Some Reflections on King v. Burwell

Its Analysis and Implications

In King v. Burwell, the Supreme Court addressed the question whether federal subsidies for the purchase of medical insurance were available to individuals who purchased on federally-run exchanges. It ruled that such subsidies were available.

In reaching this conclusion, the Court disregarded the operative language of the Affordable Care Act (ACA), which authorized federal subsidies for medical insurance purchased on an exchange “established by the state” but was silent about authorizing such subsidies purchased on an exchange established by the federal government. The Court, somewhat remarkably, regarded the pivotal statutory language as “surplusage,” and regarded the straight-forward language as “not… a particularly useful guide to a fair construction of the statute.” This acknowledged disregard of quite plain statutory language raises serious questions about the appropriate method used by the Court in interpreting the ACA (or any other statute). Effectively reading pivotal statutory text out of a statute seems well beyond the umpire or referee function much proclaimed by the Chief Justice during his confirmation process.

No matter what one thinks of the outcome in terms of health policy, the Court’s approach – purportedly saving the law from itself – is stunning, even Orwellian.

The ACA’s Structure and Text

Under the ACA, there are two kinds of exchanges, marketplaces in which sellers of medical insurance offer medical insurance policies and consumers can shop for such policies. Under Section 1311, states “shall” establish an exchange. The parties and the Court recognized that that mandatory language is unenforceable because, under the anti-commandeering principle, the federal government cannot force states to participate in federal programs. Yet the mandatory language, unenforceable though it may be, remains in the statutory text and expresses a strong preference for states to establish and operate an exchange. The role of states in running exchanges was an important difference between the ACA as drafted in the Senate, which version ultimately became the law in this regard, and the House, which contemplated federally-run exchanges.

In what I have referred to as likely an “oops” provision, Section 1321 recognizes the unenforceability of the mandatory provisions of Section 1311; states cannot be ordered to establish an exchange, although they can be incentivized to do so. Section 1321 sets up a fallback provision – namely a mandatory duty on the part of the federal government to establish “such” an exchange if a state elects not to set up an exchange under Section 1311. Absent the fallback provision of Section 1321, the ACA would have failed because states could not be compelled to set up exchanges, and no federal alternative would have been present. The federal government’s obligation (or opportunity) to establish an exchange arises only when a state chooses not to or otherwise fails to establish an exchange under Section 1311.

An entirely different ACA provision – Section 1401 – deals with subsidies for income-qualified persons who purchase medical insurance.

Under the ACA, subsidies are not available for such purchases if individuals purchase medical insurance outside an exchange. Persons can buy medical insurance outside an exchange, but no subsidies attach.

In contrast, income-qualified persons who purchase medical insurance on an exchange established by a state under Section 1311 are eligible for federal subsidies. These subsidies are available on a sliding scale for persons whose income falls in the range of 100% - 400% of the federal poverty level. No subsidies on state-run exchanges are available for persons who do not qualify for a state’s Medicaid program but whose income is below 100% of poverty.

Under the Supreme Court’s 2012 decision in NFIB v. Sebelius, states are not obliged to extend their preexisting Medicaid programs to include all persons whose income is below 100% of the federal poverty level and are thereby ineligible for the ACA’s federal subsidies on a state-established exchange. Nearly half the states have chosen not to extend their Medicaid programs, even though the matching terms under the ACA are very attractive. That leaves a significant number of persons in poverty in non-expanding states uncovered by Medicaid yet ineligible for federal subsidies on state-established exchanges.

By its terms, the ACA makes no provision for subsidies to accrue to income-qualified persons who purchase medical insurance on the fallback federally-run exchanges. Concluding that the lack of such a provision in the ACA was a gap in the ACA, the Internal Revenue Service (IRS) determined to fill that gap. By regulation, it decided that federal subsidies should apply to income-qualified persons who purchase medical insurance through federal fallback exchanges. The IRS concluded that such an extension of subsidies was consistent with the ACA (even if not directly authorized by it).

