Supreme Court Upholds ACA Federal Subsidies

Author: Marta Moakley, XpertHR Legal Editor

June 26, 2015

The Supreme Court upheld federal subsidies under the Affordable Care Act (ACA) in King v. Burwell. By a margin of 6-3, the Court upheld a 4th Circuit Court of Appeals decision that allowed individuals residing in states with no state-run exchanges to receive tax credits through a federal exchange. Chief Justice Roberts authored the majority opinion, explaining in plain terms how the law works and the central role that the subsidies play in keeping "Affordable" in the ACA.

The opinion details how the ACA was modeled on health care reform efforts in Massachusetts, which combined tax credits or subsidies with coverage mandates and insurance regulations (e.g., the requirement that coverage not be denied based on existing conditions) to produce affordable health care options for consumers. By the law's definition, insurance is affordable for an individual if its cost is below 8% of an individual's income. The applicable IRS regulations allow for subsidies for residents in states that have a federal exchange.

The King v. Burwell petitioners are Virginia residents (a state that does not have a state-run exchange) who did not wish to purchase health insurance through a federal exchange. Absent federal subsidies for a federal exchange, the cost of the residents' insurance would rise over the threshold of 8% of their income. Based on their reading of the ACA's provisions, the petitioners argued that the subsidies should be available only in those states with state exchanges and, therefore, that the IRS regulations should be struck down.

During oral arguments in the case, discussion turned to how the case might have serious consequences for individuals in the 34 states with federal exchanges if the Court were to strike down subsidies in those states. These individuals could have seen their insurance premiums skyrocket without the federal subsidies to keep the coverage affordable, causing a marked difference in coverage rates between states depending on whether the exchange was run by the state or by the federal Department of Health and Human Services. During oral arguments, Justice Kennedy described the result of removing federal subsidies in these 34 states tantamount to sending those insurance markets into a "death spiral."

The final paragraph of the majority opinion echoes Justice Kennedy's expressed concern and comprises the Court's role in interpreting the ACA:

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. [IRS Regulation] Section 36B can fairly be read consistent with what we see as Congress's plan, and that is the reading we adopt.

President Obama was swift to applaud the decision, stating that "after more than 50 votes in Congress to repeal or weaken this law; after a presidential election based in part on preserving or repealing this law; after multiple challenges to this law before the Supreme Court -- the Affordable Care Act is here to stay."

As a result of this decision, the ACA's provisions stand - including those that affect employers the most, such as the pay-or-play mandate.