Editor’s note: Watch Health Affairs Blog for more posts by Grace-Marie Turner, Sara Rosenbaum, Bill Sage, Ilya Shapiro, and others on King v. Burwell and the Supreme Court oral arguments in the case. And read Tim Jost’s Entry Point article on King v. Burwell in the March issue of Health Affairs.

One March 4, 2015, the United States Supreme Court heard oral arguments in King v. Burwell.  As every reader of this Blog knows, the issue in the case is whether the Internal Revenue Service rule that allows the federally facilitated marketplaces to grant premium tax credits is valid.

If it is not, millions of individuals in the 34 states served by the FFMs will lose their tax credits.  Without the credits, they will no longer be able to afford health insurance.  The cost of insurance to those remaining in the nongroup market will rise precipitously, causing even more Americans to lose coverage.  As the number of uninsured increases, providers will bear an increased burden of uncompensated care.  A decision for the plaintiffs, that is, will be disaster for the American health care system.

The challengers argue that this is a result Congress intended.  They contend that the subsection of the Affordable Care Act dealing with the calculation of premium tax credits limits the credits to individuals enrolled in an “Exchange established by the State.”  The government argues that this is a term of art — that Congress intended this phrase to include the federally facilitated exchanges that the ACA requires the Department of Health and Human Services to create as a fallback where the states elect not to operate their own exchange.  Dozens of other provisions of the ACA support the government’s position.

The federal district court in Virginia that originally heard the case ruled for the government, holding that the statute unambiguously supported the IRS rule.  The Fourth Circuit Court of Appeals affirmed unanimously.  The Fourth Circuit held that, although the government had the better argument, the statute was ambiguous; thus the IRS regulation should be upheld under the Chevron Rule, which requires courts to defer to administrative agency interpretations of statutory ambiguities.  Judge Davis, concurring, concluded the statute clearly supported the IRS.  In a highly unusual move, the Supreme Court took review of the case in the absence of a split between the circuits.

The argument was supposed to last an hour, but in fact went on for almost an hour and a half.  It is a masterpiece—two highly competent counsel thoroughly in control of their arguments being grilled by Justices who had obviously read the briefs, thought about the issues, and prepared themselves to ask probing and difficult questions.

Plaintiffs’ Argument

Standing.  Mr. Carvin had hardly taken the podium when Justice Ginsburg began raising questions about the standing of the plaintiffs.  The federal courts are limited by the Constitution to hearing “cases or controversies,” which has been interpreted to mean that they cannot hear cases that are solely political arguments in which no one has suffered injury.  There have been a number of media reports in recent days questioning whether the plaintiffs in this litigation have been injured in any way, and Ginsburg asked Carvin to address this.  Although the lower courts had decided the plaintiffs had standing, the question is jurisdictional and the Supreme Court can dismiss a case on its own on the basis of standing even though neither party raises it.

Although the question of standing came up again when Solicitor General Verrilli took the podium and one more time when Carvin returned for rebuttal, no one seemed eager to have the case decided on this basis at this point and everyone seemed ready to move on.

The meaning of exchange in the ACA.  Justice Breyer did move on to press Carvin, repeating the key argument of the government that “exchange” is a defined term under the ACA.  It is defined as a 1311 exchange, which in turn is defined as an exchange “established by a state.”  Section 1321 requires HHS to set up “such exchange,” that is a “required” 1311 state exchange when a state elects not to do so.

Having recited this argument, Breyer asked:  “So what’s the problem?”  Carvin responded, as he has all along, that the statute does not say an “exchange established under 1311,” but rather, an “Exchange established by the State under 1311.”

In response Justice Kagan posed a hypothetical.  If she asked one of her clerks to write a memo, another to edit it, and a third to write it if the first was too busy, and the third in fact wrote it, should the second still edit it?  Mr. Carvin, seeing where this was going (and aided by Justice Alito) protested the analogy because Congress in fact was not indifferent as to which clerk wrote the memo, that is, who set up the exchange.  But, Justice Kagan responded, the only way we know whether Congress was indifferent is from the context of the four or five words on which the plaintiffs build their case, just as the context would determine the meaning of the instructions to the clerks.

