King v. Burwell Majority Opinion Shows Savvy About Insurance, Adverse Selection

In their decision to uphold tax subsidies for policies sold on the federal health insurance exchange established by the Affordable Care Act (ACA), the Supreme Court Justices showed a keen understanding of the history of various state health reform measures and how insurance markets operate in general, invoking terms like community rating, adverse selection and death spiral.

The opinion, authored by Chief Justice John C. Roberts Jr., notes that several states tried laws in the 1990s that required guaranteed issue and community rating. Justices Anthony M. Kennedy, Ruth Bader Ginsburg, Stephen G. Breyer, Sonia Sotomayor and Elena Kagan joined in the majority opinion.

“Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them,” the opinion reads. “If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.”

Those state laws in the 1990s had unintended consequences. “They encouraged people to wait until they got sick to buy insurance,” the justices wrote—in other words, adverse selection. Insurance premiums rose. “As the cost of insurance rose, even more people waited until they became ill to buy it. This led to an economic ‘death spiral.’”

The justices held up Massachusetts as an example. While the state followed a similar script among states in the 1990s—guaranteed issue, community rating and, as a result, either death spiral or near death spiral—it shifted course in 2006 with an individual mandate, tax penalties for failure to purchase individual coverage, and tax credits. In the ACA, the justices acknowledged that the same three reforms are “closely intertwined.”

Then the opinion gets into the heart of the plaintiff’s case: The exchanges and whether the tax credits are applicable in states that did not set up their own exchanges. The plaintiffs, all residents of Virginia, which did not set up a state exchange, cited section 1401 of the ACA, which addresses tax credits: “… Exchange established by the State …” The plaintiffs don’t want to purchase health insurance, and, they argued, because Virginia does not have an exchange, they wouldn’t qualify for tax credits and, hence, would be exempted from the ACA’s coverage requirement.

However, the opinion states, the ACA defines the term “Exchange” in as an “American Health Benefit Exchange” under section 18031. But section 18041 also authorizes the secretary of Health and Human Services to establish exchanges under the same definition—“American Health Benefit Exchange.” “Otherwise,” the justices wrote, “the Federal Exchange, by definition, would not be an ‘Exchange’ at all.”

“The upshot of all this is that the phrase ‘an Exchange established by the State’ is properly viewed as ambiguous,” the opinion states. “But it is also possible that the phrase refers to all Exchanges—both State and Federal—at least for the purposes of the tax credits.” Applying a principle from a 1988 case, that held an ambiguous term “is often clarified by the remainder of the statutory scheme,” the justices got to their opinion that the federal exchange is interchangeable with a state exchange.