January 7, 2015

The High Stakes in King v. Burwell


  • In June, the Supreme Court will decide the legality of the IRS’s regulation that extends health insurance subsidies to people in 37 states who buy insurance on the federal exchange.

  • The clear language of the law, and comments from the law’s supporters, show the subsidies were designed to force states to set up their own exchanges.

  • The IRS decision to issue subsidies in the federal exchange (in violation of the letter of the law) increased spending, taxes, and debt beyond what Congress authorized.


King could affect millions of Americans

The Supreme Court will take up this term a case on the legality of an IRS regulation that extends health insurance subsidies to people in states with federal exchanges. As written, the president’s health care law limited those subsidies to people buying insurance in exchanges established by states, not the federal government.

The case, King v. Burwell, is being brought by plaintiffs who are harmed by the IRS’s rule. Three other sets of plaintiffs – including the states of Oklahoma and Indiana – have also brought suit over the rule. Since the availability of subsidies often triggers penalties under the employer mandate and individual mandate, nearly 57 million Americans face negative side effects like tax penalties because of the IRS rule.

King v. Burwell

The central question before the Supreme Court will be whether the executive branch can interpret laws so broadly that it essentially rewrites what Congress passed. A court ruling striking down the IRS regulation would help ensure that future administrations do not implement tax and spending schemes without congressional authorization. It would also have profound implications for health insurance markets across the country and could give Republicans the opportunity to enact reforms that increase consumer choice and lower the cost of health care.

Obamacare restricted premium subsidies to state exchanges

Section 1311 of the health care law instructed states to set up an exchange that satisfied specific requirements. Obamacare also authorized the Secretary of Health and Human Services to issue grants to states for them to establish their own exchanges.

If a state fails to create its own exchange, then section 1321 of the law directed the federal government to establish an exchange in that state. The law did not provide any funding for the creation of federal exchanges.

Section 1401 of the law specified that people may receive a premium tax credit if they enroll through “an Exchange established by the State under Section 1311” and if they meet certain income requirements.

Section 1402 of the law authorized extra government payments to insurers, dubbed cost-sharing subsidies, to further reduce out-of-pocket payments for low-income enrollees.

The law did not provide for either premium tax credits or cost-sharing subsidies for people buying coverage in federal exchanges. Congress designed the law this way for a reason. In order to overcome a filibuster, the law’s drafters had to secure the support of centrist Democrat Senators who preferred state exchanges. So the law’s drafters incentivized states to create exchanges. Because the Constitution prevents Congress from requiring states to implement federal policy, Washington has a long history of using a carrot-and-stick approach to encourage states to implement those policies.

There is clear evidence that Obamacare’s restriction of subsidies to state-established exchanges was intentional.

First, in a 2009 law review article one of the nation’s leading liberal health policy scholars wrote that Congress “could exercise its Constitutional authority to spend money for the public welfare (the “spending power”), either by offering tax subsidies for insurance only in states that complied with federal requirements (as it has done with respect to tax subsidies for health savings accounts) or by offering explicit payments to states that establish exchanges conforming to federal requirements.” Obamacare, which offered subsidies only in exchanges established by states and contained payments to states that conformed with federal requirements, had both of these elements. The author of that article was later invited to Obamacare’s signing ceremony.

 Second, on multiple occasions in 2012, Obamacare economic architect and HHS advisor Jonathan Gruber confirmed that the law had been designed to restrict tax credits to states that established exchanges. Speaking at one event, he stated, “[W]hat’s important to remember politically about this is if you’re a state and you don’t set up an exchange, that means your citizens don’t get their tax credits – but your citizens still pay the taxes that support this bill.”

Third, in early 2010 a group of liberal House Democrats from Texas wrote a letter to President Obama and then-Speaker Nancy Pelosi detailing what they viewed as significant problems with the Senate health care bill under consideration. This bill would eventually be what President Obama signed into law. Despite acknowledging the federal fallback exchange in the Senate bill, the group was afraid that Texans would “be left no better off than before Congress acted” since they believed that Texas state officials would not build an exchange. This indicates that members of Congress knew the bill tied the law’s supposed benefits to state cooperation.

The IRS issues an illegal rule

Despite the clear language of the law, in November 2011 the IRS proposed a rule allowing subsidies for people buying health insurance through federal exchanges. At least 25 members of Congress, including then-ranking member of the Senate Finance Committee Orrin Hatch, wrote the IRS that its proposed rule was inconsistent with the statute. Undeterred, the IRS made its rule final in May 2012.

