King v. Burwell: A “Straightforward Case of Statutory Construction”?

This is the 47th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This article discusses the oral argument at the Supreme Court yesterday in King v. Burwell, No. 14-114. King is the well-publicized case challenging a regulation of the Internal Revenue Service (IRS) under the Act, Section 1.36B-2(a)(1), allowing tax subsidies for the purchase of health insurance through either a state exchange or a federally facilitated exchange despite Section 36B(b)(2)(A) of the Internal Revenue Code, which appears to limit those subsidies to coverage purchased “through an Exchange established by the State[.]”

Counsel for petitioners, who assert that the regulation is invalid, told the Court that “[t]his is a straightforward case of statutory construction where the plain language of the statute dictates the result.” As the argument demonstrated, however, the issues are anything but “straightforward.”

This year, 37 states have federally facilitated exchanges, rather than exchanges “established by the State[.]” If petitioners’ interpretation of the Act is correct, none of those 37 states could provide subsidies to otherwise eligible individuals unless the state adopted its own exchange.

Concern that three-quarters of current exchanges might be unable to offer subsidies − and that five or six million individuals would lose subsidized insurance − has prompted a host of special interest groups to file amicus briefs in support of the IRS regulation, including briefs from 22 states (most of whom have state exchanges), members of Congress, state legislatures and associations representing health insurers, physicians and hospitals.

Plain Language vs. Context, Constitutionality and Consequences

The four liberal Supreme Court justices grilled petitioners’ counsel on his argument that “the plain language of the statute dictates the result.” Justice Ginsburg immediately questioned whether petitioners had standing, an issue the government evidentially conceded. Justice Breyer sparred with petitioners’ counsel over whether a federally facilitated exchange could nonetheless be “an exchange established by the State.”

In response to Justice Kagan, counsel for petitioners agreed that the phrase “through an Exchange established by the State” must be read in the context of the Act as a whole, but argued that the Act as a whole supported their argument. Justice Breyer suggested that what the federal government “is establishing for the State is defined as an Exchange established by the State.”

Justices Sotomayor and Kennedy both raised concerns over petitioners’ argument that subsidies were limited to state exchanges in order to encourage states to adopt exchanges:

Justice Sotomayor: “Tell me how [petitioners’ interpretation] is not coercive in an unconstitutional way.”

* * *

Justice Kennedy: “Let me say from the standpoint of the dynamics of Federalism, it does seem to me that there is something very powerful to the point that if your argument is accepted, the States are being told either to create your own Exchange, or we’ll send your insurance market into a death spiral. We’ll have people pay mandated taxes which will not get any credit on – on the subsidies. * * * [T]here’s a serious constitutional problem if we adopt your argument.”

In response, Justice Scalia and counsel for petitioners pointed out that if the unambiguous Act subsidy language were unconstitutional, then the entire subsidy provision would be struck down, rather than adopting the IRS interpretation.

Justice Kennedy seems clearly concerned about the implications of petitioners’ interpretation:

“It may well be that you’re correct as to these words, and there’s nothing we can do about it. I understand that.”

Petitioners buttressed their argument by pointing out that nothing in the legislative history of the Act suggested that federally facilitated exchanges could offer subsidies. There was no mention of the remarks of Jonathan Gruber, the Massachusetts Institute of Technology economist who consulted the Administration during the drafting of the Act, and who has been quoted as saying that tax subsidies were only available in states that set up their own exchanges.

On behalf of the federal government, the solicitor general argued that Congress could not have intended the Act to be “doomed to fail” by limiting subsidies to only state-run exchanges. In response, Justice Scalia observed that “it may not be the statute [Congress] intended. The question is whether it’s the statute that they wrote.”

Justice Scalia did not seem impressed by the solicitor general’s argument that the phrase “through an Exchange established by the State” must be read in context and to avoid adverse consequences for the Act:

If it can only reasonably mean one thing, it will continue to mean that one thing even if it has untoward consequences for the rest of the statute. * * * [I]s it not the case that if the only reasonable interpretation of a particular provision produces disastrous consequences in the rest of the statute, it nonetheless means what it says [?]

In response to the question of constitutionality raised by Justice Kennedy, the solicitor general argued that “the doctrine of constitutional avoidance becomes another very powerful reason to read the statutory text our way.” The solicitor general also pointed out that states were not given adequate notice that subsidies might be available only on state-run exchanges.

On the notice point, Justice Alito stated that the great majority of states who had federally facilitated exchanges had not filed amicus briefs supporting the IRS rule and noted that if the court were to limit subsidies to state-run exchanges, the states could establish future such exchanges if they desired, and the Court could stay its mandate to avoid disruptive consequences. “If the consequences are as disastrous as you say, so many million people without insurance and whatnot, yes, I think this Congress would act,” added Justice Scalia.

Justice Alito summarized the problem with the Act’s language as follows:

If Congress did not want the phrase “established by the State” to mean what that would normally be taken to mean, why did they use that language? Why didn’t they use other formulations that appear elsewhere in the Act? Why didn’t they say, “established under the Act”? Why didn’t they include a provision saying that an Exchange established by HHS is a State Exchange when they have a provision in there that does exactly that for the District of Columbia and for the territories?

In response, the solicitor general took the position that the full phrase is “established by the State under [Section] 1311” of the Act, which requires states to establish exchanges and provides funds to assist them in doing so, and implicitly cross-references Section 1321, which provides for federally facilitated exchanges when a state does not establish an exchange.

Finally, the solicitor general argued that the IRS had authority to interpret the statutory provision to the extent it was ambiguous, a position that troubled Justice Kennedy and Chief Justice Roberts, both of whom expressed concern that the IRS should be given authority to decide an issue involving billions of dollars in subsidies.

What Will the Supreme Court Decide?

Justices Ginsburg, Breyer, Kagan and Sotomayor seem intent on upholding the IRS interpretation, relying on the context and overall purpose of the Act, rather than the specific Act language or any authority of the IRS to interpret ambiguous language in the Act.

Justices Scalia and Alito seem to believe the phrase “through an Exchange established by the State” to unambiguously prevent federally facilitated exchanges from offering subsidies. In their view, any problems caused by this result can be remedied by Congress or by the states after the Court renders its decision.

Justice Kennedy is troubled by the constitutionality of a statute that would coerce states into adopting exchanges by limiting subsidies to only state-run exchanges. It is not clear whether he would follow the government’s suggestion that the IRS interpretation should be adopted to avoid the constitutional issue or the suggestion of Justice Scalia that such unconstitutional coercion would invalidate the whole subsidy scheme.

Justice Thomas asked no questions and Chief Justice Roberts’ only comment dealt with the problem of letting the IRS decide this critical issue. Based on their past decisions, both seem likely to agree with petitioners’ argument for the plain meaning of “established by the State,” as summarized by Justice Alito above.

On balance, Justice Kennedy may very well be the deciding vote in a probable 5-4 decision that will be announced in the next few months.

For further information, please contact either of the authors of this article, James P. McElligott Jr. and Larry R. Goldstein, or any other member of the McGuireWoods employee benefits team.