This all seems very straightforward. No subsidies are available outside the exchanges. Two types of exchanges are provided for; Section 1401 of the ACA only provides for subsidy on exchanges established by the state under Section 1311. No comparable provision authorizes subsidies on federally-run exchanges established under Section 1321. And no provision exists in the ACA, with respect to federal subsidies, for a gap-identification or gap-filling role for the IRS. The federal government is charged with establishing an exchange – “such” exchange – where the states elect not to set one up. But these are exchanges, at best, established in lieu of an exchange established by a state. The ACA defines the term “state” so that it does not include the federal government.

Had the ACA enacted subsidies on both types of exchanges – those established by a state and by the federal government – it would not have taken much to achieve that objective. The term “state” could have been defined to include the federal government. But the ACA defines a “state” so as to exclude the federal government. Or the operative subsidy provision could have been generic – subsidies are available when medical insurance is purchased on an exchange, in contrast to the lack of such subsidies when medical insurance is purchased outside an exchange. Or, even simpler, the language could have authorized subsidies for state-established or federally-established exchanges.

Under the circumstances, the operative subsidy provisions of the ACA (if not ignored) cannot reasonably be understood as enacting or authorizing subsidies on federally-run exchanges. What the ACA did (as distinct from what its drafters should have done or meant to do) is altogether clear; and the Court did not really dispute that, labeling this analysis the most “natural” interpretation of the ACA’s terms.

The ACA’s Text Should Govern

A 1980 case, arising in the context of an equal protection challenge, points the way to the conclusion that what Congress did, not what it intended to do or should have done, is what should be given effect by an interpretive court.

In U.S. Railroad Retirement Board v. Fritz, the Supreme Court dealt with a statute that fundamentally restructured the railroad retirement system – somewhat as the ACA fundamentally restructured the American health care system. Under preexisting law, railroad industry retirees who had worked for both railroad and non-railroad employers could qualify for both Social Security benefits and railroad retirement benefits. These “windfall” benefits threatened the financial viability of the railroad retirement system.

Congress cut back on these retirement benefits, preserving them for some categories of workers but not for others. The line drawn in the statute – between those whose dual benefits were preserved and those whose benefits were curtailed – was subject to constitutional challenge under equal protection.

In his dissent, Justice Brennan asserted that the “purposes” of the statute were “clear.” Committee reports stated the goal of retaining “vested” retiree rights based on considerations of fairness and the legitimate expectations of retirees. Justice Brennan criticized the resolution reached by Congress – curtailing such benefits for some preexisting beneficiaries – because that resolution did not preserve preexisting rights for all beneficiaries. Congress’ resolution as reflected in the statute was at odds with the “principal purpose” of the law – “to preserve the vested earned benefits of retirees who had already qualified for them.”

The Court’s response to that line of analysis – that the “purpose” of the statute trumped the terms of the statute itself – was clear-cut: The “plain language of [the statute] marks the beginning and end of our inquiry.” The terms of the enacted law control; and resort to ostensible but unenacted provisions cannot be used analytically to overcome a law’s terms.

The approach in the Fritz case has its counterpart in interpreting statutes; the terms of the statute must govern, unless they are unclear or “ambiguous.” The Court in King conceded as much. So how did the Court overcome the clear meaning of the ACA’s operative provisions regarding the scope of subsidy? This is where Chief Justice Roberts donned the robes of Houdini and shed those of Holmes.

The Court looked to other provisions of the ACA and concluded that there could be interpretive concerns if the ACA’s provisions regarding subsidies were applied in other contexts. Most significantly, the Court looked to a provision regarding the definition of a “qualified individual” -- a person to whom all exchanges must make health plans available. The ACA defines a “qualified individual” as a person who “resides in the State that established the Exchange.” The Court found this to be a “problem,” because such a definition would mean that no qualified individuals existed for federally-run exchanges since, in those states, there would be no exchange established by the state.

Well, does that make the subsidy provision ambiguous? Hardly. It has nothing to do with the subsidy provision. And one must wonder about the Court’s attempt to anthropomorphize the statute by inferring that Congress would not “intend” to establish a regime without any qualified individuals to whom federally-run exchanges must offer their services. The anthropomorphization of the ACA – trying to determine and then implement a single, unifying theme for the entire ACA – seems wrongheaded and hopelessly naïve, as reflected in the Court’s Fritz decision. Resort to purpose can illuminate text, not serve to eviscerate it. Statutory interpretation deserves better.

