Incentives Watch: U.S. Supreme Court Rules Affordable Care Act Tax Credits Are Available to Taxpayers in All States


In King v. Burwell, he U.S. Supreme Court recently upheld the validity of tax credits (subsidies) available for individuals who purchase their health care through the federal health care exchange, HealthCare.gov, as well as to individuals who purchase insurance through state-run exchanges. 

What Does This Mean?

The court held that the phrase “an Exchange established by the State” is ambiguous and when read within its statutory context, the best interpretation means any exchange established under I.R.C. §36B. As Chief Justice Roberts wrote, “the statutory scheme compels us to reject petitioner’s interpretation [of §36B] because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the [Affordable Care Act] to avoid.”

Consequently, state insurance marketplaces will not be flooded with a large number of newly uninsured individuals and fewer individuals will qualify for exemption from the individual mandate. 

Chevron Deference Does Not Apply 

The U.S. Supreme Court held that the two-step framework for analyzing an agency’s interpretation of a statute, set forth  in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., does not apply because it is “expressly unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.” Citing Utility Air Regulatory Group v. EPA, the court said, “[w]hether those credits are available on Federal Exchanges is thus a question of deep ‘economic and political significance’ that is central to this statutory scheme; had Congress wished to assign that question to an agency, it surely would have done so expressly.”

Instead, the court had to determine the meaning of §36B by “read[ing] the words ‘in their context and with a view to their place in the overall statutory scheme,’” citing FDA v. Brown & Williamson Tobacco Corp., before it determined that tax credits are available to any eligible individual who purchases insurance through any exchange, whether it be federal or state. 

Federal and State Exchanges are “Established by the State”

In its analysis, the court determined that federal and state exchanges are equivalent because they have “to meet the same requirements, perform the same functions, and serve the same purposes” and do not otherwise “differ in any meaningful way.” The only difference is that federal exchanges are established under 42 U.S.C. §18041, instead of §18031, which authorizes state-run exchanges. 

Also, the ACA defines “Exchange” to mean “an American Health Benefit Exchange established under section 18031.” Because a federal exchange established under §18041 is equivalent to a state exchange established under §18031, when bringing the definition of “Exchange” into 18041, the ACA authorizes the Department of Health and Human Services to establish and operate an exchange under §18031. “Otherwise, the Federal Exchange, by definition, would not be an ‘Exchange’ at all,” according to the Court. 

Ultimately, the U.S. Supreme Court held that, when taken within the broader context of the ACA, the phrase “an Exchange established by the State” is best interpreted as meaning any exchange established under I.R.C. §36B. Holding otherwise would undermine the basic purpose of the ACA, which is for all individuals to be able to have access to affordable health care.   

Tax Credits Not Limited to State Exchanges

The majority points out that the structure of the ACA suggests that tax credits were not intended to be limited to taxpayers who use state exchanges. Under §36B(c)(1), the Act provides that anyone with a household income between 100 percent and 400 percent of the federal poverty level is eligible to receive a tax credit. The majority rejects the petitioners’ argument that taxpayers within that income range are eligible for a tax credit but the value of that tax credit is zero, as this reading requires one to trace the meaning of the tax credit through several provisions. As the majority puts it, the petitioners’ interpretation hinges on a “sub-sub-sub section of the Tax Code” and suggests that, if Congress intended to limit the scope of the tax credits, “it would not have used such a winding path of connect-the-dots provisions about the amount of the credit.”

Context and Structure

The majority concedes that the petitioners have a strong argument about the plain meaning of the statute. However, the majority emphasizes the need to look towards the context and structure of the entire Act when interpreting the statute. The court does not see a reason for the state and federal exchanges to behave differently and feels the tax credits are necessary “to avoid the type of calamitous result that Congress plainly meant to avoid.”

Scalia Dissent

Justice Scalia, however, vehemently disagrees with the majority interpretation of the ACA. Scalia wrote a dissent that was about the same length as the actual opinion. Scalia said that the phrase “established by the State” is unambiguous and requires no further interpretation. Scalia also notes that the ACA does distinguish between “an Exchange” and “an Exchange established by the State” and that Congress would not have specified if they intended the credit to apply to both federal and state exchanges.

Scalia also  said that is not unusual for a taxpayer to be eligible for a credit but for the amount of the credit to be zero. Scalia points to several provisions outside of the ACA which are available to taxpayers, but reduce the credit amount to zero if the taxpayer has an income that exceeds a specified amount.

Scalia  suggested that perhaps Congress had a plan in limiting tax credits to taxpayers in states that established their own exchange. Scalia said that if states were faced with “disastrous economic consequences” that they may “react by setting up their own Exchanges.” This would help achieve one of the ACA’s goals of “promoting state involvement in the Act’s implementation.” 

Scalia was quite dismissive of the majority’s argument, calling their interpretation to be “jiggery-pokery” in one instance and “pure applesauce” in another. In addition, Scalia, referring to both the King v. Burwell and National Federation of Independent Business v. Sebelius decisions, accused the U.S. Supreme Court of playing favorites and suggests that the ACA should be referred to as “SCOTUScare.”

Continue the discussion on LinkedIn:  Do you agree with this decision of the U.S. Supreme Court?

by Rishi Agrawal and Annabelle Gibson