U.S. Supreme Court Divided Over Obamacare Challenge

On Wednesday March 4th, the U.S. Supreme Court appeared divided on ideological lines as it heard oral arguments on IRS’s regulations under the Affordable Care Act’s (ACA’s) premium tax credit provision. In this second major challenge to President Barack Obama’s healthcare law (Obamacare), Justice Anthony Kennedy appeared to be the possible swing vote in a final decision.

Background on ACA provisions:

The ACA credit is designed to make health insurance affordable for taxpayers who meet certain qualifying requirements. It is available for individuals who purchase affordable coverage through Exchanges.

States may establish and operate Exchanges, or the federal government may establish and operate an Exchange in place of the state where a state has chosen not to do so consistent with federal standards.

Exchanges make premium assistance payments (also called “subsidy” or “advance” payments) on the individual’s behalf to health plans, based on information available at the time of enrollment; then, at return time, the individual reconciles the actual credit that he is due with the amount of the subsidy payments that were made.

In describing the premium assistance amount,  ACA tax credit refers to “the monthly premiums for…qualified health plans offered in the individual market…which were enrolled in through an Exchange established by the State“.

Code Section 5000A requires non-exempt U.S. citizens and legal residents for tax years ending after December 31, 2013 to maintain minimum essential health insurance coverage (e.g., government-sponsored programs such as Medicare, Medicaid, Children’s Health Insurance Program; eligible employer-sponsored plans; plans purchased in the Exchange) or pay a penalty. This requirement is referred to as the “individual mandate” and the penalty as the “shared responsibility payment.”

There are a number of situations in which individuals are exempt from the penalty imposed by Code Sec. 5000A , including where individuals do not have an affordable health insurance coverage option available (i.e., whose required contribution for minimum essential coverage exceeds a percentage of the taxpayer’s household income-8% for 2014, 8.05% for 2015).

The issue:

In May of 2012, IRS issued regulations that interpreted the ACA tax credit to allow credits for insurance purchased on either a State or federally-established Exchange. Specifically, the regulations provide that a taxpayer may receive a tax credit if he is enrolled in one or more qualified health plans through an Exchange, which IRS defined as an Exchange serving the individual market for qualified individuals, regardless of whether the Exchange is established and operated by a State (including a regional Exchange or subsidiary Exchange) or by Health and Human Services (HHS).

By making credits more widely available, the regulation gives the individual and employer mandates-key provisions of the ACA-broader effect than they would have if credits were limited to state-established Exchanges. As noted above, the individual mandate requires individuals to maintain “minimum essential coverage” and enforces that requirement with a penalty. However, the penalty doesn’t apply to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed 8% of their projected household income.

Most of the 50 states have not created exchanges. Thirteen states and the District of Columbia have set them up, with another 34 run by the federal government and three operating as state-federal hybrids. Thus, by making tax credits available in the states with federal Exchanges, IRS through its regulations significantly increases the number of people who must purchase health insurance or face a penalty.

If the Supreme Court rules against the Obama administration, up to 7.5 million people in at least 34 states would lose the tax subsidies that help low- and moderate-income people buy private health insurance, according to the consulting firm Avalere Health.

Court challenge:

Taxpayers brought suit against IRS and HHS (Health and Human Services), arguing that regulation § 1.36B-1(k) invalidly interpreted the ACA tax credit provision. On November 7, 2014, the Supreme Court agreed to resolve a Circuit split between the Fourth Circuit upholding the regulation.

Oral arguments before the Supreme Court:

In the Supreme Court’s oral arguments on March 4th, Justice Kennedy, a conservative on the nine-member court who often casts the deciding vote in close cases, raised concerns to lawyers on both sides about the possible negative impact on states if the government loses the case, suggesting he could back the Obama administration. But he did not commit to supporting either side.

The Court’s four liberals all appeared supportive of the government, while conservatives Justices Antonin Scalia and Samuel Alito asked questions sympathetic to the challengers. Conservative Justice Clarence Thomas, sticking to his usual practice, asked no questions.

Chief Justice John Roberts, who supplied the key vote in a 5-4 ruling in 2012 upholding the law in the previous challenge, said little during the argument to signal how he might vote.

Justice Kennedy’s concerns focused on the possibility that if the law allows subsidies only for states that set up their own insurance exchanges, it would raise a new, more serious question about whether the law is unconstitutionally coercive by essentially punishing states that fail to establish exchanges. “There’s a serious constitutional problem if we adopt your argument,” he said to the challengers’ lawyer, Michael Carvin. Justice Kennedy later said the states would not be giving states a “rational choice” if they had to either set up exchanges or face losing subsidies for their residents. Justice Kennedy said throwing out subsidies would potentially unlawfully pressure states and cause an insurance “death spiral: but Kennedy added that the challengers may win anyway based on the plain meaning of the provision at issue.

Justice Alito disputed Obama administration lawyer Donald Verrilli’s assertions about the disruptive impact of a ruling that allows subsidies only in states that set up their own exchanges. Justice Alito said states could simply establish new exchanges. “Going forward, there would be no harm,” Alito told Verrilli. It was when Mr. Verrilli noted that people would lose tax credits immediately if the government loses, that Justice Alito suggested that if the court rules against the government in the conservative challenge to Obama’s signature domestic policy achievement, it could give states time to prepare for the impact by saying the ruling would only go into effect at the end of the year.

Justice Scalia also noted that Congress could potentially amend the law, although Mr. Verrilli expressed skepticism that the Republican-led House of Representatives and Senate would do so.

One possible outcome is that the Court could find that the law is ambiguous and defer to the government interpretation of the law. In one of his few remarks, Roberts said that would allow a future president to reverse course.

A decision is due by the end of June.