For the second time since the enactment of the Patient Protection and Affordable Care Act (“ACA”) in March of 2010, the U.S. Supreme Court will hear a challenge to the validity of the law.

The first challenge was to the constitutionality of the individual mandate in the ACA. I’ve written about that previously.

In that case, the Supreme Court held that the individual mandate was constitutional, but that the Medicaid expansion provision was impermissibly coercive and states must have the option to expand their Medicaid programs without the threat of termination of funding to their current program if they chose not to.

This time, the Supreme Court has agreed to hear a controversy in which two different courts of appeals came to opposite conclusions in challenges to the validity of an IRS final rule implementing the tax credit provision of the ACA.

The two cases were decided the same day: July 22, 2014. One case (Halbig vs. Burwell) was decided by the U.S. Court of Appeals for the District of Columbia Circuit, allowing the IRS rule to stand, and the other case (King vs. Burwell) was decided by the U.S. Court of Appeals for the Fourth Circuit, finding the rule to be an improper administrative act. The U.S. Court of Appeals for the District of Columbia has granted an appeal to the entire court (not just the three judge panel that decided the Halbig case) and vacated that panel’s opinion in the Halbig case.

What is the background of the current lawsuits?

The ACA can be thought of as having three major components meant to work together to ensure the greatest likelihood of controlling the escalating costs of health insurance while insuring the greatest possible number of people under the limitations of the law.

Those components are

• insurance reforms (guaranteed issue, community rating, and allowing adult children to remain on parents’ policies until age 26);
• individual mandate (to avoid adverse selection); and
• subsidies and tax credits (to allow a greater number of lower income individuals to be covered through the insurance exchanges who otherwise would have been exempted from the individual mandate and required coverage due to the unaffordability provisions of the law).

The vehicle through which Congress sought to effectuate its reforms are insurance exchanges, online marketplaces where plans and costs could be compared and subsidy eligibility could be determined.   Congress provided carrots and sticks to encourage states to set up their own exchanges – e.g., grants of federal funds to develop and implement their own exchanges (carrot) and prohibition against tightening Medicaid eligibility requirements if a state declined to implement its own insurance exchange (stick).

Where states decided against establishing their own exchanges, the federal government offered to provide its exchange. Ultimately, only 14 states (or 16 if you count the two states, including Idaho, that have established their exchanges through a federal-state partnership) and the District of Columbia established their own exchanges.

What remains uncertain is whether Congress intended the availability of subsidies and tax credits only to those who purchased their insurance through state- established and operated exchanges (as opposed to a federal exchange) as an additional carrot.

Those appealing the Halbig case indicated to the court that the ACA was a “product of legislative compromise” to gain the support of Nebraska Sen. Ben Nelson, the 60^th vote needed to avoid a filibuster.

“To gain Nelson’s support, proponents of the ACA scrapped the national exchange in favor of establishing exchanges on a state- by-state basis,” documents filed in connection with the case state. “This change, in turn, required Congress to devise means of inducing states to take on the politically and technologically challenging task of establishing exchanges (because Congress does not have the power under the Constitution to require states to set up their own exchanges).

“Congress’s solution, appellants maintain, was a (set of incentives) … (t)he most important … was … making premium tax credits available only for individual coverage purchased through state-established Exchanges. According to appellants, the ACA’s supporters believed no state would refuse so good an offer.”

In the first Supreme Court challenge to the ACA, it was established that Congress passed the act to “increase the number of Americans covered by health insurance and decrease the cost of health care.”  The ACA “provides for tax credits to millions of low- and middle-income Americans to offset the cost of insurance policies purchased on the Exchanges.” (Halbig)

The particular portions of the laws at the center of this legal challenge are:

• ACA Section 1311:  “(E)ach state shall, not later than January 1, 2014, establish an American Health Benefit Exchange.”
• ACA Section 1321:  a state may “elect” to establish an Exchange. If a state does not “elect” to establish an Exchange, or fails to meet certain federal requirements for the Exchanges, “the Secretary (of HHS) shall … establish and operate such exchange within the State.”
• 26 U.S.C. Section 36B:  this section defines the amount of premium assistance credit available to a taxpayer enrolled in a health plan “through an Exchange established by the State under section 1311.”

The IRS rule implementing 26 U.S.C. Section 36B, written after it was clear that the majority of states were not going to establish their own exchanges, interprets the ACA as authorizing tax credits for individuals who purchased health insurance on both the state-established and -operated exchanges and the federal exchanges.

The result was that several plaintiffs challenged the IRS rule, alleging that they are in states with federal exchanges, and given their incomes, if not but for the tax credits, they would not have to purchase an ACA-compliant health insurance policy (or pay a tax penalty) because they would meet the unaffordability criteria under the ACA that would exempt them from the individual mandate.

