The Supreme Court of the United States has issued its decision in King v. Burwell, a case that posed the second significant threat to the Affordable Care Act (the first being National Federation of Independent Business v. Sebelius, decided in 2012, in which the individual mandate was challenged as being unconstitutional).

I previously wrote about the background to this case and predicted the outcome.

Here’s the background:

This case was a challenge to the Patient Protection and Affordable Care Act (ACA) regarding whether subsidies and tax credits should be available through the federal insurance exchanges.

Had the outcome been different, this case threatened to undermine and unravel the ACA in that 34 states defaulted to the federal exchange, and a finding in favor of the plaintiffs would have put more than 7 million Americans at risk of losing their subsidies.

The ACA can be thought of as having three major components:

• Insurance reforms (guaranteed issuance of a policy, insurers rating your community but not you individually, and allowing adult children to remain on parents’ policies until age 26).
• An individual mandate (to avoid adverse selection, where high-risk people buy insurance but young and healthy people don’t).
• Subsidies and tax credits (to allow for more people to be covered through the exchanges).

The vehicles through which Congress sought to effectuate its reforms are the exchanges, where consumers can compare plans and their costs and determine their eligibility for subsidies. Where states decided against establishing their own exchanges, the federal government provided its exchange.

The question is whether Congress intended the availability of subsidies and tax credits for everyone, regardless of whether the exchange was set up by the state or provided by the federal government.

The text in the law states that premium-assistance credit is available to a taxpayer enrolled in a health plan “through an Exchange established by the State.” Those challenging the law have argued that tax credits and subsidies are available then only to those who buy an insurance policy through an exchange established by a state, not the feds, but the IRS rule implementing this part of the law interprets it as authorizing tax credits for individuals who purchased health insurance on either state or federal exchanges.

Supporters of the IRS rule have contended the federal government is merely stepping into the shoes of a state when it establishes an exchange. They say Congress could not have intended for the subsidies and tax credits to be limited only to those who purchase insurance from a state-based exchange.

How did the case get decided?

Six justices comprised the majority, siding with the government and holding that the subsidies and tax credits are available in states that have a federal exchange. Three justices comprised the minority and would have held in favor of the plaintiffs that the subsidies and tax credits were only available in those states that set up their own exchange.

Let’s start with the reasoning of the minority and then look to see how the majority came to their decision. The argument of the minority goes like this: To receive subsidies and tax credits, an individual must enroll in an insurance plan through an “Exchange established by the State.” The federal government is not a State. Therefore, people who buy health insurance through a federal exchange are not entitled to the subsidies or tax credits.

In other words, the minority looked at the plain meaning of the phrase, “Exchange established by the State,” and interpreted the law accordingly. Further, they contended, why add the words “established by the State” other than for the purpose of limiting the availability of the subsidies and tax credits to the state exchanges. If lawmakers had meant these subsidies and tax credits to be available to everyone who purchased an insurance plan through an exchange, state or federal, they would merely have written that an individual must enroll in an insurance plan through an exchange.

While the minority concurs with the majority that context is important, it points out that context “is a tool for understanding the terms of the law, not an excuse for rewriting them.” The minority points out that generally, the courts should accept and apply the presumption that lawmakers use words in their natural and ordinary sense. While the “ordinary connotation does not always prevail … the more unnatural the proposed interpretation of a law, the more compelling the contextual evidence must be to show that it is correct.”

The minority goes on to point out that the definition of State in the law is “each of the 50 States and the District of Columbia,” and that it is clear that the Secretary of Health and Human Services and the federal government are therefore not included in the definition of a State. In their minds, the majority’s reading of an “Exchange established by the State” causes the phrase “by the State” to have no effect, in violation of principles of statutory construction.

The minority further points out that lawmakers did not use the phrase “by the State” just once, but rather seven times; and on the other hand, did not use the phrase by rote throughout the law, but rather made use of the term “Exchange” by itself or “Exchange established under [§18031]” so as to suggest a contrast between different usages. In addition, reading each of the seven usages of “Exchange established by the State” to mean either the state or the federal government causes the states to have unusual controls or rights over federal exchanges and operations that are not customary rights of states.

The minority responds to the majority’s opinion that subsidies and tax credits are essential to the working of the statute and therefore must have been intended regardless of whether the insurance policy was attained through a state-based or federal exchange, that if true, this merely indicates that the law was flawed, not that that the phrase is ambiguous or means something different than what it states, and in fact, Congress had previously detected another flaw in the ACA that related to the provision of long-term care insurance and subsequently determined that it was fiscally unsustainable and repealed that section of the law.

As to reasons that Congress may have intended differential treatment between the two types of exchanges, the minority points to significant obligations and risks assumed by the states in setting up an exchange that, were it not for benefits that would have accrued to its citizens, there would have been no incentive to embark on such efforts if merely acquiescing to a federal exchange would have provided its citizenry with the same benefits.

