Saturday, July 19, 2014

Will the ACA litigation be decided based on a mistake?

Guest Blogger

Timothy Jost

In a recent blog post, Cato scholar Michael Cannon admitted that he and his colleague, Case Western University professor Jonathan Adler, had made a mistake in an amicus brief they submitted to the courts in the Halbig and King cases.  We all make mistakes—indeed Michael has claimed that I have made many mistakes in my analysis of these cases, some of which were indeed mistakes.  This mistake is important, however, because it goes to the central argument that he and Jonathan have relied on in their brief.  There is a real danger that the Halbig case could be decided by the D.C. Circuit Court of Appeals, perhaps as early as next week, based on a mistaken understanding of the law, its purpose and history, propagated by Cannon and Adler and apparently adopted by one of the judges in the case.  Studies released in the past week demonstrate that this mistake could have devastating consequences for the country.

The Halbig and King cases deal with the question of whether federal exchanges can award premium tax credits.  The subsection of the Affordable Care Act dealing with computing the amount of the premium tax credits that make insurance affordable to lower and middle income Americans says that those credits  should go to individuals enrolled “through an exchange established by the state.” But two thirds of the states are not operating their own health insurance exchanges, and are rather served by the federally facilitated exchange. In 2012, the IRS issued a rule authorizing the federal exchange to issue tax credits.  ACA opponents, including Cannon and Adler, argue it is illegal. Both federal courts that have ruled on their claims have held that, considering the entire statute and its purpose and history, the IRS interpretation of the provision is correct.   Both decisions are on appeal. 

When Michael Cannon first noticed this provision in the fall of 2011, he described it as a glitch.  He must have realized, however, that the federal courts would be reluctant to invalidate a major federal program based on a “glitch.”  He and Jonathan Adler, therefore, have constructed an increasingly elaborate legislative history for the provision.  First, they wrote a paper suggesting that the Senate HELP Committee, which developed its own draft of the legislation, wanted deliberately to threaten states with withholding subsidies from states that did not set up Exchanges.  Since then, in amicus briefs, Michael and Jonathan have argued that earlier health reform laws enacted or considered by Congress similarly threatened withholding of subsidies from individuals or businesses unless states agreed to comply with federal requirements.

Of course, Congress did not adopt the HELP bill or earlier proposals, but rather adopted the ACA, which contains federal fallback exchanges which step into the shoes of states that fail to establish their own exchanges, a different approach to encouraging the states to take action.   In his “erratum,” Cannon admits that he was wrong as to at least one of those earlier proposed programs, further weakening his argument.

Cannon’s error is one of a flood of misstatements that the opponents of the ACA have propagated, from “death panels” at the outset to “no federal exchange tax credits” now.  The real danger is the disinformation about the ACA could infect a decision in the Halbig case, expected soon.   The case was argued on March 25, 2014 to a three-judge panel consisting of Judges A. Raymond Randolph, Harry Edwards, and Thomas Griffith.   Almost from the moment the argument began, Judge Randolph expressed his profound dislike of the Affordable Care Act.  He also demonstrated a profound misunderstanding of the history of the statute, and of the statute itself.

One such misunderstanding seems to be based directly on the Canon-Adler brief.  Beginning early in the oral argument, Judge Randolph argued repeatedly that the premium tax credits in the ACA were modeled after the health care tax credits provided through 26 U.S.C. 35 to displaced workers under the Trade Adjustment Act, which has since expired.  During the oral argument, Judge Randolph stated, referring to section 35:

I've read that statute, that statute reads almost identically to the statute we, 36B, the one that you're arguing about, and it's clear as a bell there that the states don't, the state residents, citizens don't get any subsidies, I think it was 72 percent, to pay for their healthcare unless the state goes through a whole bunch of hoops and enacts a bunch of different laws, and so on and so forth, and if the state doesn't do it then the people don't get the money. . . . So, they copied -- I mean, it's a typical drafting thing in Congress, if you've already done it once what you do is you take that provision and you copy it into the subsidy provision of the Affordable Care Act, I mean, it's clear that's what happened.

He referred to this provision again later in the argument as having been “copied” in the premium tax credit provision.  The Canon-Adler brief had held up section 35 as a model for the ACA tax credit provision.

