Breaking! Supreme Court Will Hear Subsidy Challenge

The Supreme Court has announced that it will take the case of King v. Burwell, a lawsuit challenging the Internal Revenue Service’s decision to grant health insurance premium subsidies to individuals enrolling on federally-run health care exchanges. This is significant: if the subsidies are struck down, insurance costs for many will skyrocket.

What’s so controversial about the subsidies? Currently, all Americans with incomes up to 400 percent of poverty are considered eligible for subsidies to cover the costs of their health insurance premiums. However, that is only because the administration unilaterally decided to grant subsidies to everyone — the Affordable Care Act does not, in fact, grant subsidies to all enrollees. The text of the law provides that tax credits are available only to the insured who sign up via a health exchange “established by the State” under Section 1311 of the Affordable Care Act.  A completely different section of Obamacare, Section 1321, discusses federally-established exchanges.

But only 14 states created their own exchanges; the federal government was forced to run the exchanges for the other 36 states. Under the text of the law, individuals in those 36 states are not subsidy-eligible. However, the subsidies are what make Obamacare-compliant insurance plans affordable for many, and the idea of offering unsubsidized insurance in the majority of U.S. states was less than appealing to the Obama administration. As a result, and contrary to the text of the ACA, the Internal Revenue Service (IRS) decided to interpret the provision to allow enrollees to receive subsidies in its federally-run exchanges.

Was that interpretation valid? According to the Fourth Circuit Court of Appeals, yes. The Fourth Circuit issued its decision on July 22, the same day that the D.C. Circuit Court of Appeals ruled that the subsidies were invalid in Halbig v. Burwell. Now, the Supreme Court will resolve that question.

How important will the Court’s decision be? Very. Consider:

  • Eighty-six percent of customers on received financial assistance through subsidies.
  • The federal government runs the insurance exchanges for 36 states and is currently subsidizing health insurance costs for 5 million Americans in those states.
  • A RAND Corporation study determined that eliminating subsidies entirely would send premiums rising by up to 43 percent and drop Obamacare enrollment by 68 percent.

Notably, the validity of the subsidies affects not just the individual mandate (which does not apply if individuals cannot find insurance costing less than 8 percent of their incomes), but also the employer mandate. The ACA forces penalties of $2,000-$3,000 per employee on employers who fail to offer affordable coverage, but only if at least one of their employees receives subsidies from an exchange. Receipt of subsidies is what triggers the employer penalty. If employees in 36 states cannot access subsidies, then under the text of the law, their employers cannot be subject to a penalty for failing to offer insurance.

Clearly, the Court’s decision will have far-reaching implications (which is why the IRS decided to extend the subsidies to those in federally-run exchanges in the first place), though how the Court will rule is another question entirely. After all, in 2012, Chief Justice Roberts upheld the individual mandate, surprising countless legal experts who had expected the Court to rule the provision unconstitutional.

Comments (2)

Trackback URL | Comments RSS Feed

  1. John Fembup says:

    Q: does the federal government, or any governing body in the U.S. for that matter, have unrestricted freedom to spend money – our taxes – however it chooses, without legislative authority to do so?

    Since the answer “no” seems to me self-evident, maybe the Court will have to figure out the intent of the Congress as expressed in ACA. That’s amusing to consider, because any such Congressional intent not explicitly part of ACA as enacted may have existed only in the minds of the 0.00 percent of Democrat legislators who actually read the law before voting on it.

    I say Democrat legislators because, remember, no Republican voted for ACA in either the House or the Senate.

    Get yer popcorn early!

  2. Bob Hertz says:

    The Republicans will declare a large victory if the subsidies are overturned, but will it be a hollow victory?

    5 million people will lose subsidies. Granted that they are spread amongst 36 states and are not a voting block in any state, still, that is a flood of negative publicity.

    Insurance companies will desert the exchanges. Most insurers will by then also have deserted the off-exchange individual market.

    Some states will create their own exchanges…but not all of them by any means.
    Arizona went about 25 years before it adopted Medicaid. Mississsippi limited Medicaid to annual incomes under $6,000.

    So there is precedent for extreme stubbornness.