Supreme Court Ruling Preserves Health Insurance Subsidies

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Supreme Court held that Affordable Care Act’s tax credits can apply to Americans in every state.

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As has been widely reported, millions of Americans will continue receiving tax credits to help them pay for health insurance following one of the most high-profile decisions handed down at the end of the Supreme Court’s latest term.

The case, King v. Burwell, involved a challenge to a key provision of the Affordable Care Act (ACA) that provides financial assistance to people purchasing insurance through “exchanges” or marketplaces established under the law where individuals can comparison-shop for federally-regulated insurance plans. A ruling for the plaintiffs would have forced millions of Americans to choose between buying prohibitively expensive insurance, or foregoing health coverage altogether.

The ACA gives states the option to establish and operate their own exchanges, or else default to a federally-facilitated marketplace. The ACA also provides for tax credits to defray monthly premiums for individuals and families between 100% and 400% of the federal poverty level (FPL) purchasing insurance through the exchanges. For single-member households, that means people making anywhere from $11,770 to about $47,000 are eligible for some degree of federal assistance in paying their monthly premiums.

The plaintiffs in King v. Burwell challenged a 2012 rule, issued by the Internal Revenue Service (IRS), authorizing premium tax credits in all states—including the 34 states with federally-run or joint state-federal “partnership” exchanges. The King plaintiffs argued that, under a strict reading of the ACA, tax credits should only be available in states operating their own exchanges. The plaintiffs, and commentators supporting their position, pointed to language in the health care law that says tax credits are available through exchanges “established by the State.” The plaintiffs argued that this language explicitly precludes tax credits in states with federally-facilitated exchanges, and that the IRS rule authorizing tax credits in all states amounts to unlawful spending of tax revenues without permission from Congress.

At oral arguments in March, the government urged the court to consider congressional intent in interpreting the ACA. The government argued that the health insurance reforms envisioned by the law—universal, affordable coverage for Americans in every state—would not work as intended without the tax credits, and that the plaintiffs had taken the challenged provisions out of context.

In its 6-3 ruling in late June, the Supreme Court ultimately agreed with the government, concluding that Congress intended for every person to benefit from tax credits, regardless of where they live.

ACA supporters, including the Obama Administration, have lauded the decision as an especially strong one. They believe the Court’s reasoning will insulate the law from a similar challenge in the future.

Before King made it to the Supreme Court, an appeals court had relied upon the so-called Chevron doctrine, which requires courts to defer to interpretations of administrative agencies like the IRS whenever a statute is not clear. The lower court suggested that the law could be interpreted either way, so it deferred to the IRS’ interpretation allowing for tax credits in every state.

The Supreme Court rejected the application of the Chevron doctrine in this case and made its own independent interpretation of the law, finding that Congress intended to make tax credits available to all who income-qualify, regardless of where they live. The fact that the Court did not defer to an agency’s interpretation will make it difficult for future administrations to reach a different interpretation and undermine the subsidies provided to millions of people.

Health policy researchers estimated that anywhere from 9.3 to 13.1 million people would have lost tax credits in 2016 had the challengers in the King case prevailed. Researchers further speculated that as many as 70% of those people would have become uninsured because insurance would have become prohibitively expensive for them. States seeking to preserve tax credits would only have had a few months to get their own exchanges up and running for 2016, a process which took states currently operating their own exchanges at least one or two years to complete.

The King litigation was not the first legal challenge to the ACA that made it to the Supreme Court. The so-called “individual mandate,” which requires all Americans to have health insurance, was also challenged in the landmark case of NFIB v. Sebelius, decided in 2012. The court in NFIB upheld the individual mandate, an important victory for ACA supporters because the mandate is essential to one of the ACA’s most significant reforms—a prohibition on discrimination against individuals with pre-existing conditions.

Prior to the ACA, insurance companies were free to deny or limit coverage to individuals with pre-existing medical conditions. State-level attempts to ban this practice in the past led to imbalances in the insurance system; absent an individual mandate, healthy people would wait to buy insurance until they became ill, meaning that only sick people with high medical costs would be paying into the system. This would cause premiums to rise, further discouraging healthy people from becoming insured and creating an insurance “death spiral.” The ACA’s individual mandate spreads this risk by ensuring that healthy people without employer-sponsored coverage would buy insurance and pay into the system.

The ban on pre-existing condition discrimination, along with tax credits and the individual mandate, form the ACA’s so-called “three legged stool.” The three “legs” are designed to work in tandem and maintain balance in the insurance market by making insurance more affordable and increasing the number of healthy people paying into the system.

After King v. Burwell, eligible individuals can now be assured that they can claim the premium tax credit on their tax return at the end of the year, or they can have an estimated credit sent directly to their insurance companies to reduce their monthly premiums. The estimated credit amount is based on projected income. Individuals receiving the estimated credit in advance must repay any excess credits at the end of the tax year if their income was higher than projected, but they will receive a higher tax refund or have a reduced tax bill if their income was lower than projected.

This essay is part five of a five part series, The Supreme Court’s Regulatory Term.