Imagine filing a lawsuit so that the IRS will be forced to deny you a tax credit that they wanted to give you. A group of Virginia residents did just that. King v. Burwell is the case, and it’s one of the most significant cases for the Supreme Court this term.
The Supreme Court is no stranger to litigation related to the Patient Protection and Affordable Care Act (commonly called the ACA or Obamacare).
NFIB v. Sebelius was a landmark 2012 decision in which Chief Justice Roberts shocked many Court-watchers by voting to uphold the constitutionality of the ACA’s individual mandate. In 2014, the Court issued Burwell v. Hobby Lobby Stores, declaring that the ACA’s contraceptive mandate violated for-profit corporations’ free-exercise rights under the Religious Freedom Restoration Act (RFRA).
Both NFIB and Hobby Lobby were decided 5-4. Justices Scalia, Kennedy, Thomas, and Alito voted to strike aspects of the ACA in both cases; Justices Ginsburg, Breyer, Sotomayor, and Kagan voted to preserve those aspects.
The Supreme Court recently decided to step back into the ACA arena when it granted review in King v. Burwell. What’s at stake, and can the beleaguered ACA survive another challenge?
Health-care exchanges and subsidies
First, a bit of background about the “exchanges” envisioned in the ACA. Exchanges are a marketplace in which individuals can purchase health insurance. Exchanges exist on both the state and federal levels: the ACA says that a state may establish its own exchange; if it does not, the federal government establishes and operates an exchange within the state. (34 states have not set up their own exchanges.)
The ACA’s individual mandate requires most Americans to purchase a minimum level of health insurance or be subject to an IRS tax penalty. The ACA contains an “unaffordability” exemption if the cost of coverage would exceed 8% of household income.
Health insurance is expensive even in the pooled-risk regime envisioned by the ACA. So the ACA contains a statute that attempts to offset the cost to lower-income individuals by providing a tax credit for policies purchased on an exchange.
This explains why the appellants in King want to not receive the tax credit: if the IRS doesn’t give them the credit, then they fall within the “unaffordability” exemption.
The statute and the IRS’s interpretation
26 U.S.C. § 36B, the tax-credit provision of the Affordable Care Act, provides a credit for “all coverage months of the taxpayer occurring during the taxable year.” A “coverage month” is a month in which the taxpayer enrolled in a health plan “through an Exchange established by the State under Section 1311 [of the ACA].”
Oops. Noticeably missing from Section 36B is any mention of exchanges established by the federal government.
But that doesn’t bother the IRS. The IRS says that anyone enrolled in an exchange – whether state or federal – is eligible for the tax credit. It explains its interpretation of Section 36B:
“The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges.”
Conflicting appellate opinions
On July 22, 2014, monumental and conflicting opinions about the IRS’s interpretation of Section 36B emerged from the U.S. Courts of Appeals for the Fourth Circuit and the DC Circuit. In a 3-0 decision (King v. Burwell), the Fourth Circuit held that the IRS’s interpretation of the statue is reasonable. But in a 2-1 decision (Halbig v. Burwell), the DC Circuit held that federally funded exchanges are not eligible for the tax credit.
Two months later, a majority of the active judges of the DC Circuit decided to vacate the three-judge panel’s decision. The case was set to go through the “en banc” process (in which every active judge on the court votes on the outcome of a case) when the Supreme Court decided to grant review of the Fourth Circuit case. In response, the DC Circuit decided to hold off on oral argument.
Deference to the IRS’s interpretation
Statutory interpretation isn’t easy. Courts recognize that administrative agencies such as the IRS have particular expertise in interpreting ambiguous statutes that are there in their wheelhouse. So if a statute is susceptible to multiple interpretations, courts will defer to the administrative agency’s interpretation so long as the interpretation is reasonable. (This is often called Chevron deference, named after the Supreme Court’s landmark 1984 opinion in Chevron U.S.A., Inc. v. Natural Resource Defense Council, Inc.).
But administrative deference has its limits. If a statute’s text is clear, Chevron instructs that “that is the end of the matter, for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.’” The Fourth and DC Circuit panels disagreed as to whether Section 36B is clear or ambiguous.
Supreme Court’s grant of review
The Supreme Court’s grant of review in King surprised some Court watchers. It’s a bit unusual for the Supreme Court to hear a case without a split of authority among the federal appellate courts. (For example, Justice Ginsburg suggests that the Supreme Court did not need to weigh in on the constitutionality of same-sex marriage because there was no split among the federal appellate courts).
Because the full DC Circuit vacated the three-judge panel’s opinion, the split no longer remained. (It’s very likely, given the composition of the DC Circuit and its willingness to hear the case en banc, that the DC Circuit would ultimately have decided the case the same way the Fourth Circuit did).
But it’s not quite fair to say that review is premature. Two well-respected judges on the DC Circuit disagreed with the Fourth Circuit. On this issue of some significance, it’s not unreasonable for the Supreme Court to step in and conclusively decide whether the IRS’s interpretation of Section 36B is ambiguous.
It is fair to say, though, that the grant of review in King suggests that at least some justices thought that the Fourth Circuit got it wrong. For a case to be heard by the full Supreme Court, at least four justices must vote to grant review. We don’t know how many justices voted for review in King, but we can surmise that at least four of them will probably vote to reverse the Fourth Circuit.
What happens if the Supreme Court sides with the King appellants?
If the Supreme Court believes that Section 36B unambiguously covers state exchanges (and only state exchanges), then the IRS cannot violate the will of Congress by giving a tax credit to individuals purchasing insurance on the federal exchanges.
If they reach that result, it would probably affect many more people than just the challengers in King. Residents of the 34 states without state exchanges would no longer qualify for the IRS tax credit. Some would no longer have to purchase health insurance, as they would fall under the “unaffordability” exemption. Some people wouldn’t care – they get health insurance from their employers rather than from the exchanges.
But many people who purchase health insurance from the exchanges would no longer receive their tax credit from the IRS, increasing the effective cost of their health insurance.
Would that derail the ACA? I don’t know, but I don’t think so. The bulk of the ACA – including the individual mandate – would remain intact. The number of people who would become exempt from purchasing health insurance is probably not high (although I haven’t seen the numbers).
I haven’t seen the data, but I suspect that individuals who would qualify for the “unaffordability” exemption are a higher actuarial risk than the general pool. The cost of health insurance for some might even decrease if the Supreme Court sides with the King challengers.
Who can fix Section 36B?
In theory, Congress could fix everything by passing a new statute covering both state and federal exchanges. That’s not particularly realistic when both the House and Senate will both soon have Republican majorities.
The 34 states without exchanges could fix the problem by establishing state exchanges. Some of them probably will if the Supreme Court sides with the King challengers. But many of these states have governors who have no interest in forwarding the goals of the ACA.
If I were a betting man, I’d guess that the Supreme Court will side with the King challengers. Regardless of how you feel about the ACA, it’s almost impossible to argue that the text of Section 36B covers federal exchanges, and difficult to argue that the statute is ambiguous.
That would mean that the IRS tax credit does not apply to individuals who purchased health insurance through the federal exchanges. And I don’t think it’s likely that this Congress will fix the “broken” text of Section 36B.
Will a reversal in King disproportionately hurt the people who most needed the benefits of the ACA? Probably. But that doesn’t imply that the result is legally incorrect.