Over a forceful dissent, the US Supreme Court ruled on June 25, 2015, that the Affordable Care Act (ACA) premium tax credits offered to subsidize coverage under the ACA health insurance exchanges (under Section 36B of the Internal Revenue Code (Code)) are available in both states with a state-run exchange and those with a federal exchange (King v. Burwell, 576 U.S. 473 (2015)). (Regarding ACA compliance, see Practice Note, Affordable Care Act (ACA) Overview and Affordable Care Act (ACA) Toolkit.)

As background, the ACA's individual mandate requires nonexempt individuals to maintain health insurance coverage or make a payment to the IRS. An exemption is available if the cost of buying insurance exceeds 8% of the individual's income (the income limit) (see Legal Update, Supreme Court Upholds the ACA's Individual Mandate). The ACA also required each state to establish an exchange, by January 1, 2014, that would operate as an online marketplace through which individuals could purchase the required coverage (though other coverage, including under employer-sponsored plans, may satisfy the ACA's individual mandate). In states that did not establish their own exchanges, the ACA provided that the federal government would establish and operate an exchange within the state.

To make purchasing insurance more affordable, Code Section 36B, added by the ACA, made available tax credits for individuals with incomes between thresholds keyed to the federal poverty line (26 U.S.C. § 36B). The amount of these tax credits, which are paid in advance to the individual's insurer, depends in part on whether an individual enrolls in coverage through an "Exchange established by the State . . . " (26 U.S.C. § 36B(b)-(c)).

Four individuals living in a state with a federal exchange who did not wish to purchase health insurance under the ACA sued the government, arguing that the federal exchange in their state was not an "Exchange established by the State." As a result, the individuals asserted that:

In final regulations, however, the IRS took the view that the tax credits were available both to individuals who purchase insurance on a state-run exchange and on a federal exchange (26 C.F.R. § 1.36B-2).

In July 2014, the US Court of Appeals for the Fourth Circuit upheld the IRS's regulatory interpretation regarding availability of the Section 36B tax credits. That same day, however, the US Court of Appeals for the DC Circuit held that the ACA "unambiguously restricts" the Section 36B tax credits to state exchanges (see Legal Update, Conflicting Rulings on Tax Credits Under the ACA). In light of this circuit court split, the Supreme Court agreed to hear the case.

In analyzing the disputed Section 36B provision, the Supreme Court declined to offer Chevron deference to the IRS's interpretation of the premium tax credit rules (Chevron USA Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984)). Under Chevron, an administrative agency's interpretation is only overturned if it is found to be "arbitrary, capricious, or manifestly contrary to the statute" and if:

Citing the magnitude of the tax credit issue, the Court concluded that it would not apply deference, but would instead interpret Section 36B itself. According to the majority's opinion, doing so would require the Court to determine whether the Section 36B language was ambiguous. If so, the Court would need to view the language in the context of the ACA's overall structure to determine its meaning.

The Court offered several rationales for its conclusion that the phrase "an Exchange established by the State" is ambiguous regarding whether it restricts subsidies only to state exchanges. The Court noted that certain exchange-related provisions would make little sense if the disputed language (or its equivalent) was construed to exclude federal exchanges. Also, the Court observed that although state-run exchanges and federally run exchanges are technically established under different statutory authority and by different "sovereigns" (that is, the state and federal governments), they are essentially equivalent. For example, the Court noted that the provision under which federal exchanges are established uses the words "such Exchange" indicating that federal exchanges are the same as those established by the states. The Court reasoned that state and federal exchanges must:

As a result, the Court concluded that the disputed Section 36B provision was properly viewed as ambiguous. The phrase could alternatively be read as referring:

This ambiguity, according to the Court, was heightened by additional ACA provisions (for example, a requirement to create outreach programs) that assumed the Section 36B tax credits would be available on both state and federal exchanges.

Having concluded that the disputed Section 36B provision was ambiguous, the Court examined the ACA's broader structure and purpose to interpret the statute. The Court noted that limiting the tax credit's availability to state exchanges would destabilize the individual insurance market in those states (currently 34) with a federal exchange. This is because without the tax credits, many individuals would also be exempt from the ACA's individual mandate under the income exemption. Reduced exchange participation could result in dramatically higher premiums in an effect the Court characterized as a "death spiral." The Court therefore concluded that Congress must have intended that the tax credit would apply in every state, regardless of whether a state or the federal government established and operated the state's exchange.

In a dissenting opinion, Justice Scalia (joined by Justices Thomas and Alito) disagreed that the phrase "Exchange established by the State" referred to exchanges established by both states and the federal government. In the dissenting justices' view, this phrase was neither ambiguous nor unclear. Rather, the dissent claimed that Congress may have deliberately restricted tax credits to state exchanges to encourage states to establish their own exchanges. The dissent noted that other ACA provisions draw sharp distinctions between exchanges established by a state and ones established by the federal government (for example, funding sources and administrative authority). The dissenting justices also argued that applying the majority's reading of the disputed phrase where it appears elsewhere in the ACA would lead to strange results. For example, a requirement that any exchange established by the state use "secure electronic interface" to make eligibility determinations would mean that a state would need to control the electronic interface used in a federal exchange.

In short, the dissent accused the majority of rewriting the ACA to make it operate consistent with the majority's vision of how Congress intended the law to function. The more appropriate approach, according to the dissent, would have been to let Congress fix the ACA's limitations of tax credits to the state exchanges.

Notwithstanding the dissent's concerns over statutory interpretation, this decision should put to rest questions regarding the ACA premium tax credits in advance of the next open enrollment cycle for the exchanges. As both the majority and dissenting opinions took pains to point out, the stakes in this case (in terms of spending and the number of individuals whose health insurance would be affected) were extremely high. Had the decision gone the other way, the ACA's employer mandate also would have been affected because an individual's receipt of a Section 36B tax credit is a trigger for employer mandate liability (see Employer Mandate Toolkit).