The Supreme Court heard arguments yesterday in the latest challenge to federal health care reform.   And this challenge, though highly technical, is anything but minor – it could unravel the entire infrastructure of federal health reform. 

If the plaintiffs prevail, in the 37 states without their own Exchanges, no individual will be eligible for federal tax subsidies and no employer will be liable for penalties.  While a win for the plaintiffs would not directly affect the 13 states with their own Exchanges – including Rhode Island and Massachusetts – it would make it very difficult for any state to continue to maintain and fund a state exchange since, by turning the Exchange over to the federal government, those states will save the cost of running their own Exchange and exempt their employers from the mandate. 

As reported in prior e-alerts, the individual subsidy and employer penalties only apply to the purchase of insurance on an “Exchange established by the State under Section 1311 of the [ACA].”   If a state fails to create an Exchange, an Exchange will be created for the state, but by the federal government (not the state) and under Section 1321 (not Section 1311).  To bridge the gap, the IRS adopted a regulation that allows subsidies (and penalties) for insurance purchased on either a state- or federally-established Exchange.

So the Supreme Court challenge revolves around eight words (out of over 400,000 in the statute and 11,000,000 in the regulations): “Exchange established by a State under Section 1311”.   The challengers take the position that these words mean what they say:  only folks enrolled in State-created Exchanges are eligible for the subsidies.  The opponents say that was not Congress’ intent, and since it would undermine the fundamental purposes of the law, the words must be interpreted to include people enrolled in Exchanges that are established by the federal government when the state fails to do so.

It is always difficult to read the Supreme Court tea leaves, although the Justices appeared to split down traditional party lines during yesterday’s arguments.  However, the case really comes down to whether the Court will enforce the plain meaning of the Act, even though doing so will likely have disastrous and almost certainly unintended consequences.  Justice Scalia summed up the issue facing the Court in response to an argument that limiting subsidies and the employer mandate to State exchanges could not be Congress’ intent:

“Of course it could be.  I mean it may not be the statute they intended.  The question is whether it's the statute that they wrote.  …  [I]f the only reasonable interpretation of a particular provision produces disastrous consequences in the rest of the statute, it nonetheless means what it says.  Is that true or not?”