Can the IRS give tax credits to participants of federally-run health insurance marketplaces established under the Affordable Care Act?
In 2010, Congress passed the Patient Protection and Affordable Care Act (“ACA”). The ACA, in part, provides tax credits for insurance premiums to eligible citizens that obtain insurance through “Exchanges,” which are health insurance marketplaces. The IRS interpreted the ACA to permit tax credits to all eligible citizens regardless of whether the Exchange is federally or state-run. In this case, the Supreme Court will have the opportunity to resolve whether the ACA, which grants tax credits to individuals who obtained insurance through state-established Exchanges, also extends those tax credits to federally-established Exchanges. Several Virginia residents contend that the plain text of the ACA shows that Congress only intended for state-established Exchanges receive tax credits and that the Chevron deference is inapplicable because of the unambiguous meaning of the text. The government counters that tax credits are available to “applicable taxpayers”—a status determined independent of the type of Exchange within a citizen’s state—and, also, that the Chevron deference applies because the government’s interpretation avoids creating conflicts within the ACA. This case will profoundly impact the balance of federalism, the separation of power between the legislative and executive branches, and the American healthcare marketplace.
Questions as Framed for the Court by the Parties
Section 36B of the Internal Revenue Code, which was enacted as part of the Patient Protection and Affordable Care Act ("ACA"), authorizes federal tax-credit subsidies for health insurance coverage that is purchased through an "Exchange established by the State under section 1311" of the ACA.
The question presented is whether the Internal Revenue Service ("IRS") may permissibly promulgate regulations to extend tax-credit subsidies to coverage purchased through Exchanges established by the federal government under section 1321 of the ACA.
In 2010, to help increase health care insurance coverage, Congress passed the Patient Protection and Affordable Care Act (“ACA”). See King v. Burwell, 759 F.3d 358, 363 (4th Cir. 2014). Facilitating insurance-plan purchases, § 1311 of the ACA requires each state to establish a health insurance market place, called an Exchange, no later than January 1, 2014. See id. (referencing 42 U.S.C. § 18031). If a state “elects” not to create an Exchange, or creates an Exchange that does not satisfy federal requirements, then § 1321 of the ACA requires the Secretary of Health and Human Services to “establish and operate such Exchange within the state.” 42 U.S.C. § 18041(c); see King, 759 F.3d at 364. By the ACA’s deadline, sixteen states and the District of Columbia had created a state-run exchange, leaving the other thirty-four states with federally-run exchanges. See King, 759 F.3d at 364.
In addition to the creation of Exchanges, the ACA grants prospective lower-income purchasers a tax credit that reduces the cost of insurance plans on the Exchange. See King, 759 F.3d at 363-64. The value of that tax credit is calculated by adding the insurance assistance for a taxable year that a participant would receive for each “coverage month.” Id. at 364. Critically, the ACA (in § 36B of the Internal Revenue Code) defines “coverage month” as each month that a purchaser would have insurance that he or she obtained “through an Exchange established by the State.” See id. (quoting 26 U.S.C. § 36B). The Internal Revenue Service (“IRS”) promulgated regulations that, in part, grant these tax credits to qualifying citizens regardless of whether they obtained the insurance through a federally or state-run Exchange. See id.
Petitioners David King, Douglas Hurst, Brenda Levy, and Rose Luck (collectively, “Petitioners” or “King”) are residents of Virginia, which has a federally-run Exchange, “who do not want to purchase comprehensive health insurance.” See King, 759 F.3d at 365. Under the ACA, citizens are generally required to purchase an insurance plan or pay a tax penalty—commonly known as the “individual mandate.” See id. at 364. However, the ACA exempts from the tax penalty citizens who cannot purchase the cheapest insurance plan without exceeding eight percent of their expected annual household income. See id. In this case, without the tax credits, the lowest insurance plan available to the Petitioners would exceed eight percent of their expected annual household income, exempting them from the tax penalty. See id. at 365. However, when the IRS adds the tax credits to the Petitioners’ plans, the Petitioners’ insurance costs no longer exceed eight percent of their household income. See id. This causes the Petitioners’ exemption status to dissipate, subjecting them to the tax penalty. See id. Respondents, including Sylvia Burwell, are government officials being sued in their official capacity, or government departments and agencies (“the government”). See id. at 358.
Facing the prospect of paying the tax penalty, the Petitioners brought a suit alleging that the IRS’s regulation that granted tax credits to citizens in federally-run exchanges exceeded the agency’s statutory authority, was “arbitrary and capricious”, violated the Administrative Procedure Act (“APA”) and was, thus, void. See King, 759 F.3d at 365. The district court granted the government’s motion to dismiss the Petitioners’ claims. See id. The Petitioners appealed to the Fourth Circuit Court of Appeals, which affirmed the dismissal. See id. at 376. The Petitioners, subsequently, petitioned the Supreme Court for a writ of certiorari, which the Court granted on November 7, 2014. See Brief of Petitioner, King at 1.
