambiguous when reading the words "in their context and with a view to their place in the overall statutory scheme." They acknowledged that the phrase could be limited in its reach to state exchanges or it could also refer to all exchanges - both state and federal - for purposes of the tax subsidies. The Court observed that in a related section of the ACA, 42 U. S. C. §18041(c)(1), if a state chooses not to establish a health care exchange system of its own, the U.S. Secretary of Health and Human Services is to establish "such Exchange" for the state. The Court determined that the use of the term "such Exchange" indicates state and federal exchanges should be treated the same under the ACA, which would not be the case if only one type of exchange would help make insurance more affordable by providing billions of dollars to users, while the other type of exchange would not. In concluding that the ACA tax subsidies are available to all qualifying individuals regardless of the type of exchange used to purchase health insurance, the majority of Supreme Court Justices found Congress could not have intended to deny subsidies to individuals living in states using a FFE given the disastrous consequences that would result in the insurance markets of such states. In the majority view of the Court, any other interpretation would "likely create the very 'death spirals' that Congress designed the Act to avoid."

Currently, 8.7 million people are receiving an average subsidy of $272 a month to help pay their health insurance premiums. Approximately 6.4 million of those people were at risk of losing their subsidy if the ACA opponents prevailed because they live in the roughly three dozen states that did not set up their own health insurance exchanges.

This is the second Supreme Court decision upholding the ACA. In 2012, the Court issued a 5-4 decision regarding the constitutionality of the ACA's individual mandate in the case of National Federation of Independent Business v. Sebelius. See KZA Employer Reports, Vol. 11, Issue 8.

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.