Supreme Court Upholds Premium Subsidies In 34 States With Federally-Facilitated Marketplaces

Today the U.S. Supreme Court handed down its much anticipated decision in King v. Burwell, a case challenging the legality of Federal subsidies provided to individuals in the 34 States that did not establish State-based American Health Benefit Exchanges ("State Exchanges"), and instead provide individual marketplace coverage through "Federally-facilitated Exchanges." 1

In a 6-3 decision (Roberts, Kennedy, Ginsburg, Breyer, Sotomayor and Kagan), the Supreme Court upheld a key interpretation of the Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and Education Reconciliation Act, Pub. L. No. 111-152, 124 Stat. 1029 (2010) ("ACA"). In the second opinion authored by Chief Justice Roberts in a judicial challenge to the ACA, the Court held that individuals in States where the Federal government operates health insurance Exchanges are eligible for subsidies that help them purchase insurance through the Exchanges.2

It had been speculated that the invalidation of premium subsidies in States operating Federally-facilitated Exchanges would have caused millions of people with subsidized ACA health insurance to drop their coverage, causing serious disruptions in State insurance marketplaces.

Significantly, today's decision could pave the way for formal merger agreements involving the nation's major insurers, which some analysts believed were on hold pending the outcome of the case.3 On the other hand, while the ACA has been identified as a factor driving revenue growth in the sector, Exchange business represents a relatively small portion of overall profitability of publicly-traded insurance companies.4 The stock prices of hospitals, which were expected to be the most adversely impacted by an invalidation of subsidies, rose in the wake of today's decision.5

At issue in King v. Burwell was the interpretation of Section 1401(a) of the ACA, codified as Section 36B of the Internal Revenue Code, which provides for premium tax credits to qualified taxpayers to defray the cost of individual health coverage for qualified health plans offered "through an Exchange established by [a] State under 1311 of the [ACA]" to comply with the ACA's "individual mandate" requiring individuals to obtain "minimum essential coverage" effective January 1, 2014.6 The Internal Revenue Service ("IRS") promulgated regulations interpreting the term "Exchange" for the purpose of 26 U.S.C. § 36B to cover both State Exchanges and Federally-facilitated Exchanges, finding that the language of Section 36B and other provisions of the ACA "support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange . . . and the Federally-facilitated Exchange" and that "the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges."7 Sixteen States and the District of Columbia operate State Exchanges, and 34 States participate in Federally-facilitated Exchanges, including seven States (Arkansas, Delaware, Illinois, Iowa, Michigan, New Hampshire and West Virginia) which participate in State Partnership Exchanges approved by the U.S. Department of Health and Human Services ("HHS")...