Justice Breyer pressed on.  Literally, under the statute the federal government establishes an exchange for the state, which the statute defines as an exchange established by the state.  But even if you don’t read the statute literally, federal exchanges make no sense without tax credits.  Carvin pointed out that the ACA more literally defines territorial exchanges as equivalent to state exchanges, but the justices were not persuaded of the distinction.

Interpreting the ACA to avoid unconstitutional coercion.  And here they reached what may well prove to be the turning point of the argument.  Justice Sotomayor pointed out that if the plaintiffs’ argument is right, states that elect not to operate their own exchanges face tremendous penalties.  Not only do their residents lose the tax credits, but their nongroup insurance markets will collapse and they will be blocked from reducing Medicaid eligibility (and states that already have may lose Medicaid funding altogether).  This is clearly, Sotomayor argued, unconstitutionally coercive under recent Supreme Court cases.

Justice Kennedy joined in:

Let me say that from the  standpoint of the dynamics of Federalism, it does seem  to me that there is something very powerful to the point   that if your argument is accepted, the States are being told either create your own Exchange, or we’ll send your insurance market into a death spiral.  . . . It seems to me that under your argument, perhaps you will prevail in the plain words of the statute, there’s a serious constitutional problem if we adopt your argument.

Justices Sotomayor and Kennedy were obviously raising the possibility of applying the doctrine of constitutional avoidance, under which a statute should be interpreted to avoid constitutional difficulties if possible.  Justice Scalia pointed out that the doctrine only applies if a statute is unclear, a point Carvin readily embraced, but Justice Kennedy insisted that this was an issue to keep in mind in interpreting the statute.  To be clear, they were not considering holding the statute unconstitutional, but rather interpreting it to avoid any constitutional issues.

Carvin went on to argue that many federal statutes require states to take certain actions or forfeit federal benefits, such as Medicaid, but Justice Ginsburg responded that those are grants in aid programs where there is no federal fallback.  The states simply take the money or leave it.  She could think of no programs where Congress creates a federal fallback option but then leaves it powerless to accomplish the program’s goal.

Carvin responded that subsidies were not necessary for the exchanges to work, but Justice Kagan pointed out that when Carvin was before the court in the NFIB case in 2012 he had said that they were, that insurers would not sell on the exchanges without the subsidies.  Carvin admitted this, but said that Congress had expected all 50 states to establish exchanges; Justice Sotomayor asked why, then, the fallback exchange?

Mouse holes.  Mr. Carvin argued that there was a great deal of legislative history suggesting that exchanges were valuable as one-stop shopping markets, but no legislative history suggesting that premium tax credits were essential for them to work.  Justice Sotomayor responded, however, that Congress would have not hid a provision this threatening to the states in a “mouse hole,” like the section of the law dealing with calculation of tax credits, since its consequences were potentially so great.

Further discussion of the contradictory stance Mr. Carvin had taken in the earlier litigation ensued, interrupted by the Chief Justice, who reminded Mr. Carvin that he had lost the last time around and that perhaps it made sense for him to change his story.  Mr. Carvin proceeded to emphasize his argument that Congress wanted the states to run the exchanges and limited the subsidies to state-operated exchanges to encourage them to do so. Moreover, the term “exchange established by the state” would not have been used by a “rational, English-speaking person.” to include federally facilitated exchanges.

Justice Kagan then raised again the mouse hole issue, pointing out that it took a year and a half for anyone to notice this provision, and asking how this gave clear notice to the states, as is required by the Constitution when Congress imposes burdens on the states.  Mr. Carvin continued to maintain that it made the most sense to put the provision in the tax credit section of the statute, while Justice Kagan contended that it would logically go in the section describing the flexibility states had to establish exchanges or let the federal government do it.