The interpretive issue is what to do with the “qualified individual” provision, should it arise. That provision does not and cannot shed light on why the operative subsidy provision warrants interpretive interment. At most, the “qualified individual” provision would support an inference that the drafters assumed that state-run exchanges would be the norm, probably because of the unenforceable mandatory “shall” language in Section 1311 or, plausibly, because of the incentives built into the ACA’s subsidy provisions.

The workaround embraced by the D.C. Circuit in the Halbig case was its observation that exchanges must offer services to a “qualified individual,” but that others could make use of the exchanges as well. The D.C. Circuit’s approach comports with the ACA’s terminology, and its adoption has the virtue of focusing on the specific interpretive concern – rather than forcing the total disregard and evisceration of a clear statutory term in a different portion of the ACA (and thereby allowing federal subsidies not expressly or even impliedly provided for by the ACA).

In any event, the provisions regarding qualified individuals cannot reasonably transform clear-cut and straight-forward language regarding subsidies into ambiguous language.

The “Context” Issue

The de rigueur mantra – akin to a deus ex machina in the King Court’s rendering – is the concept of “context.” This is the Court’s “Shazam.” Say it loud and say it often – look at context, not a set of words in isolation. Seems reasonable, when helping to understand what words mean; but what when the words are clear on their own terms? The use of context not to clarify but to disregard (and even effectively excise as in King) legislative terminology is destructive of legislative supremacy. Such resort to “context” provides an executive agency or a court with a Get Out of Jail Free card – an opportunity to redo or undo the restrictive terms of a statute, thereby vesting enormous discretion and power with non-legislative actors. As reflected in the King case, this use of Houdini-like methods (or, Captain Marvel-like with reference to the term “Shazam”) improperly allows for non-legislative disregard for clear terminology in a statute – much like Justice Brennan’s claim in Fritz that the retiree benefits fix, as embodied in statutory law, was at odds with the overall purpose or objective of the law.

Purpose, Structure, and Consequences of the ACA

Once the King Court concluded that the “context” of the ACA made the otherwise-clear language of the subsidy provision of the ACA “not so clear,” that allowed the Court to delve into broader, amorphous considerations of purpose, structure, and consequences. But there again, the narrative the Court embraced was, at best, an uncertain one.

The Court contended that Congress would intend subsidies to be available on federal and state exchanges so as to avoid an insurance market death spiral. But, of course, Congress did not so provide when it would have been very easy to so provide. That type of reasoning is ex post and very much non-legislative gap-filling. Especially is that so when alternative narratives are available.

Such an alternative narrative includes the comprehensive work of Jonathan Adler and Michael Cannon (and at least one amicus brief) demonstrating that the subsidy strategy was designed to incentivize states to set up exchanges when drafters realized that states could not be commanded to set up those exchanges. Under that line of argument, the legislative preference, as formulated in the Senate version that became the ACA, was for state-established exchanges. When the drafters realized that such state-established exchanges could not be mandated (despite the mandatory language of Section 1311), they embraced an incentives approach, as permitted under the anti-commandeering cases. Those incentives, it turned out, were insufficient to induce most states to establish an exchange, but that provides no warrant for the IRS or the Supreme Court to fill a perceived gap that is not a gap contemplated by the terms of the ACA itself.

Another plausible narrative, or consequence, is that the structure of the ACA empowers states, allowing them to serve as gatekeepers. This is a federalism narrative.

The plaintiffs’ theory would establish states as gatekeepers to subsidies in their states – much as they are gatekeepers with regard to expanded Medicaid under the Court’s 2012 NFIB decision. Further, states would be empowered to provide a tax safe harbor to large employers in their states. The large-employer mandate obliges employers with 50 or more employees to provide qualifying medical insurance to their full-time employees (30 hours) or face a substantial tax/penalty. The tax/penalty is $2000 per employee per year (after an exemption for the first 30 employees). The key is that the tax is triggered when one employee receives an ACA subsidy.

