Supreme Court Upholds King, Says Obamacare Tax Credits Apply To All States

The Supreme Court has held that the Patient Protection and Affordable Care Act, sometimes called “Obamacare,” authorized federal health care tax credits for taxpayers living in states with exchanges and taxpayers living in states without exchanges who rely on the federal exchange.

The final decision was 6-3 with Chief Justice Roberts delivering the opinion. Justices Kennedy, Ginsburg, Breyer, Sotomayor and Kagan joined. Justice Scalia filed the dissent, joined by Justices Thomas and Alito.

The case wasn’t about whether Obamacare is legal (that’s already been decided) but about a specific piece of the Act – and it’s a tax piece. The issue is whether the Internal Revenue Service (IRS) should be barred from issuing tax credits on behalf of eligible taxpayers when insurance was purchased from the federal exchange. In two cases, Halbig in the DC Circuit Court, and King in the Fourth District, taxpayers argued that the IRS did not have the statutory authority to expand the scope of tax credits to include individuals who bought health insurance through the federal exchange. In Halbig, the court ruled that the IRS did not possess that authority; in King, the court upheld the availability of Affordable Care Act tax credits for health insurance purchased on both state and federal exchanges.

With two competing decisions, the matter made its way to the Supreme Court where the matter, as King v. Burwell, was granted certiorari. Procedurally, some cases (like a dispute between the states) are considered to be “original jurisdiction” matters and those cases, which are defined by statute (28 U.S.C. §1251), go straight to the Supreme Court. Most cases, however, don’t go that route. To be heard at the Supreme Court level without having original jurisdiction requires the losing party at the appellate level to file a petition seeking a review of the case. If the Supreme Court grants the petition and decides to hear the matter, it’s called a writ of certiorari. And that’s what happened here.

Here’s a look at how the cases got started.

Obamacare generally took effect on January 1, 2014 (I say generally since bits of the implementation were rolled out in installments). A key part of the plan is that individuals are required to either sign up for health insurance or pay a penalty. Taxpayers who have Medicare, Medicaid, CHIP, COBRA, retiree coverage, TRICARE, VA health coverage or private insurance obtained through an employer are considered covered and not subject to a penalty. Individuals without coverage through an employer have the option of seeking out insurance on their own or buying insurance through the state insurance exchanges.

To boost participation, tax credits were made available for taxpayers who couldn’t afford coverage: those tax credits were intended to lower the cost of premiums. The law, as originally contemplated, relied on the idea that the tax credits were available for taxpayers who purchased through state exchanges. The language in the statute indicates that there should be allowed a premium tax credit for “health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311.”

There was just one giant problem with this plan: a number of states did not (and do not) offer insurance exchanges. As states opted out, taxpayers signed up for the federal exchanges. When the IRS issued the Regulations (Regulations are the official interpretation of the Tax Code), the language applied to taxpayers participating in an Exchange. Exchange was defined as including “a State Exchange, regional Exchange, subsidiary Exchange and Federally-facilitated exchange.” In other words, under IRS Regulations, credits are available to eligible taxpayers who bought through the state and federal exchanges.

Some taxpayers balked at this idea and Halbig and King were filed in federal court to address the issue.

After arguments, the Supreme Court upheld the decision in King finding that “Section 36B’s tax credits are available to individuals in States that have a Federal Exchange.”

So why does it matter? Without those tax credits, intended to make health care affordable, coverage would have been considered unaffordable and the plaintiffs in these cases would have been exempt from the mandate to obtain coverage. With the availability of tax credits to taxpayers in all states, coverage is again considered affordable – and thus, mandatory.

The rule also affects employers. Remember that under the law, employers have to offer a minimum level of health care coverage or face a penalty. The bigger penalty applies if the employees who don’t receive coverage are eligible for the credits: in other words, if the credits are not available in certain states, the employers in those states would likewise not be as harshly penalized under the mandate.

Clearly, extending the tax credits to those who purchase under the federal exchange means that more individuals and employers are subject to the mandate. That’s the result that IRS says Congress intended. The Supreme Court agrees.

What would have happened if the Supreme Court had ruled the other way? If the tax credits could not have been extended to coverage purchased under the federal exchange, then more individuals would have fallen outside of the net of affordable coverage. Those who didn’t want to pay – or couldn’t pay – would have been able to drop their coverage without fear of the penalty. Since the future of the health care act hinges on a critical mass of individuals being enrolled, that throws the entire future of the exchanges into flux. In other words, with a different ruling, Obamacare would likely have folded. Chief Justice Roberts recognized this, writing that “[i]t is implausible that Congress meant the Act to operate in this manner.”

It hasn’t, of course, escaped the notice of the Justices that there are a number of cases involving Obamacare landing at the steps of the Supreme Court, prompting Justice Scalia to snark that “we should start calling this law SCOTUScare.” Chief Justice Roberts alluded to the same issue in his opinion, zinging, “The Affordable Care Act contains more than a few examples of inartful drafting” so that “the Act does not reflect the type of care and deliberation that one might expect of such significant legislation.”

Zoink.

Chief Justice Roberts went on to caution, “But in every case we must respect the role of the Legislature, and take care not to undo what it has done. A fair reading of legislation demands a fair understanding of the legislative plan.”

That fair reading, the Court concluded, is that “Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them.” And with that, King was affirmed.

Justice Scalia, however, in his dissent, called the interpretation “absurd” claiming that “the Court’s 21 pages of explanation make it no less so.”

(You can read the original Halbig opinion here and the original King opinion here. The Supreme Court opinion is here. And just for fun, you can read last year’s thoughts about where I thought the case might come down on a number of factors here.)

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Source: Forbes