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Commentary: The fate of the Obamacare subsidies in the Supreme Court

Yesterday, two federal courts of appeals issued conflicting decisions on a major challenge to the operation of the Affordable Care Act (ACA).  The stakes are huge.  The rule at issue provides a big subsidy for millions of people to buy insurance.  Without those subsidies, many Americans would not be required to buy insurance, including young healthy individuals that are so important to the insurance pool.  The rule also determines whether employers have to comply with the upcoming mandate to provide insurance to their employees.

Here is how the statute works.  The ACA requires states to create “exchanges” – essentially, marketplaces – for their residents to buy health insurance.  But if a state refuses, the federal government will provide the exchange.  The law then provides tax credits for people who need financial assistance.  Without the subsidy, many people will not be subject to the “individual mandate” to buy insurance.  An employer also is required to make insurance available only if its employees receive the subsidy.

The Obama Administration has issued a rule saying that the tax credits are available for purchases not just under state exchanges but also in the roughly three dozen states in which the federal government provides the exchange.  Roughly 5.4 million people have purchased insurance through the federal exchange, and almost ninety percent of them have received the subsidy.  Many could not afford insurance without it.

Here is the legal dispute.  The law establishes a formula for determining the tax credits.  It applies to insurance that is purchased through an exchange “established by the State.”  It does not mention the federal exchange.  The challengers argue that this language is clear:  the tax credits are available only for purchases through the state exchanges.

Courts are required to apply the laws that Congress enacts and to strike down rules that violate clear statutes.  On the other hand, Congress passes a lot of laws that aren’t clear.  In those cases, courts are required to uphold rules that reasonably resolve ambiguities in the statutes.

One court of appeals (the D.C. Circuit) ruled in a split decision that the ACA clearly prohibits the subsidy for purchases from the federal exchange.  Another court of appeals (the Fourth Circuit, based in Richmond, Virginia) held unanimously that, because the law is unclear, the subsidies can be provided to everyone.  Two other challenges to the rule are still waiting for decisions from the lower courts.

It seems inevitable that the Supreme Court is going to take up the issue.  The Obama administration has said that it will ask all the judges of the D.C. Circuit to rehear that case.  And there is a good chance it will win there.  The court is now tilted heavily in favor of Democratic appointees who are less likely to think that the rule exceeds the federal government’s authority.

But even if that happens, the case seems too close and too important for the Supreme Court to pass it up.  Whatever the right answer to the legal issue is, no one can doubt its significance to millions of Americans.  And while the administration publicly argues that the challenge is meritless and politically motivated, the language of the statute actually makes the legal claim very serious.

At the very least, several of the conservative members of the Court are likely to be sympathetic.  The Justices also tend to think it is their responsibility to decide these monumental issues, even when there is no disagreement in the lower courts.

All that said, if the Supreme Court does step in, I think that the administration will win.  But it will be close.  There is a good chance that the case will be decided by the same thin five-to-four majority that upheld the constitutionality of the ACA two years ago.

The key point is that the challengers can win only if the ACA is clear; if not, then the administration gets to interpret it.  Personally, I think that the better reading of the literal text of the law is probably that Congress limited the tax subsidies to purchases on state exchanges.  But I don’t think you can fairly say that the statute’s meaning is obvious.  Instead, like a lot of massive laws that include lots of compromises, it is a bit of a mess.  And its context suggests the administration is actually right.

The challengers’ main argument is that the formula for tax credits applies only when someone buys insurance on an exchange “established by the State.”  But it is unlikely that Congress made the critical decision about who would receive the subsidy in the middle of a formula, rather than in a section of the law dealing with eligibility.

Also, it isn’t clear that the formula means to exclude purchases from the federal exchange.  Even the challengers admit that another provision of the ACA expressly refers to state-created exchanges but has to also mean the federal exchange.

You can also see why Congress might have used language referring to state-created exchanges without intending to impose a limit.  The ACA actually requires states to create an exchange, which suggests that Congress understood they would do so.  It then says that the federal government will provide the exchange as a back-up if a state refuses, which many did.

On the whole, it also seems unlikely that Congress would have intended the statute to be limited just to state-created exchanges.  The challengers make the plausible argument that Congress may have wanted to provide the subsidies as a carrot to encourage states to create exchanges.  But there isn’t much evidence in the statute’s history to support that theory.

In any event, that carrot would work more like a nuclear bomb.  It would mean that if the state refused, not only would none of its residents would receive the tax credit that is so critical to the operation of law, but that many healthy people who are critical to the functioning of the insurance marketplace would not be covered and also that none of their employers would be required to provide insurance.  It is basically unheard of for Congress to turn the functioning of major national laws over to the political decisions of the states.

In the Supreme Court, those arguments are likely to carry the day in favor of a decision upholding the rule.  Several of the Justices are probably concerned that the administration has not always been faithful to the text of this law, including in postponing the operation of the employer mandate.  And the conservative Justices in particular will have no trouble believing that the states have a major role to play.

But a major lesson to be learned from the Court’s previous decision holding that the ACA is constitutional is that a majority of the Justices do not want to determine the fate of a hugely important social issue that has been debated in the country for decades.  It will take an especially clear statutory provision for the Court to rule that the law is largely ineffective in most of the country.  Given all the ambiguities in the ACA, the reference to an exchange “established by the State” does not seem to go far enough.

We can’t yet tell for sure when we will get a final answer.  For the case to be heard in the Court’s upcoming term, a petition for review would have to be filed by early November.  The challengers could easily meet that schedule by appealing the case they lost in the Fourth Circuit.  But the Justices may wait to step in until the D.C. Circuit is completely done with its case, which could take an extra six months.  If so, then a decision would have to wait another year.  Time is probably on the administration’s side, because as a practical matter the courts will be less and less likely to strike down the subsidies as more and more Americans get the benefit of them to buy health insurance.

Recommended Citation: Tom Goldstein, Commentary: The fate of the Obamacare subsidies in the Supreme Court, SCOTUSblog (Jul. 23, 2014, 10:19 AM),