The ACA's individual mandate was part of a coordinated set of interventions in health insurance markets that were designed, together, to guarantee affordable coverage to a wide range of people. In addition to requiring that individuals obtain coverage, the statute also providesthat states will create health insurance "exchanges" (essentially controlled marketplaces) for individuals to obtain that coverage, and itestablishes a series of tax subsidies to make it possible for individuals to afford the insurance that is offered on those exchanges. In states that do not set up exchanges, the statute provides that the federal government will set up and operate the exchanges for them. The mandate, the exchanges, and the subsidies all work together (along with the statute's bar on discrimination against individuals with preexisting conditions, and its penalties for employers who do not cover their employees) to achieve the goal of expanded, affordable health insurance coverage.

Although the Obama Administration has extended the deadline for states to decide whether to set up their own health insurance exchanges, estimates are that up to 20 states will refuse to do so. Those refusals, in many cases borne of continued opposition to Obamacare, will put a burden on the federal Department of Health and Human Services. But under the statutory scheme, they should ultimately be no problem: in states that don't set up exchanges, the federal government will set up and operate the exchanges for them.

But some Obamacare opponents insist that, if a state refuses to set up an exchange and the federal government sets one up in its place, the individuals who purchase insurance on the federally-operated exchange will not be entitled to receive the statute's tax subsidies. Directly rejecting that argument, the Internal Revenue Service has interpreted the statute as making the tax subsidies are available to individuals regardless of whether they live in a state that operates its own exchange or in one in which the federal government operates the exchange. But the opponents are undaunted. In an argument set forth most extensively in a widely circulated paper by Cato's Michael Cannon and my friend Professor Jonathan Adler, and in a federal-courtchallenge filed by the State of Oklahoma, they contend that the IRS's interpretation of the statute is illegal.

As Cannon acknowledges, the entire structure and operation of the ACA will unravel if individuals who receive insurance from federally-operated exchanges cannot receive the tax subsidies the statute establishes. If participants can't get tax subsidies, many won't be able to purchase insurance on the exchanges. That will harm those who cannot get insurance, and it will also undermine the benefits of mandated coverage. And, perhaps not coincidentally, it will undermine support for the law. As Jonathan Cohn argues, "Obamacare critics believe that, by blocking the subsidies, they’ll undermine the law’s effectiveness and eventually erode support to the point that people clamor for a conservative alternative."

Cannon and Adler's argument, taken up by Oklahoma in its lawsuit, is deeply flawed as a matter of law. Their basic argument is this: In Cannon's words, the provision of the ACA that establishes premium tax credits "explicitly and laboriously restricts tax credits to those who buy health insurance in Exchanges 'established by the State under section 1311.' There is no parallel language – none whatsoever – granting eligibility through Exchanges established by the federal government (section 1321)."

But that is not quite right. Although the tax-credit provision twice uses the phrase "Exchange established by the State under section 1311," see 26 U.S.C. § 36B(b)(2)(A), (c)(2)(A)(i), that phrase does not have the exclusionary meaning Cannon attributes to it. That is because Section 1321 (codified at 42 U.S.C. § 18041) makes clear that, when a state fails to set up an exchange, the federally-operated exchange will stand in the shoes of the state exchange for purposes of Section 1311. Thus, Section 1311 provides that "[e]ach State shall" set up an exchange by January 1, 2014. 42 U.S.C. § 18031(b)(1). Section 1321 provides that if a state "will not have any required Exchange operational" by then -- that is, an exchange required by Section 1311 -- then the federal government "shall (directly or through agreement with a not-for-profit entity) establish and operate such Exchange within the State." 42 U.S.C. § 18041(c)(1) (emphasis added). "[S]uch Exchange" in Section 1321 clearly refers to the "required exchange" -- that is, the Section 1311 exchange. When the federal government operates an exchange pursuant to Section 1321, then, it is not operating some wholly foreign entity; it is operating the state exchange that Section 1311 required the state to set up but that the state failed to create. Because Section 1321 provides that a federally-operated exchange will stand in the shoes of a state-operated exchange created by Section 1311, there is no basis for denying participants in federally-operated exchanges the same tax credits obtained by participants in state-operated exchanges.

The IRS's interpretation of the ACA to extend premium subsidies to participants in both state- and federally-operated exchanges thus seems to me not merely a permissible one but also the most plausible reading of the statutory text. Nor is there any reason to think that Congress would have intended to treat participants in state- and federally-operated exchanges differently for purposes of obtaining the subsidies. In both state- and federally-operated exchanges, the subsidies serve the same crucial role in achieving the statute's goal of expanded, affordable health coverage. If you take the subsidies away from participants in either sort of exchange, the law's protections are likely to unravel in the same way.

Cannon argues, though, that Congress did intend to draw a distinction between state- and federally-operated exchanges for these purposes. But his arguments are red herrings. First, Cannon argues that "[i]n order to have state-run Exchanges, the bill needed some way to encourage states to create them without 'commandeering' the states," and that offering premium subsidies limited to states that set up their own exchanges was a means to overcome the commandeering problem. But anyone who understands the Supreme Court's commandeering doctrine knows that the premium subsidies were not at all necessary to overcome any commandeering problem. The anticommandeering principle forbids Congress from compelling the states to regulate private parties, but it permits Congress to give the states the choice between regulating private parties according to federal standards and standing aside to allow the federal government to regulate those parties directly. That's the Court's square holding in New York v. United States. And that, of course, is the precise choice that the ACA gave states even without the subsidies -- regulate individuals and insurance companies through state-operated exchanges, or stand aside and let the federal government set up and operate exchanges of its own. So there is no reason to attribute to Congress a decision to limit subsidies to participants in state-operated exchanges in order to overcome any commandeering problem. Once the federal government could set up its own exchanges, there was no commandeering problem.

Second, Cannon adverts to the limited jurisdiction of the Senate Finance Committee: "The Finance Committee had even more reason to condition tax credits on state compliance: it doesn’t have direct jurisdiction over health insurance. Conditioning the tax credits on state compliance was the only way the Committee could even consider legislation directing states to establish Exchanges." But there is nothing in the Finance Committee's jurisdiction that required it to limit tax subsidies to participants in state-operated exchanges. Legislation that extended premium tax credits to participants in any exchange, whether state- or federally-operated, was fully within the Committee's jurisdiction. And, as I have argued above, that is precisely the legislation that Congress passed.

Whatever its value to conservative activists and those who wish to relitigate NFIB and the election, the rearguard effort to undermine Obamacare is deeply flawed as a matter of law.




Cross-posted from the Disability Law Blog.