There are at least three problems with this argument.  First,  I can find no evidence in the extensive debates that accompanied the Affordable Care Act or in the relevant committee reports  that Congress modeled the ACA premium tax credit structure after the Trade Adjustment Act tax credit program.  The program was mentioned in an ACA committee report as “existing law,” but nothing in the committee report suggests it was a model for the ACA.  Second, in fact an individual’s receipt of a Trade Adjustment Act tax credit was not dependent on a state doing anything.  The credits could be used for several different forms of insurance, including COBRA coverage and group and individual coverage under some circumstances.  The statute merely provided that if states wanted to make additional forms of coverage available to be covered by the credits, they had to basically meet the requirements similar to those imposed on employer-based coverage at the time under the Health Insurance Portability and Accountability Act.  Third, the ACA is quite different from the Trade Adjustment Act in that under the ACA exchanges are in effect in every state, while there is no such system set up in the Trade Adjustment Act.  The Trade Adjustment Act is completely irrelevant to the issues involving the ACA.

Other misunderstandings abounded on the part of Judge Randolph abounded in the argument.  At one point, for example, he said the phrase “established by the state under 1311” appears seven times in the statute, indeed at one point he said it appeared seven times in section 36B, the provision that creates the premium tax credits.  In fact, the phrase appears twice.  The word “Exchange” appears nine times in section 36B; seven times without the “established by the state” qualifier. It appears dozens of times in the entire ACA, sometimes with qualifiers, sometimes without.

The use of the term Exchange throughout the Affordable Care Act with and without qualifiers seems to be random.  The term is defined in section 1563 as “an American Health Benefit Exchange established under section 1311 of the Patient Protection and Affordable Care Act,’’ while section 1311(d) explains that “[a]n Exchange shall be a governmental agency or nonprofit entity that is established by a State.”  Section 1311(b) provides that states “shall” establish exchanges.  Section 1321, however, provides that if a state elects not to fulfill the duty to establish the “required” exchange, HHS shall establish “such” exchange on the state’s behalf.  Neither 1311 nor 1321 relieve the state of its duty to establish the Exchange. Section 1321 simply gives the state flexibility to satisfy the duty by either setting up the Exchange or by having the federal government do so on the state’s behalf.   Thus, under the ACA all exchanges, regardless of whether operated by the state or federal government, are 1311 exchanges “established by the state.”

Judge Randolph also suggested at oral argument that limiting premium tax credits to state exchanges was necessary to secure the vote of Senator Ben Nelson. Senator Nelson did state after the ACA passed the Senate that he favored the Senate approach, relying in the first instance on state exchanges, to the single national exchange found in the House bill, there is no evidence in the legislative history that Senator Nelson was opposed to a federal fallback exchange, with full exchange powers.  The provisions at issue in the cases were there in early House and Senate drafts from the fall and were certainly not added as a last-minute gambit to get Senator Nelson’s vote.

Finally, Judge Randolph accepted Plaintiffs’ argument that the states based their decision on whether or not to establish an exchange based on their understanding that no premium tax credits would be available to their residents if they did not do so:

And as far as the states are concerned, and we have Amicus briefs from a number of states that made the trade off that we think it's more important to preserve our liberty not to have to engage in, or not to have to buy what the federal government tells us than it is to have our citizens beholden to the federal government through subsidies.

In fact two amicus briefs for eight states were filed behalf of the plaintiffs in Halbig. Though they are full of high-sounding rhetoric, they do not refer to any contemporaneous statements by any state legislators or officials that avoiding premium tax credits for their citizens was a motivating factor in their states not establishing exchanges.  To the contrary, a brief filed by nearly 120 state legislators in support of the IRS rule provided extensive evidence that their states did not take this factor into account in deciding whether or not to establish exchanges.  A brief filed by Virginia in the companion Fourth Circuit case similarly demonstrated that Virginia’s decision not to operate an exchange was not influenced by this provision.  Moreover, when 26 States sued HHS in the earlier individual mandate litigation, they argued that the ACA coerced them into participating in the Exchanges, in violation of the 10th Amendment.  But the coercion they alleged was not that their citizens would otherwise be denied tax credits.  The States complained about ceding regulatory authority over insurance to the federal government unless they participated in the Exchanges.

One hopes that by the time the D.C. Circuit announces a decision in this case, the judges will have reread the briefs and supporting record and have corrected any erroneous first impressions.  This case is too important to be decided on wrong information.  Studies released on July 18, 2014, by Avalere Health and by the Urban Institute, demonstrate the seriousness of the issue.  A decision for the plaintiffs could deprive residents of 34 states of $36 billion in tax credits by 2016 and could cause the non-group market to collapse in those states.  The ensuing disruption of the health care system will bring financial ruin to many families and, ultimately, will cost lives.  The courts have to get this right.

Timothy S. Jost is Robert L. Willett Family Professor of Law at Washington and Lee School of Law. You can reach him by e-mail at JostT at

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