The consequences of the competing statutory interpretations.  Justice Breyer moved on to point out a number of anomalies caused by Carvin’s interpretation of the statute:  employers in a federal exchange state do not have to pay the employer mandate penalty unless they have an employee in a state-exchange state, in which case they do; federal exchange states must maintain their 2010 Medicaid eligibility standards forever while states with state-operated exchanges do not; federally facilitated exchanges cannot have qualified individual enrollees.

Carvin responded first by saying that the qualified individual argument is a red herring.  The ACA defines qualified individual as an “individual that resides in the State that established the Exchange.”   Carvin asserted that if the government lost, it would essentially ignore this provision rather than empty out the exchanges.  He also argued that the government’s interpretation created other anomalies.  The Medicaid provisions of the ACA, for example, require state Medicaid and CHIP programs to coordinate with the “Exchange established by the State” on the pain of losing all Medicaid funds.  How, Carvin asked, can they ensure coordination if the exchange is federally run?

This argument seems to me to be exactly wrong, as the Solicitor General pointed out later.  In fact, if states can only receive federal Medicaid funding if they coordinate with a state-operated exchange, then two-thirds of the states should lose their Medicaid funding– all of it, not just for the expansion population but for nursing homes and Medicare supplementation and everyone.  Of course, if states are not only faced with losing premium tax credits but also Medicaid funding, the unconstitutional coercion argument becomes even more forceful, but a rigid reading of “Exchange established by the State” seems to demand this result.

Mr. Carvin proceeded to address other anomalies, concluding with an extended colloquy about the meaning of “qualified individual,” arguing that an individual does not need to be a “qualified individual” to enroll in an exchange, a proposition that puzzled Justice Kagan.

A key point of contention.  As Mr. Carvin’s opening argument drew to a close, a key disagreement came into focus.  As Mr. Carvin tried to explain what “qualified individual” could mean other than an individual eligible to enroll through an exchange; he contended that, having established his interpretation of “Exchange established by the State” as a fixed star in the firmament, it was only necessary to interpret the remainder of the statute to avoid an absurd result.  Justice Kagan responded,

But we are interpreting a statute generally to make it make sense as a whole, right?  We look at the whole text.  We don’t look at four words.  We look at the whole text, the particular context, the more general context, try to make everything harmonious with everything else.

How King v. Burwell is decided may largely turn on which of these two approaches to fidelity to the text of the statute the Court chooses

The Government’s Argument

Standing.  Solicitor General Verrilli then took the podium.  He began by addressing the issue of standing.  While not exactly admitting that one or more plaintiffs had standing, he made it clear that the government had no interest in contesting this issue and that he would prefer to move on to his argument on the merits.

The government’s statutory interpretation approach.  His merits argument was that, first, the only way to read the text of the ACA to make sense was to conclude that federally facilitated exchanges could grant premium tax credits; and, second, that this reading was compelled by the Act’s structure and purpose.  The plaintiffs’ reading of the statute would create “rump exchanges doomed to fail,” and “make a mockery of the statute’s . . .. express textual promise of State flexibility.”  It would lead to insurance death spirals and deprive millions of affordable care.

To which Justice Scalia responded that there are statutes that in fact turn out to be ill-considered and don’t work.  Just because a statute doesn’t make sense doesn’t mean that the Court can “twist the words to make it make [sense].”  General Verrilli picked up Justice Kagan’s earlier theme that a statute must be read as a harmonious whole, but Justice Scalia responded that if a statue can only mean one thing, it must be read that way even if the reading has “untoward consequences for the rest of the statute.”  Justice Scalia challenged Verrilli to name one case in which a provision was unambiguous, but the Court had interpreted it otherwise to avoid disastrous results.  General Verrilli pointed to the Brown v. Williamson tobacco regulation case where the Court had concluded that tobacco was not a drug, despite the fact that it was under the unambiguous definition of drug in the statute, to avoid the result of such an interpretation.

