What if Congress Accidentally Killed Obamacare? Unpacking the two recent Obamacare decisions in Plain(ish) English.

CapitalAs you may have seen, the D.C. Circuit Court of Appeals and the 4th Circuit Court of Appeals recently handed down decisions which alternately crippled or saved the tax credit system that powers the Affordable Care Act’s (ACA/Obamacare) insurance exchanges.  The cases center around whether or not the ACA limited the availability of refundable tax credits to state-run (as opposed to federally-run) insurance exchanges by calculating the credits based on months covered under a policy “enrolled in through an Exchange established by the State.”  Really, the heat of the entire debate centers around one the letter “S.”  How so?  Well, I’ll explain it in more detail below, but the short answer is that “State” is a defined term explicitly meaning the 50 states plus the District of Columbia, while “State Exchange” or even “Exchange established by the state” would be a more ambiguous term that could have a broader meaning, and it turns out that a little ambiguity is as valuable as gold for the Executive Branch’s position.  In the end, I think we’re left in the rather curious position where Congress fairly clearly meant to give credits to eligible individuals enrolled in any Exchange, but Congress also pretty clearly actually wrote the law in a way that does not extend those credits to individuals in federally-run Exchanges.  So what do we do?  How do we balance things out?  Our answer to that will end up saying a lot about the way that we view the operation of government, and I think that answer also opens up a serious strategic opportunity for Republican lawmakers.

To get to that discussion, we first need a general sense of the disputed aspect of the ACA’s design, what the legal backdrop of these decisions is, what the decisions said (sorry, lawyer friends, I will gloss over some nuance here in the interest of clarity), and which court has the stronger argument.

A (Wildly Abbreviated) Summary of the Disputed Function of the ACA

In creating the ACA, Congress had the stated goal of increasing the number of Americans covered by health insurance and decreasing the cost of health care.  Regardless of outcome, it’s fair to grant that as the intent of the law.  Congress sought to achieve this goal by lowering the costs of insurance in the individual market.  That was to be achieved by the dual process of forcibly creating a subsidized marketplace (the Exchanges) and by forcing everyone who wasn’t covered elsewhere to participate in them (the Individual Mandate).  While the government is forcing everyone to buy insurance, it is concerned about trying to make that decision affordable.  To that end, the ACA offers a sliding scale of subsidies to those who purchase insurance on an Exchange (at least, that was the plan).  Similarly, if an employer fails to cover employees who then pick up government subsidies, they are penalized for their failure to the tune of hundreds of thousands of dollars.  However, the mechanism for receiving a subsidy is important.  It’s a reimbursement scheme.  That is, individuals purchase insurance now, with the subsidy of their expense coming by way of a tax credit at the end of the year.  This underlines the significance of the D.C. Circuit’s ruling: if the premiums paid for insurance from federally-run Exchanges don’t count for credits, then millions of people were just told to eat the high costs of their mandated coverage.  In fact, experts believe that this will leave over 7.3 million people out over $36.1 billion in credits.  At the same time, if citizens of states with federally-run Exchanges are ineligible for credits, then employers who fail to meet the terms of the employer mandate won’t be subject to any fines for failing to provide minimum required coverage.  Similarly, individuals are excepted from the individual mandate penalty if the cost of coverage less any credits exceeds 8% of their income, meaning large subsidy credits could easily swing which side of the 8% line someone falls on.  So, all in all, the stakes in this issue are huge.

So, given the huge potential impact of denying credits to individuals signing up for coverage in a full 36 states, what did the IRS (the agency charged with implementing the tax credits) do?  Well, it interpreted “Exchange established by the State” in IRC § 36B to really just mean “Exchange,” whether run by a federal or state government.  Understanding what this means requires looking at the mechanics of IRC § 36B.  This provision, like many in the Tax Code, functions almost like a computer program, with a certain number of definitional on/off switches and thresholds you need to cross to reach the goal line of “receiving a credit.”  Thanks to this, it might be easiest to represent this provision via flowchart:



Click Image to Enlarge

So, if “Exchange established by the State” includes in its scope any Exchange (again, remembering this is a specific insurance market created by 42 USC § 18041) run in a given state, then every individual meeting the eligibility threshold above would have some amount that they could claim as a “premium assistance credit amount.”  However, if “Exchange established by the State” means only those Exchanges which states chose to establish themselves, then the second part of the calculation is short circuited, as both the calculation of “premium assistance amounts” and “coverage months” turn on the availability of that type of Exchange.  So how do we decide which meaning to go with?  Well, that turns on the degree to which courts choose to give deference to the IRS’ choice between the two.

