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Supreme Court Hears Oral Argument in ACA Subsidies Challenge
March 5, 2015

On March 4, the U.S. Supreme Court heard oral arguments in King v. Burwell, the second challenge to the Affordable Care Act (ACA) to reach the Court.  This challenge targets the availability of subsidies on the Exchanges that were established by the Department of Health and Human Services (HHS) for the 34 states with HHS-established Exchanges.  The challengers contend that the tax code restricts subsidies to individuals who enroll in coverage through a state run Exchange when it provides that the amount of the subsidy is based on premiums on an Exchange “established by the State.”  26 U.S.C. § 36B(b)(2)(A).  The Administration, however, defends an Internal Revenue Service (IRS) rule that makes subsidies available on state-run and HHS-established Exchanges alike, contending that section 1321 of the ACA makes HHS-established Exchanges equivalent to state-run Exchanges.

It is notoriously difficult to ascertain the likely outcome of a case based on oral arguments.  Rather, oral arguments merely suggest at the leanings of particular Justices as they prepare to discuss the case and to assign drafting of the opinion(s) in private conference.  Nonetheless, oral arguments provide the only public hints of the Justices’ views before the Court issues its decision this summer.

The Likely Swing Votes.  As many expected, the tenor of oral arguments suggested that Chief Justice Roberts and Justice Kennedy are the likely swing votes in this case.  It appeared that the so-called liberal block of the Court—Justices Ginsburg, Breyer, Kagan, and Sotomayor—are critical of the challengers’ interpretation of the statute.  Rather, they seem inclined to conclude that the IRS rule is a permissible interpretation of the statute or that the rule reflects the only viable interpretation of the statute.  On the other hand, Justices Scalia and Alito appeared to be highly critical of the Administration’s position.  As is his typical practice, Justice Thomas did not ask any questions during oral argument, but most Court watchers expect that his views likely align with those of Justice Scalia and Alito. Some Court watchers had suggested that Justice Scalia might look to context to conclude that the subsidy provision is ambiguous, but his questions appeared to reflect a view that Congress enacted a statute that clearly restricts the availability of subsidies, despite the potential practical consequences of such an enactment. 

Federalism and Constitutional Avoidance. One surprise yesterday was Justice Kennedy’s expression of constitutional concerns and potential inclination to avoid a constitutional problem by considering the Administration’s interpretation of the statute.  In short, his questions echoed federalism concerns raised in an amicus brief drafted by a number of states.  While Justice Kennedy aligned with the conservative block of the Court in NFIB v. Sebelius, he may be amenable to upholding the IRS rule here to the extent that the Administration’s interpretation is viable.

Justice Kennedy’s concerns regarding federalism do not flow from the impact that an adverse decision against the government will have on the newly insured public in states without state operated Exchanges.  Rather, his concerns stem from his deeply held belief that the Court owes the utmost respect under the structure of the Constitution to the semi-sovereign states.  In his view, Congress is not allowed to coerce states into doing something it wants.  Those federalism concerns came to the fore when Justice Kennedy asked challenger’s counsel:  “If your argument is accepted, the states were told to establish exchanges in order to receive money [for their citizens] or send the insurance market into a death spiral; isn’t that coercion?   Under your argument, there would be a serious constitutional problem.” While the government had not raised the federalism argument, it had been raised by state amici.  Citing South Dakota v. Dole, he noted that Congress is required to advise states about the conditions attached to the acceptance of federal grants.  Here, clearly, Kennedy views the loss of subsidies for a state’s residents as such an unknown condition.  The thinking seems to be that when interpreting a statute, given the warning by the Court about such coercion, Congress could not have intended such result.  He hinted as much when later he suggested to government’s counsel that he should argue for the government’s view of the statute to avoid the constitutional concern. If Justice Kennedy is the swing-vote here, it is because he does not believe that Congress intended a reading of the statute that creates an unconstitutional coercion, similar to the Court’s reasoning in striking down the Medicaid provision in NFIB v. Sebelius.

Chevron Deference.  Although the decisions of the lower courts in this and similar challenges have focused on Chevron v. National Resources Defense Council, the Supreme Court spent little time discussing the potential application of Chevron deference in this case.  Instead, it appeared that some members of the Court were more inclined to conclude that there is only one permissible interpretation of the statute—whether that interpretation is the one advanced by the challengers or the Administration.

