In a move that surprised many pundits, the Supreme Court has decided to review the state/federal exchange subsidy issue. 

The debate among the academics and the bloggers about what the grant means and how the case will be decided is now at full throttle. I believe the Court will rule against the Obama administration and hold that the Affordable Care Act (ACA) does not authorize the payment of subsidies unless an otherwise qualified individual enrolls in a plan through an “exchange established by a state.” If that happens, the outcome could be significant, but it might not be what you expect.

The question at issue in this case, King v. Burwell, is whether the ACA authorizes the IRS to subsidize coverage purchased by lower-income individuals and families on all ACA exchanges or only on ACA exchanges “established by a state.” 

Only 14 states (including the District of Columbia) have pure state exchanges. Another 27 have pure federal exchanges, and 10 have “partnership exchanges,” where states agreed to allow the federal government to operate the exchanges for them.

If the Court rules against federal exchange subsidies, not only will there be no access to subsidies in the federal exchange states, but employers who have employees in one or more of the federal exchange states only also will be insulated from any mandate liability (because, to be subject to an employer mandate penalty, at least one of your employees must receive a subsidy for enrolling in exchange-provided coverage).

Court Will Rule Against Obama

Section 1311 authorizes states to establish exchanges. Section 1321 directs the federal government to establish an exchange in any state that fails to do so under Section 1311. Section 1401 then authorizes the payment of subsidies to any qualified individual who enrolls in a plan through “an exchange established by the state under Section 1311.”

Strict constructionists argue this language itself is clear and that no agency can expand the clear meaning of Section 1401 to allow payment of subsidies on federal exchanges that were not “established by a state.” But others (we’ll call them contexualists) contend it’s clear Congress intended subsidies to be paid on all exchanges.

There are 308 references to “exchanges” in the ACA statutes, and 12 of those cite “exchanges established by a state.” This should give both sides plenty of fodder to support their views. Embedded in the textual debate is a separate but related debate over government power. Strict constructionists tend to interpret grants of power to the executive branch as narrowly as possible. The contextualists, however, tend to take a much broader view.

As in the last ACA Supreme Court case, I expect Chief Justice John Roberts to cast the deciding vote. The four other conservative justices—Samuel Alito, Anthony Kennedy, Antonin Scalia and Clarence Thomas—generally are strict constructionists who all lean toward limiting government power and who all voted to find the entire ACA unconstitutional two years ago. Many believe Roberts again will depart from the views of his conservative brethren as he did two years ago in upholding the ACA. I think this time will be different for four reasons:

  • The chief justice generally shares the views of his fellow conservatives on both strict construction and interpreting grants of government power narrowly.
  • There is no statutory interpretation doctrine that allows an agency to fix a “mistake” (if that’s what the subsidy language is). Only Congress can fix a “mistake.”
  • The stakes are lower in this case. Last time, a decision against the individual mandate would have gutted the statute and been unfixable by Congress. This time, if the intent really is to have the subsidies available on all exchanges, Congress can simply fix the statutory language to make that clear. (The Court does not take into account political impediments with which Congress might have to deal.)
  • The chief justice tends to support a states-rights view of government power. If the Court rules against federal exchange subsidies, any state can still get access to the subsidies by establishing a state exchange.

If the Court rules against the administration, the fallout could be minimal or considerable.

The 14 states with pure state exchanges won’t need to do anything, as the case will not affect them. I think it is relatively clear “partnership exchange” states also will need to do nothing. These exchanges can and should be treated as exchanges “established by a state” since a state must expressly authorize their creation. Section 1311(f)(3)(A) expressly gives states the power “to enter into an agreement with an eligible entity” (i.e., the federal government) “to carry out 1 or more responsibilities of the exchange.”

The action should thus be focused on the 27 pure federal exchange states. Each should be able to overcome the decision and maintain access to subsidies for their residents by becoming a “partnership exchange” with the stroke of a pen (or they could go ahead and establish their own exchanges). But will they?

There will be enormous political pressure in both directions. In seven states, legislation would be required to reverse laws prohibiting those states from establishing an exchange. Citizens groups are likely to be very vocal in support of ensuring subsidies access, and they could be joined by large business allies, as many large businesses will not be able to avoid the mandate (because they will have at least some employees in state exchange states) and they will not want to be put at a competitive disadvantage. Businesses without employees in subsidy states undoubtedly will vocally oppose those efforts.

President Obama will have two basic choices:

  • Take the Shakespearean path and let the non-state exchange states be blown up by their own petards. This is exactly the path he chose when the Supreme Court ruled state Medicaid expansion is optional under the ACA. The president said the rational choice was for the states to voluntarily expand their Medicaid programs (he also predicted political fallout for any state officials who blocked expansion). Initially, it looked like none of the Republican-led states would agree to expand their Medicaid programs, but many—Ohio and Arkansas, for example—ultimately concluded they were better off expanding their programs. This is similar to the initial Medicaid state take-up rate experience when the law initially was passed in 1965. The last state to join the Medicaid program—Arizona—did not do so until 1982.
  • Alternatively, the president could open a political dialogue with Congress to achieve an ACA grand compromise. A decision that no subsidies can be paid on the federal exchanges would at some level gut President Obama’s universal coverage ACA aspirations, particularly when coupled with the failure to fully expand Medicaid. It also might mean ACA continues to linger as a political issue. Failure to reach some finality could leave the law in jeopardy in 2016 and beyond.

Congress either will play with the president and attempt to reform the ACA or not. The Republicans likely will be split on this strategically, and the question ultimately will be who prevails—the pragmatists or the ideologues. 

Either way, the next act in this drama probably will be the Supreme Court’s decision sometime before Independence Day. The next debate will be whether the Court’s ruling will be a liberation moment.