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King v. Burwell Decision: The ACA Provides Subsidies on all Exchanges
June 25, 2015

On June 25, 2015, the U.S. Supreme Court issued its decision in King v. Burwell, concluding that Congress made premium tax credits available nationwide-on both state-run and HHS-established Exchanges.  This is the second challenge to the individual health insurance market reforms of the Affordable Care Act (ACA) to reach the Court and the second ACA opinion to be authored by Chief Justice John Roberts.  Previously, in NFIB v. Sebelius, Chief Justice Roberts wrote for the Court in concluding that the ACA's individual mandate was a constitutional exercise of Congress' taxing power.

The Court's decision in King is notable in two respects: First, the majority took the unusual step of declining to apply so-called Chevron deference to an agency rule interpreting ambiguous statutory language.  Second, as a practical matter, the Court's ruling ensures that HHS-established Exchanges will continue to operate with support from tax credits, and that the ACA's insurance market reforms will remain intact absent the passage of legislative changes. This development underscores the importance of understanding the federal rules governing HHS-established Exchanges.  In addition, payors and plans now have greater legal certainty when making strategic decisions concerning involvement in the Exchanges and Exchange plans.

 The Availability of Premium Tax Credits on HHS-Established Exchanges

The King plaintiffs brought suit challenging the availability of premium tax credits (sometimes referred to as subsidies) on health benefit Exchanges that were established by the Department of Health and Human Services (HHS) for the 34 states that declined to create state-run Exchanges.  The challengers contended that the ACA restricts premium tax credits to individuals who enroll in coverage through a state-run Exchange when it provided that the amount of the tax credit is based on premium levels of plans offered on an Exchange "established by the State."  26 U.S.C. § 36B(b)(2)(A).  An Internal Revenue Service (IRS) Rule, however, made subsidies available on all Exchanges.  The Administration defended the IRS Rule arguing that when the tax credit provision is read in context, the ACA clearly makes tax credits available nationwide.  Alternatively, the Administration contended that the tax credit language is ambiguous and that the Court should defer to the IRS' interpretation extending subsidies to HHS-established Exchanges.

Ultimately, the Court accepted many of the Administration's arguments, concluding that Congress did in fact intend to make subsidies available on a national basis, even where a state declines to establish an Exchange and HHS is required to establish that state's Exchange.  The majority's analysis frames the ACA's insurance market reforms as having three key elements: (1) guaranteed issue and community rating requirements, which allow individuals to access health care coverage without regard for their health status; (2) the individual mandate, which imposes a penalty on those that can afford health care coverage but decline to secure such coverage; and (3) premium tax credits, which make insurance affordable for those households with incomes between 100 and 400 percent of the federal poverty level.  According to the majority, the premium tax credits are essential to the individual mandate because they render insurance affordable, and the individual mandate is in turn important to avoiding the "death spiral" that might occur if the guaranteed issue and community rating requirements stood alone.  In light of the foregoing, Chief Justice Roberts notes, "Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter."

While acknowledging that the plain text of the premium tax credit language in Section 36B of the Internal Revenue Code could be read as restricting tax credits to individuals enrolling in coverage on state-run Exchanges, the Court nonetheless determines that, in context, "Section 36B can fairly be read consistent with what [the Court] sees as Congress's plan, and that is the reading that [the Court] adopts."  In reaching this conclusion, the majority opinion explores many detailed provisions of the ACA indicating that HHS-established Exchanges are equivalent to state-run Exchanges and that Congress intended to make subsidies available to all taxpayers.  The Court acknowledges that its interpretation of the premium tax credit provision renders the words "established by the State" unnecessary, but concludes that this is the result of "inartful drafting" and does not compel the Court to accept an interpretation that negates the ACA's stated purposes.

Administrative Deference and Ambiguous Statutes

 In one key respect, the Court's decision departs from the Administration's position.  The Administration argued that either the ACA clearly provided for tax credits on HHS-established Exchanges or that, in the alternative, the Court should defer to the IRS's interpretation of an ambiguous provision.  The Court, however, concluded that even though the tax credit provision is ambiguous it would not defer to the IRS's interpretation.  Rather, the Court concluded that, in this case, it is the Court's "task to determine the correct reading" of the ambiguous premium tax credit language.