A brief exchange between Solicitor General Verilli, Justice Kennedy, and Chief Justice Roberts, however, suggests that some members of the Court may be skeptical of the applicability of Chevron deference to tax credits.  During this exchange, Justice Kennedy expressed skepticism that a question of this economic magnitude could be left to the Internal Revenue Service.  He said, “It seems to me a drastic step for us to say that the [Internal Revenue Service] can make this call one way or the other when there are . . . billions of dollars of subsidies involved . . . .  It seems to me our cases say that if the Internal Revenue Service is going to allow deductions using these, that it has to be very, very clear.”  Solicitor General Verrilli responded citing to the Court’s 2011 decision in Mayo Foundation for Medical Education & Research v. United States for the notion that “Chevron [deference] applies to the tax code like anything else.”  Chief Justice Roberts, however, appeared concerned that, under this approach “a subsequent administration could change” course and adopt a contrary interpretation concerning the availability of tax credits.  The Chief Justice asked very few questions during oral argument, but this exchange suggests he may be inclined to interpret the statute as unambiguous and not implicating Chevron deference, whether in favor of the Administration or the challengers.

Standing.  The U.S. Constitution establishes that federal court jurisdiction extends only to cases involving an actual injury, economic or otherwise.  While media coverage in recent weeks has focused on the standing of the four individual plaintiffs challenging the individual mandate, it does not appear that the Court will avoid reaching the merits of the case based on standing concerns.  No fact-finding has taken place in this case because the appeal stems from a motion to dismiss filed by the Government.  Therefore, Solicitor General Verrilli indicated that he believes it’s appropriate to take the plaintiffs’ attorney’s word that one or more of the plaintiffs has standing and that the dispute is not moot.  While Justice Ginsburg asked early questions indicating a concern with standing, it did not appear that other members of the Court were inclined to take up the issue.

Practical Consequences.  Over 85 percent of individuals who enroll in coverage on an Exchange receive subsidies to help pay for the cost of premiums and/or to reduce cost-sharing on the Exchange plan.  Most of these individuals reside in the 34 states that have HHS-established Exchanges.  Absent these subsidies, some individuals would be unable to afford coverage and would therefore be exempt from the individual mandate.  Others may have affordable coverage options but may decline to purchase coverage given the cost.  The resulting reduced enrollment would both increase the number of uninsured in states without state-run Exchanges and constrict the risk pool on those Exchanges.  As the risk pool trends toward a smaller group of less healthy individuals, premiums would increase, which some believe would threaten a death spiral on the individual market. 

In addition, the employer mandate’s operation depends on whether employees can purchase subsidized Exchange coverage absent affordable and sufficient employer coverage.  Without subsidies, employers in states with HHS-established Exchanges would not be subject to the employer mandate unless 30 or more of its employees actually reside in a neighboring state with a state-run Exchange.  While many observers believe that large employers would continue to offer coverage without the employer mandate, there is some concern that such employer-sponsored coverage might not be affordable among lower income workers, resulting in greater numbers of uninsured individuals.

During oral argument, the challenger’s counsel, Mr. Carvin, contended that there was no evidence that limitations on the subsidies would produce such disastrous consequences.  But, it appeared that most of the Justices were concerned about the market consequences if subsidies were eliminated in some markets.  Justice Alito, acknowledging these concerns, suggested that the Court might stay the mandate to provide states with an opportunity to establish state-run Exchanges before subsidies on HHS-established Exchanges are eliminated.  On the other hand, Justice Scalia expressed confidence that Congress would act to address and mitigate destabilization of the individual market.  Thus, at this stage, it is unclear how a reversal of the IRS rule might be implemented and what, if anything, the Court might do to mitigate the impact of the judgment. But certainly the potential market consequences of the elimination of subsidies on HHS-established Exchanges would be significant for plans, providers, and patients alike.  Last Tuesday, HHS Secretary Burwell stated in a letter to Congress that the Administration “know[s] of no administrative actions that could . . . undo the massive damage to our health care system that would be caused by an adverse decision.”

Furthermore, if the Court concludes that the challengers’ interpretation is the only viable interpretation of the statute, the decision may prompt further litigation concerning the constitutionality of linking the availability of subsidies to a state’s establishment of a state-run Exchange.  Justice Kennedy’s comments and questions during oral argument focused largely on the 10th Amendment and the concern that restricting subsidies to state-run Exchanges may constitute impermissible coercion of the states by the federal government.  Judicial resolution of these issues may require a new case challenging to the statute’s constitutionality and addressing the severability of the various subsidy and market reform provisions of the ACA.

But, if the Court upholds the IRS rule and concludes that the Administration’s interpretation is the only viable interpretation of the statute—whether based on the plain text and context of the provision or because of the doctrine of constitutional avoidance—the implementation of the ACA will continue without significant change and stakeholders would have the security of knowing that a future administration would be unable to reverse the IRS rule and restrict subsidies to state-run Exchanges.  On the other hand, if the Court upholds the IRS rule based on Chevron deference, a future administration could reverse course and eliminate subsidies on HHS-established Exchanges.

For additional information, please contact Katrina Pagonis in San Francisco at 415.875.8500; John Hellow in Los Angeles at 310.551.8111; or Keith Fontenot or Alex Brill in Washington, D.C. at 202.580.7700.

For media inquiries, please contact Barrett McBride at 916.456.5855.