Did the Internal Revenue Service (“IRS”) misinterpret Section 36B of the Tax Code to provide the Patient Protection and Affordable Care Act (“PPACA”) tax credits to individuals enrolled in federally-facilitated health benefit exchanges? On June 25, 2015, the United States Supreme Court held that the Section 36B tax credits are available to enrollees on both state exchanges and federally-facilitated exchanges. [1]
PPACA implements three reforms to extend health care coverage to all United States citizens. [2] First, PPACA introduces “insurance market regulations” that prevent insurers from denying coverage or raising premiums due to a person’s health. [3] Second, PPACA includes a “coverage mandate” requiring all citizens to maintain health insurance or pay a tax to the IRS. [4] The coverage mandate prevents rising premiums and eventual market failures caused by citizens only purchasing insurance when they are sick; however, the individual mandate does not apply if the cost of maintaining insurance is greater than 8% of a person’s income. [6] Third, PPACA offers tax credits for the purchase of health insurance to all persons within 100 to 400 percent of the federal poverty line. [7] The applicable tax credits act as a subsidy, thereby helping many citizens finance the annual cost of health insurance without providing undue financial hardship. [8] Millions of Americans make use of billions of dollars of tax credits per year. [9]
PPACA also requires each state to create a health benefit exchange where people can purchase health insurance plans. [10] Next, PPACA directs the Secretary of Health and Human Services (“HHS”) to establish “such exchange” in a state that fails to do so itself; thereby creating a federally-facilitated exchange in the state. [11] Further, PPACA, provides that any “applicable taxpayer” is eligible for a tax credit when she purchases health insurance through “an Exchange established by the State under [42 U.S.C. § 18031].” [12]
The issue in this case is whether tax credits are available to citizens in States with a federal exchange. The plaintiffs are from Virginia, which utilizes a HHS exchange. [13] In 2012, the IRS promulgated a rule stating that the tax credits are available through both state and federal exchanges. [14] The plaintiffs claimed that the IRS altered a clear and unambiguous portion of the PPACA, which limits tax credits to “Exchange[s] established by the State,” thus wrongfully forcing the plaintiffs to comply with the coverage mandate. [15] The plaintiffs were forced to comply with the individual mandate after HHS implemented an exchange in their home state; prior to this exchange the plaintiffs were exempt from individual mandate. The plaintiffs argued that Congress intended to limit tax credits to state facilitated exchanges, thereby encouraging states to create their own exchanges. [16] On February 18, 2014, the plaintiffs challenged the IRS rule in Federal District Court. [17]
The District Court dismissed the suit, finding that the Act unambiguously provided tax credits to users of federal exchanges. [18] The plaintiffs appealed to the United States Court of Appeals for the Fourth Circuit, who affirmed with a separate rationale. [19] The Fourth Circuit held that the act was ambiguous on the issue, but ultimately deferred to the IRS’s interpretation under the Chevron deference principle. [20] On the same day of the Fourth Circuit decision, the Court of Appeals for the District of Columbia held that PPACA unambiguously restricted tax credits to state exchanges in another case, Halbig v. Burwell. [21] The plaintiffs appealed the Fourth Circuit decision and the Supreme Court granted the writ of certiorari to clear the discrepancy. [22] The Supreme Court affirmed the lower Court’s ruling extending the PPACA tax credits to users of federal exchanges. [23]
First, the Court found that Chevron deference does not apply to the IRS rule. [24] Chevron deference is a administrative law principle where a statute’s ambiguity is considered an “implicit delegation from Congress to [an] agency to fill the statutory gaps.” [25] But there are extraordinary cases where the Court can infer that Congress would not have intended to implicitly grant such authority. [26] The Court reasoned that tax credits are one of PPACA’s three essential reforms that affect millions of people and involve billions of dollars. [27] Consequently, the availability of tax credits is a “question of deep ‘economic and political significance’…central to the statutory scheme[.]” [28] Therefore, Congress would have expressly assigned such question to an agency. [29] Without deference to the IRS, the Court had to interpret the statute itself to answer the question. [30]
Next, the Court held that the phrase “an Exchange established by the State under [42 U.S.C. § 18031]” is ambiguous. [31] If statutory language is plain, its plain meaning must be enforced. [32] However, the language must be placed in context of the whole statutory scheme to determine whether its meaning is plain or ambiguous. [33]