In this case, the United States Supreme Court is presented with the opportunity to determine whether the IRS can interpret § 36B of the Internal Revenue Code, which allows tax credits for participants of an “Exchange established by the State under [§] 1311 of the [ACA],” to also allow tax-credits for Exchanges established by the federal government through the U.S. Department of Health and Human Services (“HHS”) under § 1321 of the ACA. See Brief for Petitioner at i. King asserts that the plain text of the ACA establishes that tax credits are available only for state Exchanges, that federal Exchanges cannot be considered the same as state Exchanges, and that Chevron deference is inapplicable since the ACA’s plain text communicates Congress’s intent. See Brief for Petitioner at 18, 21, 51. The government, on the other hand, argues that the ACA allows tax-credit subsidies to an “applicable taxpayer,” that the ACA’s text makes it clear that a federal Exchange is the same as a state-established Exchange for purposes of the ACA, and that its reading of § 36B warrants Chevron deference. Brief for Respondent, Burwell at 19, 27.
THE TEXT OF THE ACA
Does the IRS’s interpretation contradict THE TEXT’s PLAIN MEANING?
King contends that the plain text of the ACA clearly establishes that tax-credit subsidies are only available for state-run Exchanges and the IRS’s regulation granting tax-credit subsidies for both state and federal Exchanges runs contrary to this plain meaning. See Brief for Petitioner at 18. King points out that there are three sections created with the ACA (§§ 1311, 1321, and 36B) that, if read together, limit the availability of tax-credit subsidies to state-run Exchanges only. See id. at 18-21. For instance, King notes that § 36B authorizes tax credits only for taxpayers enrolled “through an Exchange established by the State under [§] 1311,” in contrast to the federal Exchanges under § 1321. Id. at 18, 20. The IRS’s interpretation applying the tax credit to all Exchanges, King argues, would disregard this clear language chosen by Congress. See id. at 20.
The government counters that § 36B authorizes tax-credits to any “applicable taxpayer” whose household income is a certain percentage above the federal poverty level, and thus, tax credit eligibility is not determined based on whether they obtained insurance through a state or federal Exchange. See Brief for Respondent at 19. Furthermore, the government asserts that the language King seizes upon is contained in two sub-clauses in § 36B, describing the formula to be used, and that this language “cannot be read in isolation.” See id. at 19-21. Contrary to King’s position, the government argues that the phrase, “an Exchange established by the State [under § 1311]”, is a term of art that includes both state-run and federally-run Exchanges. See id. at 20-21.
Do exchanges “established by the state” include federal exchanges?
King also contends that Exchanges “established by the State,” as limited by the language in § 36B, cannot be read to include federally-run Exchanges. See Brief for Petitioner at 21. King states that because the ACA “directs two distinct entities to establish Exchanges,” then the language in § 36B authorizing tax credits for Exchanges “established by the State” cannot also include federal Exchanges. See id. That is, King argues, because Congress knew it had created two different types of Exchanges, its reference to one Exchange in § 36B simply cannot be understood to include both Exchanges. See id. Also, King argues that § 1321’s language authorizing the HHS to establish “such Exchange” only “describes what the Exchange is, not who established it.” See id. at 22 (emphasis removed). King therefore contends that the word “such” only means that the HHS has to establish an Exchange identical to the one the state would have established, and not that the HHS is establishing a state Exchange. See id.
The government, in contrast, argues that the phrase “established by the State,” when read with §§ 1311 and 1321 in the ACA, also means federal Exchanges established by the HHS. See Brief for Respondent at 21. In support, the government points to the language in § 1321 that allows the HHS to “establish and operate such Exchange within the State.” See id. at 22. The government notes that, because § 1321 also refers to the “required Exchange” that states are directed by § 1311 to establish, a state’s failure to do so means that the HHS is establishing the Exchange “required” by § 1311. See id. at 22-23. The government therefore contends that a federal Exchange established by the HHS is the same as a state-established Exchange. See id. at 23. The government also points to the statutory definition of “Exchange,” which is defined as “an American Health Benefit Exchange established under section .” See id. Consequently, the government asserts that when the HHS creates an Exchange under § 1321, it is the same Exchange that a state creates under § 1311 since that is how Exchange is defined. See id.
Does King’s interpretation contradict the legislative history or congressional purpose?
