State Attorneys General Return to Health Care Reform in U.S. Supreme Court

On Wednesday, the U.S. Supreme Court will hear arguments in what is being teed up to be “Round 2” on the Affordable Care Act (ACA). In the case King v. Burwell, the question before the Court is whether the IRS can extend tax credit subsidies to those using the federal health care exchange when the ACA limits subsidies to exchanges “established by the state.” This question of statutory interpretation may go as much to the heart of the ACA as the prior constitutional challenge on the individual mandate.

The ACA urges states to establish their own exchanges as a marketplace for individuals and small businesses to compare and purchase affordable health care insurance. For a state that does not set up an exchange, the ACA provides that the federal government exchange (healthcare.gov) will be available to that state’s citizens. Further, the ACA requires the IRS to make tax credit subsidies (“premium assistance”) available to individuals, with incomes less than 400% of the federal poverty limit, who purchase insurance on an exchange “established by the state.”

Yet 34 states have declined to establish health care exchanges. Whether the federal government can step into the shoes of a state in the sense that the federal exchange is treated as one “established by the state” is critical to the IRS’s legal authority to provide the subsidies in all states. Without those subsidies, it is estimated that 8.2 million purchasers on the federal exchange will become uninsured.

Petitioners are challenging an IRS rule that allows tax credit subsidies for the federal exchange. The petitioners argue that Congress engineered carrots and sticks to encourage participation in health care reform, expecting that no state would turn down the subsidies for their citizens by failing to establish an exchange. But, alas, only 16 states have established an exchange. Petitioners press their statutory reading that logically, and intentionally, the federal exchange cannot be “established by the state.” Further, they assert that other ACA terms referring more generally to “such an exchange” describe only what an exchange is, for instance the requirements of all exchanges, and do not determine who established it.

The Virginia Attorney General led 20 states in an amicus brief supporting the extension of exchange-based subsidies to all states. The brief relies heavily on the Supreme Court’s Pennhurst doctrine which requires that costs and benefits must be transparent in order to give states a real choice in programs enacted by Congress under the Constitution’s Spending Clause. The Democratic AGs give numerous examples of the 34 states expecting to obtain the federal subsidies even while those states did not establish an exchange. The argument is that if now the subsidies become unavailable, those states then lacked clear notice from Congress as to the consequences of declining to establish an exchange.

The Oklahoma Attorney General, along with a half dozen Republican AGs, argues in an amicus brief that upholding the IRS rule would undercut the motivations of “cooperative federalism.” The brief asserts that any federal intrusion must be explicit as health insurance is traditionally a state regulatory responsibility. Otherwise the usual constitutional balance between the states and the federal government is altered without Congress being “unmistakably clear” in the statutory language.

An amicus brief by America’s Health Insurance Plans (AHIP) provides a thorough explanation of the ACA’s key elements used to offset the Act’s limitations on “risk-based underwriting,” for instance the ban on insurance denials due to pre-existing health conditions. The AHIP brief contends that, if the subsidies are not available in states lacking their own exchanges, premiums will increase as fewer individuals will be in the insurance pool. For these states, insurance would be less available and more expensive making the health care insurance market worse than before the ACA.

If the Court halts the IRS from allowing tax credit subsidies in the 34 states, one curious outcome will be any instructions the Court might give on remand to the lower court. Considering the Virginia brief, states would now have clear notice, if they also had time, to establish exchanges for the very purpose of obtaining the subsidies.