The U.S. Supreme Court heard oral arguments Wednesday in King v. Burwell, the latest challenge to the viability of the Affordable Care Act. The petitioners, David King and others, argued that the ACA’s statutory language only allows federal subsidies to be paid to lower-income individuals who purchase health insurance coverage under a health care exchange or marketplace established by a state.

The petitioners also argued that the Internal Revenue Service regulation that allows subsidies to be paid under all exchanges, regardless of whether they are established by a state or by the U.S. Department of Health and Human Services on a state’s behalf, is invalid. The federal government, in response, argued that the ACA permits subsidies to be paid in all exchanges, and that the applicable IRS regulation was authorized under the ACA. 

The justices were very active in questioning both parties, although the most probing questions were aimed at the petitioners’ position. Several of the justices expressed concern over the dire consequences of ruling in favor of the petitioner. Justice Scalia, on the other hand, pointed out that Congress sometimes crafts bad laws, and it is not the court’s job to convert bad laws into good laws.

Also see: How King v. Burwell could impact 5 key health care system stakeholders

Both sides have staked out legitimate positions. The petitioners pointed out that the ACA’s language calls for subsidies to be provided to individuals enrolled in health insurance coverage in an exchange “established by the state.”

Currently, only 16 states and the District of Columbia have established their own exchanges. The other 34 states have either elected not to establish an exchange or did not meet the January 1, 2014, deadline for doing so. In those cases, HHS has stepped in and established exchanges, which are available through the website HealthCare.gov, for the benefit of those states’ citizens.

Because the ACA does not expressly authorize subsidies in exchanges established by HHS on behalf of the states, the petitioners argued, the IRS regulation extending subsidies to those exchanges is invalid.

The federal government contended that Congress intended to provide subsidies through all exchanges, regardless of how they are established. The federal government argued that the court should look at the ACA as a whole, and in particular the several related sections that seem to support a construction where subsidies are universally available.

For example, the federal government points out that all exchanges are subject to ACA reporting requirements regarding the subsidies that were provided through the exchange. If the HHS-established exchanges cannot provide subsidies, the reporting requirement would be rendered superfluous.

In addition, the justices quizzed the petitioners about the impact of their position on the definitions of qualified health plan and qualified individual, noting that under their interpretation, HHS-established exchanges would have no customers and could offer no health insurance coverage.

Finally, the federal government cited the ACA’s overall purpose, which is to make coverage accessible to the 35 million Americans who lacked viable access to coverage before the ACA. Taking away the subsidies that provide access to lower-income individuals would defeat that purpose.

Once again, SCOTUS will determine the ACA’s future

The ACA’s future once again rests in the Supreme Court's hands. While King v. Burwell is not a constitutional challenge, it cuts to the very core of the delicate balance struck among the federal government, states, insurance companies, employers and individual Americans.

If the Supreme Court decides in favor of the petitioners, and rules that subsidies cannot be made available to lower-income individuals in the 34 states with HHS- established exchanges, approximately 5 million individuals will lose the subsidies that enable them to purchase health insurance through the exchange.

In addition, millions more individuals in those states will become exempt from the ACA's individual mandate, which requires individuals to enroll in health coverage or pay a penalty. If health insurance becomes more expensive for individuals, and there is no penalty for opting out of health insurance coverage, we could start to see the insurance “death spiral,” where the sickest people buy health insurance and the healthiest people (the “good risk” in insurance parlance) stay out of the insurance pool until they get sick. This would lead to higher and higher insurance premiums, and ultimately we would see insurance companies leave the market in the states where no subsidies are available.

Also see: How King v. Burwell could shake out for employers

Another consequence that has been somewhat overlooked is the impact of King v. Burwell on large employers that are subject to the ACA's employer mandate, which requires large employers to offer health insurance coverage to full-time employees or pay a penalty. If the petitioners are successful, and subsidies are not available in the 34 states with HHS-established exchanges, the employers whose workforces are limited to those states will be effectively exempt from the employer mandate penalty. Those large employers will not be required to offer coverage to their full-time employees, which will drive more individuals to the exchanges, where no subsidized coverage would be available.

We likely will not see a Supreme Court decision until the end of the current term in June. At that point, 5 million individuals will have been receiving subsidized coverage for as long as 18 months. If the petitioners are successful, the federal government needs to have contingency plans ready to handle the fallout.

Brian Pinheiro is a partner at Ballard Spahr LLP, and chairs the law firm’s business and finance department and is the practice leader of the firm's employee benefits and executive compensation group. 

The information in this legal alert is for educational purposes only and should not be taken as specific legal advice

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