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 wlu.edu