Finally, the minority points out that under the separation of powers, Congress has the legislative powers and as such, they are responsible for both making the laws and fixing them. The courts should only step in to correct drafting errors when they are plain and obvious to a reasonable reader. The courts can correct drafting errors, but not “inartful drafting” or a “drafting fumble.” The courts lack the power to repair laws that do not work out in practice; rather that right remains the sole responsibility of Congress.

Now, let’s examine the majority opinion. The majority first looks to the history of failed health insurance reform, where states have imposed a guaranteed-issue requirement barring insurers from denying coverage to any person because of his or her health history and a community rating requirement, whereby insurers were barred from charging higher premiums to a person because of their health history.

This resulted in “adverse selection,” a dynamic in which relatively healthy individuals could hold off on purchasing health insurance until such time as they developed a health issue and then purchase insurance when the insurance company could not deny them, nor charge them a higher premium. This led to higher premiums to reflect the cost of insuring those who did purchase insurance, without the advantage of premiums contributed by healthy individuals who did not require significant services, which in turn, led to higher and higher premiums as more individuals waited to purchase insurance due to the high cost, resulting in a “death spiral” for the market and often the departure of insurers from that market. They conclude that the coverage requirement was an essential element of the law to creating effective health insurance markets.

Moreover, because persons would be exempted from the coverage requirement if the cost of purchasing insurance would exceed 8 percent of their income, the subsidies and tax credits were essential to keeping sufficient numbers of lower-income people (especially the young and healthy) in the insurance pool to avoid adverse selection.

The majority then looks at the legislative language. The court points out that the tax credits are one of the law’s key reforms and thus, whether they are available on the federal exchanges is a question of “deep economic and political significance” that cannot be delegated to an agency for interpretation, but rather, the court must determine the proper meaning.

While the majority agrees with the minority that if the statutory language is plain, the court must enforce the statute accordingly; in this case, the majority determines that the meaning of “established by the State” must be determined in context and with a view of the overall statutory scheme. When viewed this way, the majority finds the phrase to be ambiguous.

In one section, the law plainly states that tax credits shall be allowed for any applicable taxpayer. In another, it states that the amount of the tax credit depends in part on whether the taxpayer has enrolled in an insurance plan through “an Exchange established by the State,” while a subsequent section states, “if a State nonetheless chooses not to establish its own Exchange, the Act provides that the Secretary of Health and Human Services ‘shall … establish and operate such Exchange (italics mine) within the State.’”

These two words – “such Exchange” – save the ACA. The majority states that by using the phrase “such Exchange,” the law instructs the Secretary to establish and operate the same Exchange that the State was directed to establish, that is to say, the state and federal exchanges are equivalent – they must meet the same requirements, perform the same functions, and serve the same purposes.

Further, the majority finds that “such Exchange” must mean either a state or federal exchange or else there would be no “qualified individuals” in states with federal exchanges, in conflict with another provision of the law that states that all Exchanges “shall make available qualified health plans to qualified individuals.”

The majority also points to a section of the law that requires all exchanges to create outreach programs that must “distribute fair and impartial information concerning … the availability of premium tax credits…” as well as other provisions that seem to make little sense as to why the requirement would exist if tax credits were not available under the federal exchanges.

The majority also chalks some of the confusion up to inartful drafting, of which there are more than a few examples. They also noted the circumstances that existed at the time the law was passed, requiring the use of reconciliation that limited opportunities for debate and amendment.

In the end, the majority felt compelled to interpret “Exchange established by the State” to mean either a state or federal exchange because failing to do so would destabilize the individual insurance market in any state with a federal exchange, likely precipitating the very death spirals Congress sought to avoid. If lower-income individuals do not have access to subsidies and tax credits, the purchase of insurance would not be affordable and they would be exempted from the coverage requirement resulting in the adverse selection Congress purposely tried to prevent.

As evidence of the magnitude of this problem, the majority took notice of the fact that approximately 87 percent of the people who bought insurance on the federal exchange did so with subsidies and tax credits, and without this financial assistance, almost all would have been exempt from the coverage requirement. Additionally, one study predicted a 70 percent drop in enrollment and premium increases of 47 percent in states with federal exchanges without the benefit of the subsidies and credits.

For those who decried the Supreme Court agreeing to hear this case and asserting that there could be no reasonable position other than that subsidies and tax credits were available on all exchanges, the majority states that the arguments adopted by the minority about the plain meaning of the phrase “Exchange established by the State” are strong.

What about my prediction?

I’d predicted the court would find for the government, but I was wrong in predicting it would be a 5-4 decision; it was 6-3. I correctly predicted where each of the Justices would come out with their vote – although I predicted that Justice Anthony Kennedy’s rationale would be different than it was – except for Chief Justice John Roberts. He surprised most of us back in 2012, and he surprised at least me this time.