Supreme Court Upholds Nationwide ACA Subsidies and Penalties

Today, the United States Supreme Court, in its King v Burwell decision, dashed the hopes of many employers for relief from the Affordable Care Act by upholding an IRS regulation that unilaterally extended ACA individual health insurance subsidies and employer “pay or play” penalties to all of the states. The opinion rejects the challenges of citizens claiming that the text of the ACA statute exempts about two-thirds of the states from these subsidies and penalties.

What the case was about

The actual words of the law appear to limit ACA subsidies and penalties to the states that have established health insurance exchanges. This limitation was discussed as a political compromise to pass the law. All states now have exchanges, but most of them (more than two thirds) were established by the federal government after states refused to do it or after the state-established exchanges failed.

Soon after ACA’s enactment, legal scholars observed that these “federal exchange” states would be exempt from the subsidies and most of the penalties. Fearing that widespread exemptions from subsidies and penalties would undermine the overall design of the ACA, the IRS issued regulations granting subsidies and enforcing penalties in all states, regardless of the law’s plain language and regardless of the sponsorship of the exchanges. Several lawsuits were filed to challenge the IRS rule.

PREMIUM CONTENT: U.S. Affordable Care Act: Employer Reporting Requirements and Subsidy Notices

The arguments

The citizens challenging the IRS in King v. Burwell argued what the scholars had explained that the law’s plain language and legislative history limited the subsidies and penalties to states with state-established exchanges and that the IRS rule was contrary to the law and beyond IRS’s powers. They also presented legislative history showing that the literal meaning of the ACA was its intended meaning as a negotiated compromise to pass the law.

The Obama Administration urged the Court to “read the law as a whole,” to infer that Congress “must” have intended nationwide subsidies and penalties, to ignore the statutory condition on subsidies because the law didn’t bluntly warn states about that condition, and to allow IRS to use its own interpretation of the law that Congress passed.

During the months leading up to the Court’s decision, several videos emerged showing top Administration healthcare consultant Jonathan Gruber confirming that ACA subsidies were always designed to be payable only through state-established exchanges. However, that input ended up not making any difference to the Court.

The Court’s decision

The Supreme Court, in a 6-3 opinion written by Chief Justice Roberts, agreed with the administration, adopting many, if not all, of the administration’s arguments.

Justice Scalia wrote the dissenting opinion, a detailed and compelling legal analysis punctuated by his trademark candid remarks, characterizing the majority opinion as “absurd,” “unnatural,” “applesauce,” and “a contrivance” and accusing the majority of favoring this particular law, which he renamed “SCOTUScare.”

If the challengers had won the case, the IRS rule would have been nullified and the subsidies and most penalties in two thirds of the states would have disappeared, as long as those states would continue to avoid establishing state exchanges. With this decision, all of the ACA subsidies and penalties will continue in all of the states.

Consequences beyond ACA

Like many Supreme Court decisions, King does more than settle one case for the parties in the case. It establishes general legal principles that will apply to many different future issues and cases. This decision and the Court’s earlier decision on the ACA, NFIB v. Sebelius, will affect American life beyond ACA and healthcare.

Everyone expected the main issue in NFIB to be whether the ACA’s individual mandate was within the federal government’s constitutional Commerce Clause authority. The Court decided that the Commerce Clause does not authorize the individual mandate. However, the Court also held that, because the mandate included a penalty that constituted a tax, the whole mandate was a permissible exercise of the federal government’s constitutional taxing power. In other words, the federal government can regulate or compel just about any activity of the people, even without specific constitutional authority, as long as it imposes a penalty tax to encourage obedience to its commands.

The King decision implies that the words used by Congress in federal statutes are now little more than general guidelines for the federal agencies charged with enforcing them. Bureaucratic agencies can find or create ambiguity, impose their own interpretations, and act on those interpretations at great expense and with great consequences — even where the law’s words seem clear and contrary to the agency’s position. The judicial process for counteracting an agency campaign of this type takes a long time – usually years.

The King majority opinion denied that it was giving deference to the IRS interpretation and claimed that the court was itself resolving a statutory ambiguity. But the IRS had for 18 months spent billions of dollars on the subsidies, causing the majority justices to express their concern about the consequences of discontinuing the subsidies, such as the imagined “death spirals” in insurance plans and the loss of coverage by people unable to pay even community-rated premiums. The lesson to future bureaucracies is to aggressively create a politically irreversible fait accompli before the courts have time to rule against it.

MORE: Mechanics of ACA: Will my employee receive a tax credit?

George M. Reardon

George M. Reardon
George M. Reardon is an attorney whose practice is focused on the staffing industry. He can be reached at georgemreardon (at) aol (dot) com.

George M. Reardon

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