Coercion redux.  Justice Alito then asked whether General Verrilli agreed that the plaintiff’s interpretation of the statute made it unconstitutionally coercive.  This question put General Verrilli in a difficult position, as the Solicitor General’s job is to defend statutes against claims of unconstitutionality, but General Verrilli did admit that this was a “novel issue.”  Justice Kennedy rejoined the debate at this point, contending that the plaintiff’s argument did raise an issue of unconstitutional coercion, and that the doctrine of constitutional avoidance would seem to apply. Without conceding unconstitutionality, General Verrilli assented that constitutional avoidance should apply, and not just because the plaintiff’s interpretation was coercive but also because the states were not given adequate notice of the consequences of failing to operate their own exchange.

To this, Justice Alito asked why only six (factually ten) of the 22 states that signed the amicus brief for the government were federal exchange states.  Why were the others not complaining?  General Verrilli responded that all 22 states complained of lack of notice, and that 3 of the 8 (I count 7) states that filed an amicus brief for the plaintiffs had filed comments on the IRS proposed rule but failed to raise this issue.   Alito suggested that the states could always establish their own exchanges now that they understood the rules, but Verrilli noted the immense damage that would be caused in the interim. (Interestingly, Justice Alito counted four states that are partnership states as state  exchange states.  HHS has always considered these to be federal exchange states, and so did the lower courts and the plaintiffs in their briefs.)

An interesting approach from Justice Alito.  At this point Justice Alito made a truly novel suggestion.  What if we ruled for plaintiffs but delayed the mandate to the end of the tax year?  Verrilli questioned the authority of the Court to do this — the Court cannot simply create tax credits not authorized by Congress — but also pointed out the tremendous practical problems of establishing an exchange in this short a time frame.

Justice Scalia suggested that Congress would fix the problem.  At this point the transcript records:

GENERAL VERRILLI:  Well, this Congress, Your Honor, I — I —    (Laughter.)

What did Congress want?  General Verrilli moved on, refocusing the discussion on the objective, textual, indications of what Congress in fact did in 2010.  First, it created federal exchanges, which made no sense if Congress thought every state would establish its own exchange.  This scheme, Verrilli contended in response to an interjection from Justice Kennedy, promoted federalism by giving the states a choice as to how to participate in the implementation of the act.

Second, the title of section 1321, which creates the federal exchange, refers to state flexibility, which makes no sense if the states are effectively given no choice but to operate their own exchange.  And third, if Congress really meant to bludgeon the states into creating exchanges under threat of losing the premium tax credits, it would not have buried the threat in a section on calculating tax credits where no one would see it.

Justice Scalia responded by arguing that the statute was “pushed through on expedited procedures” and unsurprisingly had “imperfections.”  Verrilli disagreed, pointing out that the language came out of the Senate Finance Committee markup, which went on for weeks and was covered by C-Span.

Justice Scalia, who apparently was unaware of the Democratic congressional members’ amicus brief, then asserted that the provision was added at the instance of senators who opposed the federal government “running the whole thing.”  General Verrilli pointed out that Carvin had argued that Senator Ben Nelson had insisted on this, but, first, there is no contemporaneous evidence of this; second, Senator Nelson insists it is not true; and three, the negotiated provisions of the bill are found in Title X, and none have anything to do with this.

The heart of the matter.  Justice Alito then asked the central question in the litigation:  “If Congress meant to empower federal exchanges to grant tax credits, why did it use the phrase “established by the State,” rather than “established under the Act,” or “established within the State”?  Why not say that a federally facilitated exchange is a state exchange?  General Verrilli responded by saying that the statute in fact says “established by the State under section 1311,” and that 1311 includes federal exchanges.

This response confused Justice Kennedy and failed to satisfy Justice Alito, who asked why the statute did not just say “established under 1311”?   General Verrilli responded that the phrase refers to a specific exchange located geographically in a particular state.  Moreover, under section 1321, a state as surely “establishes” an exchange by electing to have the federal government operate the exchange as it does by operating it itself.

