Divisions Within Supreme Court Seem Clear In Argument Over Availability of Subsidies

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By Mary Anne Pazanowski

March 4 — Divisions among the U.S. Supreme Court justices March 4 seemed clear as they heard attorneys argue for and against an Internal Revenue Service rule that makes subsidies, or tax credits, available to eligible health-plan purchasers on both state-run and federally facilitated Affordable Care Act exchanges.

But, like previous ACA cases, attorneys present at the oral argument said they believe the outcome will turn on the views of Chief Justice John G. Roberts Jr. and Justice Anthony M. Kennedy. Roberts famously voted to uphold the ACA's individual mandate under the Constitution's tax and spending clause, when four other justices would have stricken it under the commerce clause in NFIB v. Sebelius, 2012 BL 160004 (U.S. 2012).

Roberts, according to Simon Lazarus, senior counsel at the Constitutional Accountability Center in Washington, was “uncharacteristically silent.” The chief justice, he said, doesn't shy away from “exposing weaknesses in arguments he doesn't support,” and it was interesting that he didn't speak up more at the argument.

In a statement provided to Bloomberg BNA, Ilya Shapiro, senior fellow in constitutional studies at the Cato Institute in Washington, said Roberts and Kennedy “gave very little away at oral argument,” leaving listeners to speculate on whether they will vote to uphold the IRS's subsidy rule.

Kennedy, although not as active as some of the other justices, seemed mainly concerned with whether a win for the challengers would raise “serious constitutional questions” regarding federal-state relations.

Intense Questioning

The questioning started out “intensely” and became more intense as it went along, Sam Kazman, general counsel of the Competitive Enterprise Institute in Washington, observed. CEI funded and coordinated the litigation.

Justices Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotomayor and Elena Kagan made their views plain by closely grilling plaintiffs' attorney Michael A. Carvin, of Jones Day, Washington, over the meaning of the ACA section that says subsidies will be available for eligible individuals who buy health insurance on “an Exchange established by the State.”

Justices Antonin Scalia and Samuel A. Alito Jr., although also questioning Carvin, saved most of their queries for Solicitor General Donald B. Verrilli Jr., Washington, who argued for the government. Justice Clarence Thomas was typically silent.

Carvin insisted at the beginning that this is a “straightforward case of statutory construction.” The only proper way to construe 26 U.S.C. § 36B, he said, would be to hold that it doesn't allow assistance in the form of tax credits or subsidies for individuals who use federally facilitated exchanges.

Verrilli's main theme was that an exchange established by the Health and Human Services Department is “an Exchange established by the State” within the meaning of the ACA.

Stakes of Case

The stakes of the case are high. The ACA's main goal is to ensure that all Americans have affordable health insurance coverage. The subsidies were intended to help individuals who couldn't afford to buy plans to do so.

The 2015 sign-up period ended Feb. 15, but was extended for one week, until Feb. 22, for consumers who experienced long wait times or technical difficulties. Thirty-seven states used the federal platform during that period, while 13 states plus the District of Columbia operated their own exchanges.

According to a weekly enrollment snapshot issued by the HHS Feb. 22, over 12 million applications for health-care insurance were submitted using an exchange, and over 8 million plans were selected. In a Jan. 27 enrollment report, the HHS said that 87 percent of the individuals who selected plans on the federal HealthCare.gov platform as of Jan. 15 qualified for premium tax credits and/or cost-sharing reductions.

The government argued that those reductions would go away if the court rules for the challengers. This would mean that millions of individuals no longer would be able to afford to buy health insurance. With those purchasers out of the market, the entire system could fall into a “death spiral,” the government said in its briefs.

Standing Question

The questioning began with Ginsburg asking Carvin if any of the four plaintiffs had standing to bring the lawsuit, an issue that was raised in the media but wasn't explored in the lower courts.

Verrilli, facing the same question, said there was no fact-finding on this issue in the district court, because the case was decided on a motion to dismiss. On rebuttal, Carvin said that at least one of the plaintiffs would be subject to tax penalties for not having had insurance in 2014, which was sufficient to establish standing.

The justices quickly moved on, with Breyer pointing out that the ACA's definitional section defines an exchange as one established under ACA Section 1311. That section discusses the establishment of exchanges by states, while a later section, ACA Section 1321, says that, if a state doesn't establish and operate an exchange pursuant to Section 1311, the HHS shall establish and operate “such” exchange in that state.

The law's reference to an exchange established by the state is the only type of exchange referred to by the law, so “such” exchange must mean one established by either a state or the federal government. “So, what's the problem,” Breyer asked.