While arguing that the text’s plain meaning ends the matter, King also asserts that the legislative history and Congress’s purpose for the language, nonetheless, supports holding that the tax credit applies only to state-run exchanges. See Brief for Petitioner at 20, 35, 39-40. King maintains that the language advances Congress’s goal, textually stated, of inducing states to establish exchanges. See id. at 34. Moreover, King submits, the legislative history demonstrates that this language was adopted, in part, to gain the votes of “centrist Senators” who were apprehensive about the federally-run Exchanges. See id. at 41-42. Finally, King argues that its interpretation does not bring about any objectively absurd results either in its consequences or in other parts of the ACA. See id. at 30-31.
On the other hand, the government argues that the ACA’s legislative history demonstrates that the tax credit would be available in every state; for example, the expressions by congressional members, when the statute was under consideration, that the tax credit would be available in all Exchanges. Brief for Respondent at 45-47. Furthermore, the government argues that it does not make sense that Congress would try to induce states in “so oblique a manner” by hiding the consequences in the sub-clauses of a formula. Id. at 39. Finally, the government contends that King’s interpretation would generate textual absurdities. Id. at 51.
King argues that Chevron deference is inapplicable in this case because the ACA’s text is unambiguous about tax-credits being authorized only for taxpayers who obtained insurance through state Exchanges. See Brief for Petitioner at 51. In the alternative, King asserts that even if the ACA’s text is ambiguous, Chevron deference is inapplicable for three reasons. See id. at 51. First, King states that it is implausible that Congress gave the IRS authority to decide whether to make an enormous expenditure by extending tax-credits to federal Exchanges. See id. at 51-52. Second, King notes that Chevron deference only applies after the “traditional tools of statutory construction have been exhausted” and here, the clear statement rule for tax credits, deductions, and exemptions means that Congress must express its approval of any of these in “clear and unambiguous terms,” which is not the case with the ACA. See id. at 51, 53-55. Finally, King argues that § 36B is the only ACA section within the domain of the IRS, and therefore the IRS does not have authority to administer or interpret §§ 1311 and 1321 since they are within the domain of the HHS. See id. at 51, 55-56.
The government counters by stating that § 36B authorizes the IRS to “prescribe such regulations as may be necessary” in order “to implement the [ACA’s] tax credits,” which means that an interpretation by the IRS pursuant to that authority makes Chevron applicable. Brief for Respondent at 55. The government points out that King’s interpretation of the phrase “established by the State” would create many conflicts within the ACA and as a result, it cannot be argued that “established by the State” unambiguously means that tax credits are available only for state Exchanges. See id. at 55-56. Moreover, the government contends that King’s three reasons for not applying Chevron are meritless: first, the government argues that it is more likely that Congress would have been explicit about denying tax-credits to federal Exchanges and thus, deference to an interpretation that grants tax credits to federal Exchanges is appropriate; second, the government states that Court precedent establishes that “Chevron applies with full force in the tax context,” regardless of tools of statutory construction; lastly, the government asserts that Congress delegated authority to the HHS and IRS to “administer related provisions of the [ACA]” and “coordinate their implementation,” and Chevron “applies where two agencies jointly charged with implementing a statute adopt a common interpretation.” See id. 57-58. Finally, according to the government, because the government’s reading avoids creating conflicts within the ACA, it should be given deference. See id. at 59.
This case presents the Supreme Court with the opportunity to determine whether the ACA extends tax credits to citizens of states that have federally-run health care Exchanges. See Brief for Petitioner at i. King maintains that Congress authorized the IRS to provide tax credits only for state-run Exchanges. See id. at 18. The government counters that Congress authorized the IRS to provide tax credits to both federally and state-run Exchanges. See Brief for Respondent at 18-19. The Supreme Court’s resolution of this case will impact the balance of federalism, the proper allocation of power between the legislative and executive branches, and the American healthcare system. See Brief of Amici Curiae the Galen Institute, in Support of Petitioner at 16, 21; Brief of Amici Curiae Citizens’ Council for Health Freedom et al. in Support of Petitioner at 12; Brief of Amici Curiae CATO Institute et al., in Support of Petitioner at 24.
King and supporting amici fear that if the Court permits the IRS to offer tax credits to potential participants in federally-run Exchanges, then the Court will improperly alter the federalism balance between state and federal governments. See Brief of The Galen Institute et al. at 16, 21. The Galen Institute maintains that states have traditionally regulated health insurance and that tax credits place a forced tax burden on the states and eliminate the states’ power to choose how to regulate health care. See id. at 16. Furthermore, the Missouri Liberty Project claims that some states elected to create an exchange to gain the tax credits while many states consciously declined to create a state exchange to forgo the tax credits, a forbearance which will dissolve if the IRS can offer tax credits to federally-run exchanges. See Brief of Amici Curiae The Missouri Liberty Project et al., in support of Respondent at 13–20.
