On June 25, 2015, the Supreme Court of the United States decided King v. Burwell, No. 14-114, holding that tax credits authorized under the Patient Protection and Affordable Care Act are available to individuals who purchase insurance through a federal exchange.
When Congress passed the Patient Protection and Affordable Care Act (ACA) in 2010, it created three interlocking reforms designed to expand coverage in the individual health insurance market. First, it barred insurers from denying coverage to any person and from charging higher premiums because of the person’s health. Second, it required all individuals to purchase individual health insurance or make a payment to the IRS; it exempted anyone who had to spend more than 8 percent of his income on health insurance. And third, it gave refundable tax credits to individuals with a household income between 100 percent and 400 percent of the federal poverty line. Congress found that the first reforms would not work without a coverage requirement, and the coverage requirement would not work without the tax credits.
Congress also required the creation of insurance “Exchanges” in each state where individuals can shop for health insurance. The ACA specifies that an “Exchange” may be created either by a state, or if a state chooses not to create one, by the federal government, through the department of Health and Human Services (HHS). Sixteen states and the District of Columbia created state exchanges, and the other 34 states have elected to have HHS do so.
The state of Virginia did not establish a state exchange, and instead had one established by HHS (a Federal Exchange). Several Virginia residents who did not wish to purchase health insurance filed a lawsuit challenging a specific interpretation of the ACA—an IRS rule providing that a taxpayer is eligible for a tax credit if he is enrolled in any “Exchange,” whether State or Federal. The ACA states that tax credits are available to individuals who enroll in a health insurance plan “established by the State,” and the Virginia residents argued that the Federal Exchange did not satisfy that definition. If the tax credits were not available to them because the Federal Exchange was not “established by the State,” then the cost of health insurance would exceed 8 percent of their income and they would be exempt from having to buy it.
The United States District Court for the Eastern District of Virginia dismissed the lawsuit, holding that the ACA unambiguously made tax credits available to individuals enrolled through a Federal Exchange. The United States Court of Appeals for the Fourth Circuit affirmed, but under a different rationale: the ACA’s “established by a State” provision was ambiguous, and the IRS’s interpretation of that provision warranted deference under the doctrine of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). But on the same day, the United States Court of Appeals for the District of Columbia Circuit vacated the IRS rule, holding that the ACA “unambiguously restricts” tax credits to state exchanges only.
The Supreme Court granted certiorari and affirmed, holding that tax credits authorized under the ACA are available to individuals in states with a federal exchange. The Court first rejected the Fourth Circuit’s reliance on so-called Chevron deference, because it was unlikely that Congress would have implicitly delegated to the IRS the task of interpreting a statute that involved “billions of dollars in spending each year” and affected “the price of health insurance for millions of people.”
The Court then applied principles of statutory interpretation, first examining whether the meaning of “established by a State” was plain and unambiguous. Although the Virginia residents’ argument about the plain meaning of that provision—that a “state” did not include the “Federal Exchange”—was “strong,” the Court ultimately held that it was ambiguous when read in context with a view to the “overall statutory scheme.” Part of the ambiguity arose from interpretational absurdities with other parts of the statute; the Court explained that giving the phrase “established by the State” its most natural meaning would render other parts of the ACA meaningless or nonsensical. On top of that, other parts of the ACA assumed tax credits would be made available on both State and Federal exchanges.
Given Congress’s “inartful drafting,” the Court turned to the broader structure of the ACA. That was conclusive: the entire structure of the ACA was designed to expand individual health insurance coverage while controlling costs. The Virginia residents’ reading of the ACA, by contrast, “would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.” The Court relied upon empirical evidence that 87 percent of people who bought insurance on a Federal Exchange did so with tax credits, and virtually all of those people would have been exempt. “It is implausible that Congress meant the Act to operate in this manner,” the Court explained. Ultimately, the context and structure of the ACA compelled the Court to depart from what would otherwise have been the most natural reading of the phrase, “established by the State.” Such an interpretation avoided the “calamitous result that Congress plainly meant to avoid.”
Chief Justice Roberts delivered the opinion for the Court, in which Justices Kennedy, Ginsburg, Breyer, Sotomayor, and Kagan joined. Justice Scalia filed a dissenting opinion, in which Justices Thomas and Alito joined.