The Court reasoned that both the plaintiffs and the federal government agree that a federal exchange qualifies as “an exchange.” [34] Further, Section 18041 of PPACA requires the HHS to establish an “exchange” within a state that chooses not to do so, which denotatively instructs the federal government to create the same exchange that the states was required to establish under Section 18031. [35] Further, the Court reasoned that “established by the State” is not always given its most natural meaning. [36] Section 18031(d)(2)(A) of PPACA requires all exchanges to make qualified health plans available to qualified individuals. [37] “Qualified individuals” are partly defined as an individual who “resides in the State that established the Exchange.” [38] If “Established by the State” was subjected to its plain meaning, a federal exchange would not qualify as an exchange since it could not provide health plans to “qualified individuals.” [39]
Lastly, the Court found that offering tax credits through federal exchanges is most compatible with PPACA. [40] Even though Section 36B is ambiguous, its meaning must be determined considering the broad structure of the ACA. [41] The statutory scheme of PPACA clarifies which meaning of the isolated provision “produces a substantive effect that is compatible with the rest of the law.” [42]
The Court reasoned that Congress’s intent was to use the three interdependent reforms in all states to extend healthcare coverage for United States citizens. [43] Since 87 percent of federal exchange users purchase health insurance using tax credits, the coverage mandate would apply to far fewer people if those tax credits were no longer available. [44] Effectively, only one reform would apply in federal exchanges. [45] Premiums would rise in both state and federal exchanges because PPACA “requires insurers to treat the entire individual market as a single risk pool,” leading to an insurance market “death spiral” from dramatically decreased enrollment. [46] Further, the Court reasoned that Congress would not have risked the collapse of PPACA in a “sub-sub-sub section of the Tax Code.” [47] If Congress wished to limit tax credits, it would have addressed it in a “prominent manner[,]” such as expressing the limitation in the definition of an “applicable taxpayer.” [48] Instead, PPACA states “tax credits ‘shall be allowed’ for any ‘applicable taxpayer,’” and applicable taxpayer is defined as anyone with an income of 100-400% of the federal poverty line. [49] Therefore, the plaintiffs interpretation conflicts with Congress’s intent and PPACA’s structure. [50]
The dissent vibrantly argued that the statutes purpose should “not overcome the clarity [of] the statute’s text. [51] As such, they argued that the plain meaning of “established by the State” limited tax credits to state-created exchanges. [52] They also accused the majority of rewriting the law to keep PPACA intact, stating, “The majority rewrites the law to make tax credits available everywhere. We should start calling this law SCOTUScare.”. [53]
Due to the broad effect tax credits had on the health insurance market, the IRS was not granted Chevron deference. [54] Contradictory provisions of the ACA deemed the phrase, “an Exchange established by the State under [42 U.S.C. § 18031],” ambiguous. [55] Reading the phrase in context with the Act’s Congressional intent and structure determined that tax credits were available through federal exchanges. [56] This case serves as important precedent for future statutes with deep political and economic significance.
[1] King v. Burwell, 2015 U.S. LEXIS 4248 (2015).
[2] Id. at *12.
[3] Id. at *12-13.
[4] Id. at *13.
[5] Id.
[6] Id.
[7] Id.
[8] Id. at *14, *16, *30.
[9] Id. at *18.
[10] Id. at *14.
[11] Id. at *14-15.
[12] Id. at *15
[13] Id.
[14] Id.
[15] Id. at *15-16.
[16] Id. at *32-34.
[17] Id. at *16.
[18] Id.
[19] Id.
[20] Id. at *16-17.
[21] Id. at *17.
[22] Id.
[23] King, 2015 U.S. LEXIS 4248.
[24] Id. at *18-19.
[25] Id. at *18 (quoting FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 159 (2000)).
[26] Id.
[27] Id. at *18.
[28] Id. at *18-19.
[29] Id.
[30] Id.
[31] Id. at *19-28.
[32] Id. at *19.
[33] Id.
[34] Id. at *20.
[35] Id. at *20-21.
[36] Id. at *22.
[37] Id. at *21 (quoting 42 U.S.C. § 18031(d)(2)(A)).
[38] Id. at *21 (quoting 42 U.S.C. § 18032(f)(1)(A)).
[39] Id. at *21-22.
[40] Id. at *28-36.
[41] Id. at *28.
[42] Id. at *28 (quoting United Sav. Assn. of Tex. v. Timbers of Inwood Forest Associates, 484 U. S. 365, 371 (1988)).
[43] Id. at *28-29.
[44] Id. at *29.
[45] Id. at *31.
[46] Id. at *31-32.
[47] Id. at *36.
[48] Id.
[49] Id. at *34-35.
[50] Id. at *28-36.
[51] Id at *56 (quoting Kloechner v. Solis, 133 S. Ct. 596 (2012)).
[52] Id at *38-69.
[53] Id at *67-68.
[54] Id at *17-19.
[55] Id at *19-28.
[56] Id at *28-36.