If a state controls access to subsidies (e.g., by not setting up an exchange), it can bar subsidies by not establishing an exchange; states can thereby provide a safe harbor to their employers from the bite of the employer mandate/tax. The political process in such states would be charged with determining what to prioritize – strong business climate with its economic benefits and with some non-qualifying medical benefits for workers vs. expanded subsidies for residents with incomes in the 100% - 400% of poverty range. Under King, such state empowerment does not exist, a real federalism cost.

In addition, there are important separation-of-powers costs that stem from King. The ACA empowers the IRS to make various implementing regulations, but there is no indication that IRS is authorized to determine whether the terms of the ACA regarding subsidy leave a statutory gap and if so how to fill that gap.

Legislative gap-filling in this context is a job for Congress, not the courts or the IRS. The IRS regulation challenged in King reflects executive-branch overreaching, and it is disappointing that the Supreme Court did not see that the IRS regulation in the King case was part of a broader mosaic of executive-branch overreaching that the courts can and should rein in. This is especially true regarding tax subsidies, where enormous expenses are at stake and are being implemented based, at best, on an ambiguous legislative platform.

Chevron and Related Issues

Preexisting case law, stemming back over 100 years, seemingly had established a legislative clear statement rule for authorizing tax credits. That is, tax credits “must be expressed in clear and unambiguous terms.”

That earlier doctrine is in tension with the more recent approach in the Chevron case, which mandates deference to agency rulemaking where an underlying statute is ambiguous. King provided the Court with an opportunity to address and/or resolve that tension. In an earlier decision, the Supreme Court had held that an agency, faced with an ambiguous underlying statute, retained its deference under Chevron in rulemaking, even in matters related to taxation. That is the so-called Chevron Step 2 analysis; but the Court had not addressed the question of the vitality of the earlier “clear statement” mandate in the context of determining whether agency rulemaking granting tax credits is warranted – i.e., Chevron Step 1.

The King Court did not address that earlier clear statement doctrine or its relationship to the Chevron-style analysis, a missed opportunity.

As noted, a case could be made that the Chevron rule, which calls for judicial deference to agency rulemaking when an underlying statute is ambiguous, was in tension with the earlier tax-clear-statement doctrine. But the Court in King expressly declined to invoke the Chevron framework, so one would think that the earlier tax-subsidy clear-statement doctrine would still be the right precedent to use. Resolution of the tension on this issue – did Chevron erode the preexisting tax-subsidy clear statement doctrine – would have been an important clarification. But, again, the Court missed its mark, ignoring the issue entirely. The Court left the inference that the older case law regarding tax subsidies is no longer operative since the IRS’ tax subsidy under the ACA was upheld based on a law considered by the Court to be ambiguous, not clear. But the King Court left this to inference by not dealing with the status of the tax-subsidy-clear-statement rule in the modern context.

Another issue of importance arises from the Court’s refusing to apply the Chevron framework to this case.

Under Chevron, an agency receives deference for its regulations when a statute authorizes agency action but is ambiguous about how an agency should resolve a set of policy options deemed reasonable under the operative legislation. In King, the Court found the ACA to be ambiguous; so presumably under Chevron an agency can resolve policy options and receive judicial deference. That does not mean that an agency can, based purely on political preferences, undo previous agency action. But it can make changes where it chooses and defends alternative policy prescriptions authorized by underlying legislation.

In this case, a putative Republican President could redo the Obama Administration’s IRS regulation. For example, the IRS in the future could embrace the federalism goals outlined earlier, empowering states to choose between business climate considerations and tax subsidies for its residents. That would reflect an enhanced gatekeeping role for states, allowing states to provide a safe harbor from employer-mandate taxation for noncompliance with the ACA. A future IRS could analogize such a state decisionmaking role as comparable to states’ roles in providing a safe harbor from federal antitrust legislation under the Parker v. Brownstate action doctrine. Under Parker, states can insulate private parties from federal antitrust enforcement when states adopt a policy that prefers regulation to competition (in contrast to federal antitrust laws) and actively supervises private conduct to assure that state policies are being adhered to.

