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The Straightforward Explanation for "Established by the State" in the Affordable Care Act

02/23/2015 12:29 pm ET | Updated Apr 25, 2015

In the coming weeks much will be written about King v. Burwell, the latest attack on the Affordable Care Act before the Supreme Court. The law's opponents argue the statute authorizes tax credits only in the states that operate their own health insurance marketplaces (also known as exchanges). If this were correct -- and subsidies weren't available to Americans living in states where the federal government operates the exchanges -- as many as 11 million Americans could lose health coverage and insurance markets in 34 states could be upended.

The lynchpin of their argument is a mistaken interpretation of a single phrase -- "an Exchange established by the State" -- in the definition of "Premium Assistance Amount" in one sentence of a long and complicated law. They say these few words can refer only to the exchanges run by the states, not the 34 exchanges operated by the federal government for states that elected not to run their own.

But the explanation for these words is actually not complicated. The concept of 50 state-specific exchanges is essential to the law. Regardless of whether a state operates its own exchange or the federal government does it for the state, each state will have its own distinct roster of insurance companies and rate options. The identifier "an Exchange established by the State" is a clarifying reference to a particular state-specific exchange, as opposed to the exchanges operating in other states (this is what's referred to as a "term of art"). When the IRS determines the appropriate tax credit, distinguishing between state-specific exchanges matters: Texans are supposed to get tax credits based on the cost of health insurance in the Texas exchange, not New York's or North Dakota's.

In the broader context, it's even clearer: one section of the law directs the IRS to take into account the rates charged in "an Exchange established by the State" in setting premium assistance, while another provides that federally run exchanges are "such Exchange within the State," and are to be treated as exchanges established by the states. It's just an attempt at statutory clarity. And it amounts to nothing more than that, no matter how creatively the law's opponents try to interpret those words.

Of course, the lawyers challenging the Affordable Care Act (ACA) haven't only invented a new interpretation, but they have concocted an entire theory that Congress and the President intended this result. This is preposterous and defies the statutory language, the context and design of the law, and the legislative history.

The ACA was built on three interlocking principles: prohibiting insurance companies from discriminating against individuals with pre-existing conditions, requiring everyone to have insurance to prevent adverse selection from undermining the market, and providing tax credits to help everyone afford coverage. Although the ACA obviously has attracted implacable opponents, it's silly even for them to argue that a single, unremarkable phrase could be interpreted in a way that upends the law's fundamental architecture.

It's even more ridiculous to pretend the ACA was intended to operate in the dysfunctional and self-defeating way its legal opponents insist it should. As President Obama's Director of Legislative Affairs when the ACA was enacted, I know (because I was part of them) that the President was briefed in memos and in meetings on every imaginable issue as the legislation worked its way through Congress. The notion that the law would base tax credits on whether states set up their own exchanges -- and deny subsidies to American families as a result -- never came up. When Democratic leaders huddled in the White House in January 2010 to resolve differences between the Senate and House bills, this issue never came up. When the Congressional Budget Office and even the Heritage Foundation analyzed the ACA, this issue never came up. When the law was debated in the Senate for 25 days--in the second longest continuous Senate floor debate in history -- this issue never came up. And when the President met all day with Republicans and Democrats in February 2010 on national television--in a final attempt to find common ground -- this issue never came up.

It never came up because everyone had a common understanding. No one working for or against the bill interpreted the language to discriminate between Americans depending on whether their states set up an exchange. That's because the law states that a credit "shall be allowed" to every "applicable taxpayer." And no Democratic representative or senator from a state with a Republican governor would ever have voted for the ACA if it meant their constituents might run the risk of being denied tax credits simply because a governor might refuse to set up an exchange.

King v. Burwell can't be taken lightly because the Supreme Court decided to hear the case. But the plain language, the context, and the intent all couldn't be clearer.