Answering an analogy posed by Kagan, in which she asked if one law clerk writes a memo that was assigned to another law clerk, a third law clerk still must edit “such” memo, Carvin said that it would depend on whether she was “agnostic” as to who wrote the memo. Congress wasn't “agnostic” when it referred to “such” exchange, he said.

Then the answer depends on the context, Kagan replied; it doesn't just turn on the meaning of four or five words. Breyer said that, if context is important, then the challengers' argument is weaker.

Sotomayor noted that, if the law is read in the way proposed by the challengers, it possibly would infringe on federal-state relations in violation of the Constitution. In order to ensure their citizens access to tax credits or subsidies, states would be required to establish exchanges, she said. How is that not coercion, she asked. Carvin said state sovereignty wouldn't be implicated, but Kennedy raised his own federalism concerns.

“Your argument raises a serious Constitutional question,” Kennedy said.

Concern About Consequences

Brian M. Pinheiro, practice leader of the employee benefits and executive compensation group at Ballard Spahr in Philadelphia, told Bloomberg BNA he was struck by how much time the justices spent talking about the consequences should the court uphold the challengers' position. The justices asked both attorneys what would happen if the lack of tax credits or subsidies led to the collapse of the federally facilitated exchanges.

The justices concluded that Congress surely didn't intend such a “draconian” result. Pinheiro said “they were more interested in that question” than he thought they would be.

Sotomayor said it would be a “huge disaster” if individuals in states that didn't establish exchanges weren't able to afford insurance. “Do you believe those states understood” the consequences for their citizens when they opted not to open exchanges, she asked Carvin. He replied that there would have been no incentive for states to open exchanges if it were otherwise.

Ginsburg, joined by Sotomayor, questioned that Congress would have put such an important limitation on the availability of subsidies in an obscure provision. Section 36B, she said, is an implementing provision. The limitation certainly wasn't put “where you'd expect it to be,” Sotomayor said. Alito then asked, “where else would it go?” Kagan said she wouldn't look for it in a provision that discusses coverage months.

Read With Text

Verrilli began by saying that “an Exchange established by the State” language may not be read alone. It can be read only as part of the whole text of the law, he said. The conclusion that subsidies and tax credits are available to purchasers on federally facilitated exchanges then is compelled by the ACA's “structure and design,” he said.

Verrilli also said that the “draconian” result that would follow from a decision upholding the challengers' position can't be what Congress intended.

Scalia inserted that it might not be what Congress intended, but it might be the way it wrote the statute. “Not every statute makes sense,” he said.

Scalia continued by saying that, if there is only one reasonable meaning that can be ascribed to a law, the court must interpret a statute in accordance with that meaning, no matter how disconcerting or “disastrous” the consequences. The court can't interpret a statute to mean one thing if it clearly says another, Scalia said.

Verrilli argued that there is more than one way to read this particular statute, and that is to say that it allows for the IRS to make tax credits available to individuals who buy insurance on federally facilitated exchanges.

Notice Problem

Verrilli said that the interpretation urged by the challengers raised a “profound” notice problem; that is, that the states weren't put on notice that, by failing to establish exchanges, their citizens wouldn't be eligible for tax credits or subsidies.

Alito responded that it seems odd that 34 states were “caught off guard.” Only eight opt-out states signed on to an amicus brief that argued that the states didn't realize this consequence of not establishing an exchange, he said. But, Verrilli replied, 22 states argued that they didn't understand the connection between establishing an exchange and the availability of subsidies.

Scalia and Alito suggested that something might be done going forward to remedy any problems caused by a ruling for the challengers. Do we expect that Congress will “just sit there” and do nothing, Scalia asked. Theoretically, Congress could act, Verrilli said. But, he added, as a practical matter it would be virtually impossible for a state to establish an operating exchange in time for the 2015 tax year.

Verrilli concluded by saying that “irresolvable conflicts” as to the meanings of other parts of the law would arise under the challengers' interpretation.

Kennedy asked Verrilli final questions about whether the law is ambiguous and, thus, the IRS's interpretation is entitled to deference. Verrilli answered that Section 36B delegates authority to the IRS and that the deference rule “applies to big questions, as well as small.”

Outcome Uncertain?

Kazman declined to predict an outcome, but said he was “hopeful” the court would side with the challengers.

Lazarus, on the other hand, predicted at least five votes for the government, with either Kennedy or Roberts as the swing vote. Kennedy likely will find one of two things, he said: either that Section 36B is unambiguous and compels the challengers' interpretation, and is unconstitutional; or that it is reasonable to interpret Section 36B as allowing for subsidies to be paid to individuals who buy insurance on federally facilitated exchanges and thus avoid draconian consequences.

To contact the reporter on this story: Mary Anne Pazanowski in Washington at mpazanowski@bna.com

To contact the editor responsible for this story: Fabia Mahoney at fmahoney@bna.com