Yesterday, the U.S. Supreme Court upheld a key provision of the Affordable Care Act, ruling that eligible individuals may receive federal subsidies through a state’s health insurance exchange even if the exchange is run by the federal government. The case, King v. Burwell
, was decided by a 6-3 vote, with the majority opinion written by Chief Justice Roberts.
Background on the ACA’s Individual Mandate and Federal Subsidies
The ACA’s “individual mandate” generally requires individuals to obtain health insurance coverage or pay a penalty. Individuals may obtain coverage through health insurance marketplaces, or “exchanges,” that are required to be organized in each state. While 16 states and the District of Columbia have opted to organize and run their own exchanges, the federal government runs the exchanges in the remaining 34 states, which is the default rule for states that choose not to organize and run their own exchanges. (Note: While Oregon generally is included among the 16 state-run exchanges, there is a question as to whether Oregon’s exchange is state-run or federally-run. As discussed below, after yesterday’s decision, the question is moot.)
Under the individual mandate, if the cost of an individual’s health insurance coverage exceeds eight percent of an individual’s income, the individual is no longer required to obtain coverage. To avoid this result, the ACA provides that individuals with household incomes of between 100% and 400% of the federal poverty level are eligible for federal tax credits, or subsidies, toward the cost of coverage obtained through an exchange. So, the subsidies facilitate enforcement of the individual mandate by bringing the cost of coverage, after application of the subsidy, down to an affordable level.
The ACA literally provides that these subsidies are available only for coverage purchased through “an Exchange established by the State.” The IRS has interpreted this language to mean that eligible individuals can obtain subsidies from federally-run as well as state-run exchanges.
The King v. Burwell Case and the Supreme Court’s Decision
In King v. Burwell
, four residents of the State of Virginia, whose healthcare exchange is operated by the federal government, did not want to be forced to purchase health insurance under the individual mandate. They sued the Department of Health and Human Services, arguing that because Virginia’s exchange is federally-run, it is not “an Exchange established by the State,” and therefore could not provide subsidies to residents of Virginia. Without subsidies, the petitioners asserted, they were not required to purchase coverage, because the cost of coverage without a subsidy exceeded eight percent of their income, and was therefore unaffordable under the individual mandate.
The lower courts ruled against these plaintiffs, but another federal appeals court reached the opposite conclusion. The Supreme Court agreed to hear the case to resolve the conflict.
The Supreme Court upheld the right of a federally-run exchange to provide subsidies. It held that the phrase “an Exchange established by the State” is ambiguous and must be considered in light of the “broader structure of the Act.” Seen in that light, the Court concluded, the phrase was intended by Congress to include both state-run and federally-run exchanges. To adopt the position proposed by the petitioners, the Court reasoned, would destabilize the insurance market in states with federally-run exchanges by disallowing subsidies, thereby eliminating the requirement for most individuals to purchase coverage in those states. The Court acknowledged that it is not always a court’s role to rely on the context and structure of statutory language, instead of the plain language of the statute, but stated that reliance on context was necessary in this case in order to avoid the “calamitous result” of a disruption of the insurance markets, which the Court believed Congress clearly did not intend.
What the King v. Burwell Decision Means
In many ways, King v. Burwell
does not change anything. Federal agencies will continue to require all exchanges to offer subsidies to eligible individuals. Employers subject to the employer mandate will still face penalties if they fail to offer adequate coverage to full-time employees who receive a subsidy from an exchange.
Looking forward, here is what to expect:
- Under the ACA, every state exchange will offer the same federal subsidies, regardless of whether that exchange is state-run or federally-run.
- Individuals whose income is not greater than 400% of the federal poverty line may be eligible for a subsidy if they seek coverage through any state exchange.
- If an individual does not obtain coverage in 2015 through an exchange, or through an employer, spouse/partner, governmental program, or some other source, the individual may become subject to a penalty tax under the individual mandate equal to the greater of $325 or 2% of the individual’s household income.
- Employers subject to the ACA’s employer mandate may face penalties for failing to offer adequate coverage to full-time employees who receive a subsidy from an exchange.
We will continue to report from time to time on new developments related to healthcare reform. Please also feel free to contact us at any time about healthcare reform or other labor, employment, or benefits issues.