Under the two-step framework announced in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), to consider disputes about the meaning of legislation in a regulated environment, courts typically defer to agency interpretations where the statute is ambiguous and the agency's interpretation is reasonable.  In declining to apply Chevron in this case, the majority concludes that this case presents an "extraordinary" situation in which ambiguous statutory language does not imply a delegation of interpretive authority to an agency.  First, the tax credits are a key element of the ACA's reforms and their availability is a question of "deep economic and political significance' that is central to [the ACA's] statutory scheme."  Second, the IRS lacks the requisite expertise in health insurance policy.  Therefore, the Court concludes that absent an express delegation of authority on the question, it is unlikely that Congress intended to assign the question of the tax credits' availability on HHS-run Exchanges to the IRS.

The King decision, therefore, reinforces the contention that Chevron deference is not appropriate for issues of critical significance, particularly where the regulator lacks relevant expertise.  Rather, in such cases, the courts must exercise their constitutional authority to interpret the underlying statute independently.  In this way, King may be of value in future health care disputes where an agency endeavors to decide critical questions without the requisite expertise.  In taking this extra step, the Court has insulated the interpretation of this provision of ACA from changes of administration and an agency's potential shifting view (a matter that concerned Justice Kennedy during oral argument). It also prompts lower courts in the future to potentially be less deferential to administrative agencies on key policy issues in legislation when agencies do not possess the requisite expertise, for example, on limitations of actions periods or retroactivity, by searching more carefully whether Congress intended to delegate interpretive authority to an agency on a particular question of statutory construction.

The Health Care Reform Outlook 

The King decision is also significant insofar as it provides greater certainty that health care reform will continue to be operative in the 34 states that use HHS-established Exchanges absent further legislation.  We may see see continued congressional efforts to repeal or substantially alter the ACA, but with the Supreme Court's affirmance, these efforts are unlikely to have significant impact under this administration.  Nonetheless, ongoing bipartisan legislative activities impacting health care reform will continue, if not increase.  Such legislation may address critical issues concerning the definition of "small employer," the future of the employer mandate, and possible repeal of the medical device tax.

While health care reform may be further shaped under the next administration and in future litigation, the health care reform landscape in states with HHS-established Exchanges (e.g., Texas, Florida, and Tennessee) is far more certain than it has ever been.  States with HHS-established Exchanges need not establish new, state-run Exchanges in order to preserve their residents' access to tax credits.  These HHS-established Exchanges operate under uniform rules established by HHS, allowing providers and plans to engage with one regulator to influence key Exchange rules in numerous states.[1]  For example, HHS has indicated an interest in articulating more concrete network adequacy requirements for HHS-established Exchanges in coming years.  In light of King, HHS' establishment of detailed rules for plans on HHS-established Exchanges will continue, and the resulting rules will be of significance for providers and plans operating in these states.

As HHS' rules governing Exchange plans become more refined, we should expect to see increased cross-pollination between Medicare Advantage, Medicaid Managed Care, and Exchange plan rules.  As a result, it will become increasingly important for providers to stay abreast of and comment on proposed changes to all three programs regardless of their particular payor mix.

The greater certainty afforded by King may also prompt payors and providers to increasingly focus their strategic planning on individual market plans offered through Exchanges.  An expansion of Exchange-related activities may raise questions concerning plans' and payors' obligations under commercial managed care agreements that apply to Exchange markets.  For example, some payors have attempted to insist on provisions that purport to shift the plan's regulatory obligations to providers.  In addition, plans and providers may confront questions regarding a provider's network status for plans on an Exchange.  Moreover, the proliferation of narrow and tiered plans on the Exchanges increases the importance of out-of-network reimbursement calculations, particularly with regard to emergency and post-stabilization services.

Finally, some providers may explore avenues to increase enrollment on Exchange plans in their communities where a significant portion of the uninsured population may be eligible for premium tax credits and the provider is in-network with key Exchange plans.  As providers take on new outreach and enrollment activities, they may confront unique regulatory and compliance questions.  For example, the privacy rules applicable to Exchange enrollment-assistance activities differ from the more familiar HIPAA Privacy Rules that frequently apply to providers' activities.

Conclusion

We expect that the commercial market reforms of the ACA will continue to evolve over the coming years through legislative activity and regulatory refinement.  The King decision, however, puts to rest a key challenge to the ACA.  As a result, providers are in a better position to develop strategic plans that take into account the ACA's commercial market reforms more generally.  Key stakeholders may also choose to devote more resources to engaging with regulators concerning the rules applicable to insurers participating in HHS-established Exchanges.

For additional information, please contact John Hellow in Los Angeles at 310.551.8111; Katrina Pagonis in San Francisco at 415.875.8500; Mark Johnson or Jennifer Hansen in San Diego at 619.744.7300; or Marty CorryKeith FontenotRobert Roth or James Segroves in Washington, D.C. at 202.580.7700.

For media inquiries, please contact Barrett McBride at 916.456.5855.