A multi-year investigation by the House Oversight Committee and the Ways and Means Committee revealed serious problems with the way IRS and Treasury issued the regulation. Among the findings:

  • Early drafts of the premium-subsidy regulation contained the statutory language restricting tax credits to exchanges “established by the State.” This language was removed from the drafts in early March 2011.
  • In March 2011, Obama administration officials expressed concern that there was no direct statutory authority to interpret federal exchanges as an exchange “established by the State.”

Federal courts have been hearing challenges to the IRS rule as well. The U.S. District Court for the Eastern District of Oklahoma sided with the state of Oklahoma in its challenge to the IRS rule. The judge’s decision in September 2014 noted that the IRS rule “leads us down a path toward Alice’s Wonderland, where up is down and down is up, and words mean anything.” According to court’s analysis, the statute does not permit tax credits in exchanges established by the federal government. The judge also wrote that “the court is upholding the Act as written. Congress is free to amend the ACA to provide for tax credits in both state and federal exchanges, if that is the legislative will.” The state of Indiana has also filed suit against the IRS rule. While the U.S. District Court for the Southern District of Indiana heard oral arguments in this case in October 2014, a decision has not yet been rendered.

On July 22, 2014, two Circuit Courts of Appeals reached different decisions on the legality of the IRS rule. In a 2-1 decision, the D.C. Circuit Court ruled in Halbig v. Burwell that subsidies in federal exchanges were not allowed by the law. The D.C. Circuit found that the language in the law clearly restricted tax credits to state-established exchanges. That same day, in King v. Burwell, a three-judge panel of the Fourth Circuit in Richmond, Virginia, unanimously upheld the rule, finding that the language of the law is “ambiguous and subject to multiple interpretations.” The King plaintiffs petitioned the Supreme Court to take up the case, and in November 2014 the Supreme Court agreed to hear their appeal this term.

What if the Supreme Court finds the IRS rule to be illegal?

The IRS rule increased taxes and spending beyond what was authorized by Congress. It shifted costs from exchange policyholders to taxpayers in states that opted for a federal exchange. The rule also extended Obamacare’s employer mandate and individual mandate penalties beyond what Congress authorized. A Supreme Court decision striking down the IRS rule would undo all of this damage.

A court ruling striking down the IRS rule would not increase the premiums charged by insurers in 2015, though it would eliminate subsidies for some people buying Obamacare coverage.

According to the Congressional Budget Office, Obamacare’s subsidies will increase Washington’s debt by more than $1 trillion over the next decade. CBO estimates that about 87 percent of the budgetary cost of Obamacare’s subsidies will result from new spending, with the rest coming from a decline in tax revenue. Since most states have opted against creating an exchange, a court decision striking down the IRS rule would reduce federal deficits by several hundred billion dollars over the next decade alone.

A business and its employees are only assessed employer mandate penalties if at least one worker receives an Obamacare subsidy. If the court strikes down the IRS rule, it would essentially repeal the law’s destructive employer mandate in all states with federal exchanges. By one estimate, this would free more than 250,000 businesses and 57 million workers from being subject to the employer mandate.

A court ruling striking down the IRS rule would also free millions of people in states with federal exchanges from the individual mandate because of the mandate’s affordability exemption. Without the subsidies to lower the out-of-pocket premium, Obamacare coverage would meet the law’s definition of “unaffordability” for many people. That could free more than 8.3 million people from the individual mandate tax penalties in states with federal exchanges.

A chance for real health care reform

The Obama administration has made a large gamble on the Supreme Court upholding the IRS rule. Despite the urging of Senate Republican leaders that the administration inform current enrollees or people browsing plans on HealthCare.gov of the potential ramifications of the King decision, the administration has decided to keep Americans in the dark. In contrast, the administration has provided insurers with protection from such a ruling.

While a court decision striking down the IRS rule would protect tens of millions of people from Obamacare’s individual mandate and employer mandate – and all Americans from increased government spending and debt – roughly five million people who purchased coverage through HealthCare.gov would see their share of the premium skyrocket. When faced with the true cost of Obamacare’s many mandates and regulations, people will likely demand the repeal and replacement of the core provisions of the law. President Obama will then have much less leverage to veto Republican solutions.

Issue Tag: Health Care