Supreme Court Hears Obamacare Case

Published March 18, 2015

A lawsuit that could determine the fate of the Affordable Care Act (ACA) is now being considered by the U.S. Supreme Court (SCOTUS), where plaintiffs from Virginia in March argued the plain text of the law allows tax credits for purchasing health insurance only to be used on exchanges established by states.

A ruling by SCOTUS in favor of the plaintiffs in the case, King v. Burwell, would mean federal tax credits will not be made available to people purchasing insurance through federally established exchanges, effectively eliminating much of the Affordable Care Act in the 37 states that opted not to set up state exchanges.

The Internal Revenue Service (IRS) has allowed subsidies to apply to all individuals who sign up through an Obamacare exchange, including the federal exchange, on the grounds that Congress never intended for the subsidies to be limited to state-established exchanges.

“In order to save the Affordable Care Act, the Obama administration needs the Supreme Court to ignore what the law actually says,” said Sally Pipes, president of the Pacific Research Institute. “The Supreme Court shouldn’t be in the business of fixing Congress’ blunder.”

Dispute Over Law’s Meaning

The case hinges on six words in the ACA. The legislation says tax credits are to be available through exchanges “established by the state under 1311,” referring to the section of the law addressing how states are to set up exchanges. A later section, 1321, describes the duty of the U.S. Secretary of Health and Human Services to establish an exchange where a state chose not to.

Despite this language, in 2012 the IRS decided to interpret the law as allowing tax credits to be distributed through exchanges established by the federal government.

The plaintiffs argue the language is clear, and they note Congress routinely includes in legislation stipulations denying benefits and funds to states that do not follow Congress’ provisions established by a law.

Evidence of this comes from the comments of MIT professor Jonathan Gruber, a key architect of Obamacare.

“I think what’s important to remember politically about this, is if you’re a state and you don’t set up an Exchange, that means your citizens don’t get their tax credits,” Gruber said to the nonprofit science, technology, and strategy organization Noblis in January 2012. “But your citizens still pay the taxes that support this bill. So you’re essentially saying to your citizens, you’re going to pay all the taxes to help all the other states in the country. I hope that’s a blatant enough political reality that states will get their act together and realize there are billions of dollars at stake here in setting up these Exchanges.”

Defenders of the IRS’ interpretation claim the language is ambiguous and leaves the IRS authority to determine an exchange established by the federal government qualifies as an exchange “established by the state.”

Will Congressional Republicans Act?

A Supreme Court decision for the plaintiffs would effectively repeal much of Obamacare in 37 states relying on the federal health insurance exchange. In addition to tax credits no longer being available, the employer mandate would be effectively repealed, and many people would be released from the individual mandate.

Republicans in Congress are likely to feel pressure to respond to a victory for the plaintiffs by enacting legislation either to restore the tax credits or create an alternative to make health insurance more affordable, says John Goodman, a senior fellow at the Independent Institute.

“Republicans cannot afford to do nothing,” Goodman said. “There seems to be broad agreement that they will temporarily restore some or all of the subsidies and in the same bill enact more substantial changes after a period of adjustment.”

Goodman specifically pointed to a plan by Rep. Paul Ryan (R-WI) that would give states the option to choose mandate-free health insurance and provide people in states without state-established exchanges a fixed-sum tax credit that does not vary with income.

According to Paul von Ebers, former CEO of Blue Cross Blue Shield of North Dakota, approximately 6.5 million people could lose tax credits out of 8.5 million who signed up for coverage through federal exchanges. Ebers predicts 10 or 12 states will establish exchanges if SCOTUS rules against tax credits on the federal exchange, which would mean about 4 million people would lose tax credits.

The Supreme Court is expected to rule in the case by the end of June.

Sean Parnell ([email protected]) is managing editor of Health Care News.