What are the competing arguments?

In a nutshell, those challenging the law take the position that tax credits and subsidies are only available to those who purchase an insurance policy through an exchange established by the state. The federal government is clearly not a state and had Congress intended the subsidies to be available on both exchanges, Congress would have said so.

They urge the courts to implement the clear and plain language of the statute and explain how creating this incentive for states to establish their own exchanges is not inconsistent with the purposes of the ACA. They also suggest that this outcome was the result of legislative compromise and the courts should not legislate from the bench, but rather, if it was an error or oversight, it is up to Congress to correct it, not the courts.

Those supporting the IRS rule indicate that the federal government is merely stepping into the shoes of the state when it establishes the exchange as evidenced by the language of Section 1321 when it refers to the Secretary (of HHS) establishing “such exchange”, i.e., an exchange established by the state.

They point to the purpose of the ACA to achieve near universal coverage, and that Congress could not have intended for the subsidies and tax credits to be limited to only those who purchase insurance from a state-based exchange.

They further argue that, in a more than 900-page statute with hundreds of provisions, it is hardly remarkable that a provision such as this might be poorly worded, especially in view of the compressed time for legislative action and because the House and Senate versions were synthesized through a reconciliation process, rather than the standard conference committee process.

What are the implications of the Supreme Court’s decision in this case?

This is a big deal, at least theoretically.

If the Supreme Court invalidates the IRS final rule, tax credits are no longer available in the 36 states that have (or had, in the case of Idaho) federal exchanges, and as a result, more than half (approximately 4.7 million) of the 7.3 million people who purchased ACA-compliant insurance plans and received subsidies are no longer entitled to them.

In turn, it would be expected that many of those currently covered would drop coverage and avoid the tax penalty under the hardship exemption for unaffordability, leaving more uninsured and fewer individuals in the exchange plans which, in turn, could increase the costs for those who retain coverage, resulting in significant increases in insurance rates and undermining the objectives of the ACA.

According to a recent RAND Corp. study, premiums would increase by as much as 43 percent and enrollment would drop by 68 percent, resulting in more than 11 million Americans losing their health insurance coverage.

On the other hand, it is possible that such a decision by the Supreme Court would cause many of the states who previously did not create their own exchanges to do so to protect their citizens. Based upon a friend of the court brief filed in this case urging the Court to uphold the IRS rule, it appears that at least 11 states – Arkansas, Delaware, Illinois, Iowa, Maine, Mississippi, New Hampshire, New Mexico, North Carolina, Pennsylvania, and Virginia – would set up their own exchanges if necessary.

What’s my prediction?

I would urge caution in minimizing or trivializing this case. This is a substantial legal question entailing difficult legal analysis. Having read both opinions, I can tell you that two U.S. Courts of Appeals used very sound legal reasoning and analysis and yet came up with different opinions.

Even the King court that upheld the IRS rule concluded that “the court is of the opinion that the defendants have the stronger position, although only slightly,” and specifically commented on the “common-sense appeal of the plaintiff’s argument.”

Another case involving this same issue was heard and decided in the United States District Court for the Eastern District of Oklahoma at the end of September. That judge had the benefit of both U.S. Court of Appeals decisions. That court determined that the Halbig decision (striking down the IRS rule) was the more persuasive.

Ultimately, the decision will be whether the Supreme Court takes a literal view of the statutory language or whether the Court intends to try to find a way to more broadly interpret “established by the State” to include the federal government standing in the shoes of the state.

The argument that Congress intended the subsidies to be applied to as many as possible to make coverage as near universal as possible, to me, is not persuasive. If that were true, one would think that Congress would have made subsidies available for all levels of plans on the exchange (it did not) and even for plans purchased off the exchanges (it did not).

Nevertheless, I believe that the Supreme Court will uphold the IRS rule and find some creative way to do so. Chief Justice Roberts has already demonstrated his willingness to be creative and come up with a solution to save the Accountable Care Act from itself and spare the Court from political attacks and reputational harm.

This is likely to be another split decision that will be either 5-4 or 6-3, depending upon which side Justice Kennedy comes down. My guess is 6-3 upholding the U.S. Court of Appeals for the Fourth Circuit’s decision in King vs. Burwell.

I leave you with this observation from the concurring opinion in the King case, based on Robert Pear’s writing in The New York Times:

“Sausage-makers are indeed offended when their craft is linked to legislating.”  (Robert Pear, “If Only Laws Were Like Sausages,” The New York Times, Dec. 5, 2010.)