At the King oral argument, the question of a possible redo of the IRS regulation by a future administration was raised by the Chief Justice. Some have interpreted the Court’s avoidance of reliance on the Chevron framework as a signal that future administrations will not be afforded an opportunity to redo the existing IRS regulations by limiting tax subsidies to state-established exchanges. The contention is that the King Court interpreted the ACA and left no room for agency flexibility in embracing alternative interpretations of the ACA subsidy provisions going forward.

This is an interesting issue, and that commentary is not clearly unfounded; but I think that that set of conclusions overreads the King opinion. An ostensible reason, seemingly apparent from oral argument, that the Court likely chose not to embrace the type of deference mandated by Chevron is that the IRS was providing for enormous increases in federal tax subsidies – something that past precedent allowed only when legislation clearly authorized those subsidies. As I noted earlier, the Court did not expressly link its analysis to this earlier doctrine, but it did express its concern about granting such deference to an agency when the ACA was, at best, ambiguous.

But King does not necessarily apply symmetrically with respect to the increase or decrease of the availability of federal tax credits. The reason for skepticism in situations such as King about deference to the IRS, given the history, is that tax credits are being increased without clear statutory authorization. Where tax credits are being reduced, the concerns about clear legislative authorization are diminished, given prior precedent, and greater deference in that circumstance would seem not inappropriate. But the issue is surely fair to raise, and only time will tell if a Republican Administration is elected in 2016 and if it seeks to revisit these issues administratively.

Judicial Role Considerations

Finally, one comes to the question of judicial role. The Chief Justice received much criticism in some quarters for his rescuing of the ACA in the NFIB case by deeming the individual mandate a constitutionally-valid tax, rather than a constitutionally-questionable penalty. I saw the penalty/tax issue as one of political accountability; if Congress and the Obama Administration wanted the legal benefits of labeling the individual mandate as a tax, it should not be allowed to play political dodge-ball games by labeling the individual mandate in the ACA itself a penalty and not a tax.

But I also have recognized and respected the Chief Justice’s broader view from 20,000 feet that the Court would put itself into a difficult position to strike down the entire ACA on constitutional grounds when that legislation was the signature product of an Administration that also had a super-majority in both the Senate and the House at the time of enactment. In 2012, for the Court to invalidate the entire ACA would have been a judicial trumping of both other branches. It would have been seen as and treated as a political confrontation during the 2012 presidential election, and it would have placed the Court’s institutional role in the political cross hairs of a fierce political and partisan campaign. The Court would have stood against the political branches, and one can understand the impetus of the Chief Justice for restraint in those circumstances.

The posture in King was altogether different. The issue was legislative interpretation, not constitutional interpretation; statutory interpretation is undoubtedly within the Court’s job description, and the Court’s legitimacy is beyond criticism in that sphere. Further, the Court was not in confrontation with the other branches. It was asked to referee a dispute that pitted the IRS, an executive branch agency, against Congress, which (if plaintiffs prevailed) would be empowered to determine whether a problem existed and if so how to resolve it.

But the Congress of 2015 is under new management as compared to the Congress that enacted the ACA in 2010. If anything, that should have increased the Court’s unwillingness to use its Houdini approach to safeguard the purported broad purposes of the enacting Congress by allowing for perceived drafting gaps to be filled nonlegislatively. That is, there was a strong case for the Supreme Court to hold the enacting Congress to the text of what it had enacted.

That would have created an opportunity for dialogue, an approach that should have appeal to a Frankfurterian such as the Chief Justice. A ruling for plaintiffs would undoubtedly have had some destabilizing short-run practical consequences, but many of those concerns could have been resolved remedially through a transition phase. But a ruling for plaintiffs would also have increased the likelihood that the party in control of Congress (Republicans) and the President (a Democrat) would have to have a conversation about future changes to the ACA. And, to the extent that Congress’ Republicans had no participation in the enactment of the ACA and had a certain political validation from the legislative takeover (shared to some degree with the President’s reelection), a ruling for plaintiffs might have forced some discussion about health reform legislation that would have had the fingerprints on it of both parties.

