King v. Burwell: An Interchangeable Exchange

by Baker Ober Health Law

The Supreme Court ruled recently in favor of the Obama Administration and its defense of another provision of the Patient Protection and Affordable Care Act (ACA or the Act). King v. Burwell, No. 14-114 (U.S. June 25, 2015). The Court interpreted the phrase established by the State interchangeably with an exchange established by the federal government in a State, which allows necessary tax credits to flow to qualified individuals whether they buy insurance through a state-created insurance Exchange, or one created by the federal government. Depending on one’s point of view, the opinion either reinforces the Court’s view that the overall purpose of ACA is paramount to interpreting its voluminous text, or that the Court seems to engage in interpretive jiggery-pokery whenever faced with precise legal challenges to ACA’s broad mandate.


It is important to view King v. Burwell in the context of the previous legal challenge to ACA, National Federation of Independent Business v. Sebelius, 567 U.S. ___, 132 S. Ct. 2566 (2012).

In National Federation of Independent Business the Court examined an individual mandate and a state issue. The Court first explained that ACA’s individual mandate was beyond Congress’ almost unlimited Commerce Clause powers yet well within Congress’ plenary power to “lay and collect taxes.” However, the mandatory penalty for states that failed to expand Medicaid, which would have removed all of a state’s federal Medicaid funding, was struck down.

The Court explained in 2012 that removing all of a state’s federal Medicaid funding exceeded Congress’ Spending Clause authority. ACA did not expand Medicaid; instead, it created an entirely different, national health insurance benefit that exceeded the health insurance plan known pre-ACA as Medicaid. The Court removed the mandatory fail-to-expand Medicaid penalty from ACA, which left states to choose whether to accept Medicaid expansion and the contribution of at least 90 percent of the funding for the expansion from the federal fisc, or to reject Medicaid expansion altogether without any change in that state’s existing federal Medicaid contribution.

King v. Burwell provided a different challenge to ACA. Drawing heavily from policy arguments in favor of ACA, the Court’ opined that the Act’s success in insuring more individuals largely depends on three key mechanisms: (1) insurers cannot use pre-existing health conditions to determine insurance premiums; (2) every person must have health insurance or make a payment to the Internal Revenue Service (IRS); and (3) qualified individuals that do not qualify for Medicaid may get tax credits to help purchase health insurance. Without all three provisions working in unison, the coverage pool is subject to “death spiral” conditions in which there are not enough people, or not enough healthy people, in the insurance pool, causing insurers to raise rates and the system to collapse. The third provision, the tax credit to low-income individuals, is the subject in this case.

ACA allows tax credits for taxpayers enrolled in an insurance plan through “an Exchange established by the State under” ACA. The Act requires the creation of an “Exchange,” or insurance marketplace, in each state. States may establish their own Exchanges, but if they do not, the federal government will establish “such Exchange” and make it available to individuals in that state.

Meanwhile, an IRS rule made the tax credit available to qualified taxpayers who enrolled in a plan through an insurance Exchange, regardless of whether the Exchange was established and operated by a state or by the federal government. The credit enabled qualified individuals to afford insurance, join the coverage pool and support a healthy insurance system.

The four petitioners lived in Virginia, one of 34 states with a Federal Government Exchange because it did not make a State Exchange. They claimed that the Virginia Federal Exchange did not qualify as “an Exchange established by the State” by the plain terms of ACA, and so they did not qualify for any tax credits. Without those tax credits, insurance would cost them more than 8 percent of their income, exempting them from compliance with ACA and its requirement to purchase insurance.

The issue before the Court was whether ACA’s tax credits, as administered by IRS rule, are available to individuals in states that have a Federal Exchange, or only those states that establish their own Exchanges. The Court, by a majority vote of 6-3, held that the credits are available to all Exchanges, State and Federal.

Majority’s Analysis

The Court began its analysis by side-stepping Chevron deference, a theory of legal analysis by which courts defer to agency interpretation of the statutes they are charged with enforcing, unless such interpretations are unreasonable. Essentially, where a statute is ambiguous, it marks an implicit delegation from Congress to the agency to fill statutory gaps, so long as the agency does so within reason. However, as the Court said, in extraordinary cases, there are reasons to doubt that Congress intended to delegate such interpretation. Here, the Court found that the tax credit issue was deeply significant to ACA’s survival, as one of its three mechanisms for success, and so Congress would not have delegated its authority to the IRS to make a rule about which individuals, on which Exchanges, should receive the credit. Accordingly, the Court chose not to apply Chevron deference to the IRS rule, instead undertaking its own review of the statutory context and structure of ACA, paired with Congressional intent.

The Court structured its analysis in three parts, noting first that for the tax credits to be available to the Federal Exchange, the Federal Exchange would have to be “an Exchange,” which it clearly is. Second, it would have to be “established by the State.” And third, it would have to be an Exchange established under ACA. As to this third point, the Court found that by requiring the states to establish the Exchange or, alternatively, the federal government to establish “such Exchange,” ACA actually means for the Federal Exchange to be the equivalent of the State Exchange, and so the Court considered both as established “under” ACA. The second point, “established by the State,” required more analysis.