On the other hand, the government and its amici argue that if the Court determines that the IRS cannot provide tax credits for federally-run exchanges, then the ACA transforms into a coercive statute that also inappropriately alters the federalism balance. See Brief of Amici Curiae Marilyn Ralat-Albernas et al. in support of Respondent at 6. A group of healthcare workers contend that King’s interpretation of the statute would result in an unconstitutionally coercive statute that ties severe fiscal injury to non-compliance with the ACA’s Exchange mandate. See id. at 6–8. A coalition of states echoes this worry and assert that King’s argument raises Tenth Amendment concerns because the ACA, under King’s interpretation, would force states to choose between either having a state-run health care Exchange or depriving its citizens of billions of tax-credit dollars—a choice the states contend is untenably coercive. See Brief of Amici Curiae the Commonwealth of Virginia et al., in Support of Respondent at 43–44.
SEPARATION OF POWERS
King and supporting amici allege that the government’s interpretation of the ACA will reallocate power from the legislative to the executive branch. See Brief of Citizens’ Council for Health Freedom et al. at 11-12. For example, the Citizens’ Council for Health Freedom contends that the ACA does not authorize the IRS to provide tax credits to federally-run exchanges, and thus, the executive branch, through the IRS, has usurped Congress’s power to create law. See id. at 12.
The government and its amici, however, contend that Congress did in fact authorize the IRS to provide tax-credits to citizens obtaining insurance through federally-run exchanges, and, accordingly, the executive followed Congress’s command and did not usurp power. See Brief of Amicus Curiae Families USA, in Support of Respondent at 25–27.
FRUSTRATION OF CONGRESSIONAL PURPOSE
King and supporting amici contend that the government’s interpretation will not further Congress’s purpose for enacting the ACA. See Brief of CATO Institute et al. at 23-24. The CATO Institute contends that Congress intended for state leadership in healthcare, which is defeated by allowing the IRS to provide tax credits to the federally-run Exchanges. See id. at 24. Moreover, Consumers’ Research asserts that the ACA will not cease to function without tax credits for federally-run exchanges, since the government will have ample opportunity to remedy negative effects. See Brief of Amicus Curiae Consumers’ Research, in Support of Petitioner at 16–17.
The government and supporting amici counter that providing affordable health insurance for all Americans is the Congressional purpose of the ACA, which would be thwarted if the IRS could only provide tax credits to participants of state Exchanges. See Brief of Amici Curiae Public Health Deans et al., in Support of Respondent at 16–17. A group of public health deans maintain that restrict tax credits to participants of state Exchanges would result in low-income citizens in two-thirds of states losing access to affordable insurance. See id. at 28. Thus, according to the Harvard Law School Center for Health Law and Policy Innovation, millions of low-income and middle-income Americans could feel the impact of such a restriction. See Brief of Amici Curiae Harvard Law School Center for Health Law and Policy Innovation, et al., in Support of Respondent at 5. Moreover, a group of bipartisan economic scholars alleges that the ACA cannot function without tax credits in all states. See Brief of Amicus Curiae Bipartisan Economic Scholars, in Support of Respondents at 16. Resultantly, citizens with preexisting conditions, according to the American Academy of Family Physicians, would not receive affordable insurance plans. See Brief of Amici Curiae American Academy of Pediatrics et al., in Support of Respondents at 19.
In this case, the Supreme Court will determine whether the IRS can extend tax credits to federal Exchanges established by the HHS despite language that allegedly authorizes tax credits only for Exchanges established by states. To resolve this issue, the Supreme Court will have to examine the text and purpose of the ACA and decide whether state and federal Exchanges are the same for the purpose of receiving tax credits. Furthermore, the Supreme Court will have to decide whether Chevron deference is applicable. The Court’s ruling will potentially alter the allocation of power between the state and federal governments as well as between the executive and legislative branches, and will have a profound effect on the American healthcare system.
- Drew Altman: How 13 Million Americans Could Lose Insurance Subsidies, Wall Street Journal blog (Nov. 19, 2014).
- Robert Barnes: Supreme Court Case on Key Obamacare Provision Takes Up this Senator’s Account, The Washington Post (Jan. 28, 2015).
- Tom Howell, Jr.: House Budget Chairman: Supreme Court Could Unravel Obamacare “Pretty Darn Quickly, The Washington Times (Jan. 12, 2015).
- Kimberly Leonard: Eligible Americans Turn Down Obamacare Tax Credits, U.S. News (Jan. 12, 2015).