Challengers Argue Affordable Care Act Only Permits Tax Credits on State-Run Exchanges

By JESS BRAVIN And  LOUISE RADNOFSKY

Updated Nov. 7, 2014 3:25 p.m. ET

WASHINGTON—The Supreme Court on Friday said it would review the legality of a centerpiece of the Affordable Care Act, agreeing to decide whether consumers can receive subsidies for insurance purchased through federal exchanges operating in more than 30 states.

The court’s decision to hear the case sets the stage for the third major health-care law ruling next summer and casts a cloud over the tax subsidies, which nonprofit groups have been pushing to get more people to sign up when the second round of enrollment starts later in mid-November.

Arguments are likely in March 2015, with a decision before July.

Friday’s order suggests the justices are eager to step into the issue. In July, the Fourth U.S. Circuit Court of Appeals in Richmond, Va., upheld the subsidies for the federally run exchange on the same day a panel on the U.S. Court of Appeals for the District of Columbia Circuit struck them down.

The full D.C. Circuit decided to rehear its decision, setting aside that ruling, and is scheduled to hold arguments in December. Given the Supreme Court’s move, however, the D.C. Circuit could cancel the arguments in light of the Supreme Court’s action.

“The need for a quick and final resolution of this question is undeniable,” said Sam Kazman, general counsel of the Competitive Enterprise Institute, a conservative advocacy group that is coordinating lawsuits against the tax credits. “This ’subsidies-for-everyone’ rule affects nearly every person across the country,” he said.

The White House said it believes the credits can withstand Supreme Court scrutiny. “These lawsuits won’t stand in the way of the Affordable Care Act and the millions of Americans who can now afford health insurance because of it,” White House spokesman Josh Earnest said in a written statement. “We are confident that the financial help afforded millions of Americans was the intent of the law and it is working as Congress designed.”

The Affordable Care Act provides that tax credits to lower-income Americans who purchase insurance “through an exchange established by the state.” At issue is whether those same credits are available to consumers who buy insurance through exchanges operated by the federal government, which the 2010 health-care overhaul established as a backup should states fail to set up their own marketplace.

The 2010 health-care overhaul was conceived as a federal-state partnership which, like Medicaid and other programs, would principally be funded through Washington but managed by state governments. But many Republican-controlled states and some Democratic-led ones were unable or unwilling to fully set up their own exchanges, leaving the federal government to run them.

The decision to hear the case comes eight days before the start of the second round of enrollment under the law. The HealthCare.gov website, which will serve as the main platform for people in 37 states to get coverage this year, goes live Nov. 15. Enrollment supporters are emphasizing the tax subsidies in their pitch to millions of low-income people who sat out last year’s sign-up drive, and the court’s move could complicate that message.

At least a dozen states are fully running their own exchanges. A number of other states are in a gray area because they have turned over at least some responsibilities to the federal government. Officials in some of those states have already indicated they are willing to take further steps to guarantee their residents’ access to the tax credits if they have to.

The court’s move was quickly praised by Republican lawmakers. “The Obama administration has been potentially doling out billions of dollars in taxpayer subsidies without the proper statutory authority and I applaud the Supreme Court’s decision to review this case,” said Rep. Diane Black (R., Tenn.).

Ron Pollack of Families USA, a group that advocates for the law, said the latest case represented “the most serious existential threat” of the moment to the 2010 law.

The law’s requirements that health insurers sell coverage to everyone regardless of their medical history and that most individuals buy coverage or pay a penalty hinge on subsidies to help lower-income Americans pay for their premiums, he said in a statement describing the tax credits as one leg of a “three-legged stool.”

Around 4.7 million Americans got tax credits in states that weren’t fully running their own exchanges in 2014.

Doug Kendall, president of the Constitutional Accountability Center that filed friend-of-the-court briefs on behalf of congressional Democrats, said he was disappointed. “We remain very confident that the court will ultimately find that both the text of the ACA and the intentions of Congress mandate a ruling for the federal government,” he added.

The Affordable Care Act requires most Americans to carry health insurance, regardless of their home state. The exchanges were designed to extend coverage to the uninsured—for the most part, individuals who didn’t get health care through their employer, Medicaid or Medicare—by providing a competitive marketplace for policies. Tax credits for lower-income consumers were considered essential in delivering the promise of the law’s name.