Where the terms of the ACA were clear cut, the Court had a duty to enforce its terms; but in the face of admitted statutory ambiguity, the Court had no obligation to enforce the broad general purposes, policy preferences, or objectives when they were not embedded as enactments in the actual terms of the ACA itself. That is a role for Congress – especially a Congress under new management.

The Supreme Court, after all is said and done, is a court. Courts operate with rules. The Chief Justice noted at oral argument that the case was before the Supreme Court on a motion to dismiss. In a proceeding under a motion to dismiss, the focus is on the pleadings, not extrinsic evidence. Yet the Court’s opinion is replete with analysis that turned on extrinsic facts, such as predictions about a death spiral in the individual medical insurance marketplace. These observations have little if any role in a motion-to-dismiss proceeding. The Court easily could have reversed the grant of the motion to dismiss and remanded for further factfinding or consideration of context in a summary judgment proceeding. The subsidies would have remained in place during the pendency of those proceedings, as the result of the Court’s action would only be a reversal of a motion to dismiss, not a judgment for plaintiffs.

The Court’s treatment of these extrinsic matters in the procedural posture of ruling on a motion to dismiss further calls into question just what was going on and why in the Court.

How Far Does Executive Discretion Extend?

After King, one is left to wonder what extensions to federal subsidies could be implemented by executive action under the ACA. If broad purposes trump, and even relegate directly on-point statutory language to the dung heap of “surplusage,” can the IRS do even more?

Under the ACA, subsidies on exchanges are now available to purchasers on both federally-established and state-established exchanges. But those eligible for such subsidies must be income-qualified – i.e., persons having incomes in the range of 100% - 400% of poverty. The 100% - 400% of poverty range was adopted under the assumption that persons with lower incomes (under 100% of poverty) would be covered under states’ Medicaid programs. Indeed, in NFIB the Supreme Court ruled that the ACA went too far in assuring coverage of an expanded population under states’ Medicaid programs.

The result of NFIB is that states may opt in to expanded Medicaid with attractive financial incentives, but they have a genuine choice; they no longer must put at risk their preexisting Medicaid programs if they choose not to expand Medicaid. And nearly half of the states have, to this point, declined to expand their Medicaid programs to cover the ACA’s preferred population.

The result is that, in non-expanding states, persons with incomes under 100% of poverty may not be covered by Medicaid and yet would be too poor to qualify for tax subsidies on an exchange. The income-qualification guidelines are clearly specified in the ACA – 100% - 400% of poverty. But NFIB also makes it abundantly clear that Congress in the ACA had a clear preference that persons in poverty have medical coverage; indeed, so clear was that objective that Congress overreached by effectively (and unconstitutionally) mandating states expand their Medicaid programs to cover all those who would otherwise not be eligible for subsidies on an exchange.

Given this “context” and these “purposes,” is IRS free to issue regulations that extend subsidies on exchanges to those who are not eligible for their state’s Medicaid program but who now do not qualify for subsidies on exchanges because their incomes are too low (below 100% of poverty)? This type of expansion has not been under consideration, but wouldn’t the type of reasoning in King lend itself to this type of executive-driven expansion of subsidy availability? If operative and controlling statutory terms or provisions are consigned to the Orwellian world of “surplusage,” overborne by resort to such amorphous and malleable concepts as overall “purpose, ” or “structure,” or “context,” why is such an IRS regulation expanding subsidies (which are indisputably in accord with Congress’ overall access-oriented objectives) unsupportable? One can imagine a limitation, but just asking the question and having to do more than saying “the provisions of the ACA do not provide for such subsidies” indicate just how broad and undisciplined the Court’s decision in King really is. Maybe we should stay tuned on this.

In sum, the Court’s opinion in King was highly disappointing and institutionally corrosive; the Court missed an opportunity to empower Congress (and indirectly the states) by ruling for plaintiffs. And, in the process, the unpersuasive use of Shazam tactics in reaching its outcome undermines its own institutional credibility. This is particularly the case when the Court, in Orwellian fashion, concludes that the key operative language -- about availability of federal subsidies on exchanges established by a state -- is to be ignored as surplusage.