Justice Scalia was not satisfied.  He described as “gobbledygook” the government’s argument that the statute’s reference to HHS establishing “such” exchange made the federally facilitated exchange a state exchange.  General Verrilli disagreed, contending that his reading of the statute was the only reading that is consistent with the ACA’s proclamation that a state “shall” establish an exchange and the Tenth Amendment’s prohibition against Congress requiring states to participate in federal regulatory programs.  A state can establish an exchange by defaulting to the federal government to do so.  This is the only way to read the statute as a harmonious whole.

Justice Alito then asked:  What about other places in the statute that refer to an “Exchange established by the State”?  Don’t they refer only to state-operated exchanges?  Specifically, Justice Alito referred to the provisions requiring state Medicaid and CHIP programs to coordinate with an “Exchange established by the State.”  In response General Verrilli pointed out that this provision assumes that there will be an exchange in every state for the Medicaid and CHIP programs to interface with, which will not be possible if only state operated exchanges qualified.  He might have gone on to say that the clear import of Carvin’s argument on this front was that no state could have a Medicaid program without a state-operated exchange.

General Verrilli, however, proceeded instead to point out anomalies that follow from the plaintiff’s interpretation.  Exchanges can only sell “qualified health plans,” and “qualified health plans” must be determined to be in the interest of “qualified individuals,” and “qualified individuals” must reside in the state that established the exchange.  Justice Alito responded that there is no provision that says only qualified individuals can purchase coverage through the exchange.  But General Verrilli responded that there is no other way of reading “qualified,” proceeding to refute the arguments Mr. Carvin had made to explain away the term qualified.

Chevron deference.  At this point Justice Kennedy asked if General Verrilli was contending that the statute was ambiguous and that therefore the Chevron rule should cause the Court defer to the agency.  If so, continued Justice Kennedy, it seems like a drastic step to defer to the IRS when billions of dollars in subsidies are at stake.  He further asserted that precedent suggested the Court should only defer to the IRS on the question of deductions when the law was “very, very clear,” and that the IRS should have pointed out this ambiguity to Congress.

General Verrilli first asserted that the Court should rule for the government on the text without resorting to Chevron deference, but that it should defer to the IRS if it found ambiguity.  Chevron applies to big questions as well as small questions and to the IRS just like any other agency.

At this point the Chief Justice, who had been silent for much of the argument, interjected that if Chevron applied, a subsequent administration could come up with a different interpretation.  General Verrilli responded that a subsequent administration would need a strong argument for doing so, and concluded his argument by asking the Court to rule for the government.

Plaintiffs’ Rebuttal

As Mr. Carvin began his brief rebuttal, Justice Sotomayor asked Mr. Carvin if his argument for limiting Chevron deference when tax subsidies were involved did not cut both ways, since had the IRS limited premium tax credits to state-operated exchanges it would be expanding tax relief for employers and individuals in federally facilitated exchange states who would be freed from mandate penalties.  Mr. Carvin responded by stating that the fact that the employer mandate did not apply in federally facilitated exchange states was unambiguous and that the government was trying unconstitutionally to enforce it against states as a form of coercion.  He concluded by saying that section 1311 only applies to state-operated and not federally facilitated exchanges, a curious position since the ACA clearly defines all exchanges as 1311 exchanges, a fact accepted by Judge Griffith in his ruling for Carvin in the Halbig case.

Looking Forward

Although it is risky to predict the result of a case from oral argument, it seems to me that the government came out of the argument on top.  The government’s position is clearly supported by Justices Breyer, Kagan, Ginsburg, and Sotomayor.  It seems to me that the government has a more than even shot at Justice Kennedy.  It is clear that Justices Scalia and Alito are prepared to side with the challengers.  The Chief Justice, however, did not clearly stake out a position one way or the other.  Justice Thomas, as is his custom, was silent, although the government should probably draw no comfort from that.

The Court will meet this Friday to discuss and probably vote on the result in the case.  We are unlikely to know that they decide, however, until June.