The Court read the phrase established by the State in context, with an eye towards the overall statutory scheme, rather than reading the phrase in isolation. It must be read in conjunction with the requirement that all Exchanges are required to make available qualified health plans to qualified individuals – those who reside in the “State that established the Exchange.” Indeed, the Court found that if it gave the phrase State that established the Exchange its most natural meaning, there would be no qualified individuals on Federal Exchanges, despite the fact that the Act contemplates that qualified individuals will exist on every Exchange, including the Federal Exchanges. If there are no qualified individuals, then an Exchange cannot meet ACA’s requirements, which is a preposterous outcome. Similarly, to the majority, the phrase established by the State is not used in its most natural sense throughout the Act, but is more of a moving target. The Court found it possible that the phrase was limited to State Exchanges, or to all Exchanges, both State and Federal “at least for purposes of the tax credits.” At best, it was used ambiguously enough to allow the Court to search for its meaning here.

After concluding the phrase was ambiguous, the Court was free to search the broader structure of the Act for meaning. Because ACA’s three key mechanisms for success are meant to prevent “death spirals,” the Court rejected the plain meaning of established by the State – that plain meaning would destabilize the individual insurance market in any State or Federal Exchange, which is precisely what Congress meant to avoid. Without tax credits, and without enrollees like the petitioners, the insurance coverage pool would flounder, which is not what Congress intended.

So the Court saved ACA and the IRS rule because “Congress passed the Affordable Care Act to improve health insurance markets, not destroy them.” After finding the phrase established by the State ambiguous, the Court was free to use the statutory context of the phrase to expand established by the State beyond the 16 states that had established State Exchanges. Accordingly, the tax credits apply to individuals in any Exchange, State or Federal.

Dissenting Opinion

Justice Scalia’s dissent took issue with the majority’s willingness to ignore the plain language of the law, in preference for policy, politics, and “interpretive jiggery-pokery.” It began by restating the majority holding: “when the [ACA] says ‘Exchange established by the State’ it means ‘Exchange established by the State or the Federal Government.’” Continuing, “[t]hat is of course quite absurd, and the Court’s 21 pages of explanation make it no less so.” In his eyes, the majority rendered the words by the State meaningless, with no operative effect, and none of the majority’s arguments “come close to establishing the implausible conclusion that Congress used ‘by the State’ to mean ‘by the State or not by the State.’”

Justice Scalia surmised that “[w]ords no longer have meaning if an Exchange that is not established by a State is ‘established by the State. . . .Under all the usual rules of interpretation, in short, the Government should lose this case. But normal rules of interpretation seem always to yield to the overriding principle of the present Court: The Affordable Care Act must be saved.”

While agreeing with the majority that the context of the law as a whole is important for understanding the terms of the law, the dissent notes that context is “not an excuse for rewriting them.” Furthermore, according to Justice Scalia, that “context” actually undermines the majority’s interpretation of the phrase established by the State at every turn because, for instance, other parts of the Act sharply distinguish between the states and the federal government. For instance, the states’ authority to create an Exchange comes from a totally different section of the Act than the federal government’s authority to create an Exchange.

Justice Scalia comments that “[i]t is common sense that any speaker who says ‘Exchange’ some of the time, but ‘Exchange established by the State’ the rest of the time, probably means something by the contrast.” The majority disagreed, but as Justice Scalia highlights, the majority’s nullification of the words by the State makes other parts of the Act nonsensical. For instance, the Act requires states to use secure electronic means to determine an individual’s eligibility for tax credits, but how could a state control the electronic interface that the federal government uses (if the state did not create an exchange, but relied on the Federal Exchange instead)? Similarly, the Act allows the state to oversee contracting decisions for Exchanges established by a state, yet if the state uses the Federal Exchange, surely Congress did not intend for the states to have control over federal contracting choices.

Justice Scalia was unimpressed by the majority’s death spiral rationale as well. He notes that even “[i]f true, these projections would show only that the statutory scheme contains a flaw; they would not show that the statute means the opposite of what it says.” It is not the Court’s prerogative to “rescue Congress from its drafting errors.”

Ultimately, as Justice Scalia concludes, this case, along with the prior Supreme Court decision upholding the constitutionality of ACA, “will publish forever the discouraging truth that the Supreme Court of the United States favors some laws over others, and is prepared to do whatever it takes to uphold and assist its favorites.” Justice Scalia observed wryly that perhaps ACA should be now called SCOTUScare.

Ober | Kaler’s Comments

Whether it is called ACA, Obamacare or SCOTUScare, the Court has turned down challenges to ACA founded in how ACA affects individuals because the argument supporting the individual cause failed against ACA’s greater purpose of providing health insurance to more Americans. Justice Scalia’s concluding remarks ring true, in that the majority has twice engaged in mental gymnastics to deny challenges to the individual mandate and to an individual’s ability to receive tax credits under Exchanges not established by the state.

Curiously, although not too surprising considering the scope of previous Spending Clause opinions, the Court supported the state challenge to the Medicaid expansion penalty. A plain comparison of these cases on a more basic level is that the Court seems more willing to preserve challenges tied to the state fisc and state sovereignty and less willing to be persuaded by technical, legal challenges brought for individual purposes.

It is uncertain that an actual death spiral would have occurred had the King petitioners prevailed – commercial markets are difficult to predict and the adverse selection death spiral has been espoused by naysayers for decades. More realistically, had King concluded differently, states with Federal Exchanges would have had tremendous economic and political pressure to establish State Exchanges to make the tax credit available. After all, the failure of the Medicaid expansion penalty was not fatal to the roll out of ACA. Either way, one could pick through countless statutes that distinguish between the states and the federal government and stir up questions about what was meant. This case adds to the confusion of statutory interpretation, but it saves ACA, Obamacare and SCOTUScare.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Baker Ober Health Law | Attorney Advertising

Written by:

Baker Ober Health Law

Baker Ober Health Law on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.