The False Analogy of Territorial Exchanges in King v. Burwell

03/06/2015 02:50 pm ET | Updated May 06, 2015

One of the Red Herring flopping about on the deck of King v. Burwell is the analogy of the territorial exchanges. The central legal question of King v. Burwell is whether the federally facilitated fallback exchanges created by section 1321 of the Affordable Care Act can be the "Exchange established by the State under section 1311" mentioned in section 1401 of the ACA, which authorizes the grant of premium tax credits. The plaintiffs say it cannot be--only a state-operated exchange can be an "Exchange established by the State." The federal government, on the other hand, asserts that under section 1321, if a state that elects not to establish the Exchange it is required to establish under section 1311, the federally facilitated exchange becomes "such Exchange" with all the powers and authorities of the state exchange, including the authority to grant premium tax credits.

Section 1323 of the ACA creates a third kind of exchange, the territorial exchange. This section provides:

(a) IN GENERAL.--A territory that--(1) elects consistent with subsection (b) to establish an Exchange in accordance with part II of this subtitle and establishes such an Exchange in accordance with such part shall be treated as a State for purposes of such part and shall be entitled to payment from the amount allocated to the territory under subsection (c) . . .

The plaintiffs argue that 1) this section demonstrates that Congress knew how to explicitly state its intention when it meant for an exchange that was not a state exchange to be treated like a state exchange (and explicitly did not do so when it authorized federally facilitated exchanges), and 2) that the phrase "such Exchange" in 1321 did not make the federally facilitated exchange into a state exchange for purposes of section 1401, just as the phrase "such an Exchange" did not make the territorial exchanges into state exchanges.

This all sounds neat, but in fact shows a profound lack of understanding as to how the Affordable Care Act works, and in particular its provision for the territories.

The territories--for these purposes Puerto Rico, The U.S. Virgin Islands, American Samoa, Guam, and the Northern Mariana Islands--have a unique status. For some purposes they are treated like states under American law, for other purposes like foreign countries. This is true under the ACA.

The ACA attempts to make provision for providing access to affordable health care for low and moderate-income residents of the territories. It does not do so through refundable premium tax credits, however, in part because residents of these territories do not pay federal income tax. Rather Congress appropriated a billion dollars to the territories to provide premium and cost sharing assistance for the period from 2014 to 2019. The territories could spend this money in one of two ways. Either they could set up exchanges and issue premium and cost sharing assistance through those exchanges or they could simply increase the funding for their Medicaid programs.

If a territory elected to set up an exchange, that exchange would have to, as set out in the section above, meet the requirements set out in part II of Subtitle D of Title I of the ACA, that is sections 1311, 1312, and 1313--the sections dealing with exchanges. Those sections refer to state exchanges, so section 1323 provides that a territory will be treated as a state for the purposes of applying the requirements of those sections. Section 1401, the tax credit provision, is not one of these sections and territorial exchanges cannot grant tax credits. In fact, however, this stipulation was superfluous, because section 1563(b)(1) already provides that the term "Exchange" in the ACA means a 1311 Exchange and thus any Exchange authorized by the ACA--including the federal fallback exchange (or, for that matter, regional exchanges created under section 1311(f))--is effectively a state exchange. Section 1323 only clarifies this further with respect to territorial exchanges.

The phrase "such an Exchange" used in section 1323 clearly refers to the exchange described in section 1311, which is to be the model for the territorial exchange. The phrase "such an Exchange" in 1323, therefore, plays a completely different role that the phrase "such Exchange" in 1321. The phrase "such an Exchange" merely applies the requirements of section 1311 to any territorial Exchange. The phrase "such Exchange" in section 1321 provides that the federal fallback exchange created by that section actually steps into the shoes of--indeed actually becomes--the "required" Exchange referred to earlier in that section, that is, a state established exchange.

In sum, none of the provisions governing the territories have anything to do with the federally facilitated exchange, or for that matter with premium tax credits, which are not in any event available in the territories. Section 1323 is in fact simply irrelevant to King v.Burwell.

But not totally irrelevant. In fact, none of the territories created exchanges. Without the premium tax credits made available through section 1401, there was little point in doing so. It was easier to just put the extra funding into the territorial Medicaid program. Similarly, without the ability to award premium tax credits the federal fallback exchange--clearly intended under section 1321 to take the place of a state-operated exchange in a state that elects not to operate its own--would serve little purpose. Congress should not be presumed to have created a federal fallback exchange that was essentially useless. But a careful reading of the text of section 1321 reveals that it did not do so. In fact, the ACA defines the federal fallback exchange as a state-established exchange, which can grant premium tax credits under section 1401. It does not do so for territorial exchanges.