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Jan. 22 — The denial of tax credits to individuals who buy health insurance through federally facilitated exchanges would have “disastrous consequences” for individuals and insurance markets in states that have elected not to create their own exchanges, the Obama administration told the U.S. Supreme Court Jan. 21.
Government attorneys told the high court that challengers to an Internal Revenue Service rule that makes tax credits, or subsidies, available to all purchasers, regardless of whether they buy insurance through an exchange run by a state or the federal government, have construed the Affordable Care Act incorrectly. If their argument that the ACA makes credits available only to those who buy insurance on state-run exchanges is accepted by the court, then they have doomed insurance markets in the remaining states to death spirals, the government’s response brief said.
Additionally, in the brief responding to arguments posed by petitioner David King and others, the government said that more than 5 million of the people who obtained coverage through exchanges in 2014 lived in one of the 34 states with an exchange run by the federal government. The “overwhelming majority of those people relied on tax credits to pay their premiums every month,” the brief said.
Through this lawsuit, the petitioners “seek to upend the Act and extinguish the coverage of millions of Americans,” the government said.
The challengers' position, set out in a Dec. 22 opening brief on the merits, is that the Internal Revenue Service overstepped its bounds when it published a rule, 26 C.F.R. § 1.36B-1, that would allow individuals access to tax credits for buying insurance on either a state-run or federally facilitated exchange.
The challengers argued that the ACA, in a section codified in the Internal Revenue Code, 26 U.S.C. § 36B, limited the availability of subsidies to individuals who buy insurance on exchanges established by the states. This would mean that subsidies aren't available to individuals who live in states that have elected to allow the federal government to operate exchanges within their borders.
The government disputed this argument, saying the ACA section on which it was premised doesn't, in fact, so limit the subsidies' availability. Section 36B provides that a tax credit shall be allowed for any eligible taxpayer and that the amount of the credit shall be determined based on the premium paid for an insurance plan “offered in the individual market within a State” that was “enrolled in through an Exchange established by the State under” 42 U.S.C. § 18031.
The act provides for the creation of exchanges by the states in Section 18031, but it gives the states “flexibility” in meeting the requirement. A state may elect to set up its own exchange, but if it doesn't, the federal government “shall establish and operate such Exchange within the State,” 42 U.S.C. § 18041(c)(1).
Each federally facilitated exchange, though run by the Health and Human Services Department, “is the same state-specific Exchange the State otherwise would have established,” the government said in its brief. Insurers offering policies on the exchanges are regulated by the states, and the premiums are based on factors unique to each state.
Contrary to the challengers' argument, the phrase “an Exchange established by the State” under Section 18031 “is a term of art that includes both an Exchange a State establishes for itself and an Exchange HHS establishes for the State,” the government said.
Section 18041(c)(1) says the HHS shall “establish and operate such Exchange within the State,” if the state elects not to do so. “The term ‘such Exchange,'” as used in this section “conveys that an Exchange HHS establishes as a statutory surrogate for a State fulfills Section 18031(b)(1)'s requirement that ‘[e]ach State' establish an Exchange,” the government's brief said. For the ACA's purposes, therefore, a federally facilitated exchange is “an Exchange established by the State” under Section 18031.
Competitive Enterprise Institute General Counsel Sam Kazman criticized the government's argument in a Jan. 22 press release. “The government takes an incredibly carefree approach to the English language by arguing the text of the Obamacare law plays second fiddle to the law’s alleged overriding purpose,” Kazman said.
“By claiming the phrase ‘established by the state’ reflects ‘style and grammar,’ the government argues ‘establish’ is no longer a verb; it's an ornament.” Kazman referred to a section of the brief that claimed the phrase “established by the state” only identified the exchange in a particular state and “reflects style and grammar,” not a substantive limitation on the type of exchange. CEI, in Washington, is coordinating and funding the case.
Robert Weiner, of Arnold & Porter in Washington, disagreed. The government's brief is “devastating,” he told Bloomberg BNA Jan. 22. “It provides example after example of how the Petitioners’ interpretation is not only inconsistent with other provisions of the Act, but renders them inoperative.”
The government's argument also “shows how the Petitioners make their ‘plain meaning' argument only by disregarding the inconvenient fact that Congress defined the terms that are in dispute,” Weiner said. “When Congress provides a definition, that is what the word means in the statute, not what we might understand them to mean if we were talking on the street.”
The government also asserted that the availability of tax credits to purchasers on all exchanges is “essential to the Act's nationwide insurance market reforms.” The act “relies on three interdependent reforms,” it said. The act prohibits insurers from denying coverage or raising premiums based on a person's medical history; it imposes a tax penalty on people who fail to obtain and maintain coverage; and it subsidizes the purchase of insurance by people who otherwise couldn't afford it.
The third and second prongs are essential to the success of the first prong, the government said. It noted that some states, in the past, adopted anti-discrimination provisions that prohibited insurers from refusing to insure or raising rates for people with certain medical conditions. These provisions, however, often led insurers to pull out of the states because they couldn't afford to do business under those terms. An inability to raise rates, married with a dearth of healthy subscribers, led the insurance markets in those states to fall into a “death spiral,” the government said.
By requiring everyone to have health insurance, and by providing subsidies for people who otherwise wouldn't be able to afford it, the ACA ensures that insurers will get paid, even if they may not exclude certain individuals or charge them more for their coverage. Without the subsidies encouraging people to buy insurance, the markets would face the same “death spiral” that they previously faced in the states, the government said.
The government also argued that the ACA's “structure and design” confirmed that tax credits are available on exchanges in every state, and that the law's legislative history didn't support the challengers' claim that the subsidies were meant to act as “carrots” to induce states to establish exchanges.
It was “well understood when the act was passed” that not every state would establish its own exchange, the brief said. Still, the tax credits weren't “structured as a conditional-spending program designed to induce the States to take action.” The credits are federal in nature, and are provided to federal taxpayers as “an integral part of national reforms” intended to apply regardless of state action, the government said.
Moreover, the brief said, “no Member of Congress ever suggested that tax credits would be available only in States that established their own Exchanges.”
The case is at the court for review of a decision by the U.S. Court of Appeals for the Fourth Circuit that upheld the IRS rule. In an unusual move, the court granted review in November 2014, even though there was no existing circuit court split on the issue. There are at least three other pending cases that raised the same issue.
Oral arguments are scheduled for March 4.
Donald B. Verrilli Jr., Joyce R. Branda, Ian Health Gershengorn, Edwin S. Kneedler, Beth S. Brinkmann, Brian H. Fletcher, Mark B. Stern, and Alisa B. Klein of the U.S. Department of Justice, Washington; Christopher J. Meade, of the Department of Treasury, Washington; M. Patricia Smith, of the Department of Labor, Washington; and William B. Schultz, of the Department of Health and Human Services, Washington, represented the government.
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