What the Heck is Deference? or Why Ambiguity Matters

Deference is a legal concept by Courts decide whether or not to go along with an agency’s interpretation of a statute (e.g. what “Exchange established by the State” means).  It is based on a seminal Supreme Court case called Chevron v. NRDC.   When I’ve taught Chevron to college students in past years, it had a tendency to confuse and traumatize them to a level that I don’t wish to impose on you, so I’ll use a different method and try an analogy instead:

Situation 1: General Instructions

Imagine Sheila is leading a meeting.  While presenting, Sheila gestures a little too expressively and knocks her coffee mug on the floor.  She immediately turns to her assistant, Fred, and says, “Fred, would you please go get something to clean that up?”  Now, Sheila has authorized Fred to carry out the job of cleaning the spilled coffee; however, in directing him to do so, she has not specified exactly how he is to do so.  This means that Sheila shouldn’t really get upset whether Fred comes back with paper towels from the bathroom or a washcloth and towel from the kitchenette in the break room.  However, if Fred came back with Nancy’s seeing eye Shih Tzu and started rubbing it vigorously on the carpet, Sheila would rightly object.  She could say, “Fred, you idiot, I told you to get something to clean this up, not to assault a service animal!”

Situation 2: More Specific Instructions

Imagine instead if, in the same circumstance, Sheila said, “Fred, go to the bathroom and get some paper towels to soak this spill up.”  If Fred went instead to the kitchenette and grabbed a washcloth and towel, Sheila might not call him an idiot, but it’s equally clear that he didn’t follow her instructions.

Situation 3: A Conflict Arises

Imagine now that Mark objects to Fred grabbing a towel and washcloth from the kitchenette, because Mark uses those to clean his dishes from lunch, and he doesn’t want the dirt from the floor all over them.  Who’s to blame for inconveniencing Mark?  Well, in Situation 1, Fred seems to have chosen from a couple of reasonable options available to him, so while Mark might disagree with Fred’s choice, it seems a little unfair to blame him for it.  However, in Situation 2, Fred ignored Sheila’s instructions, and while we might not agree with Mark blowing up at Fred, we’d have to agree that any blame lays squarely on Fred’s head, since he disregarded Sheila.

This is how Chevron deference works.  We first check to see if Congress’ (Sheila) instructions (statutes) were so clear as to specify one specific option among reasonable alternatives (Called Chevron Step 1)  If so, then an agency (Fred) has not acted within the authority delegated to them if they choose any other reasonable option in its regulations.  If Congress’ instructions are more vague (such as with asking Fred to “get something”), then the Court enters Chevron Step 2 and will defer to the agency’s judgment as to which of a range of reasonable options it chose unless the agency chose something totally unreasonable (Nancy’s Shih Tzu).

So cases dealing with agency interpretations are all about whether or not the statutory provision that the agency is interpreting is ambiguous.  Returning once more to use legal language in the hypothetical: In Situation 1, the agency would have very broad authority to act, because the statutory provision is very broad.  In Situation 2, the statutory authorization is much more specific, and the court would be much less inclined to defer to Fred’s interpretation, saying instead, “she told you to do X, if you did Y, you were wrong.”  This doesn’t mean Situation 2 is without ambiguity, for if Fred went to the women’s restroom instead of the men’s, it’s a closer question.  Rather than just saying that Fred’s in the clear because his directions were ambiguous, we might look to other laws (office policies) and see that men aren’t allowed in the women’s restroom, meaning that while Sheila’s directions were silent to the fact, Fred was still not authorized to enter the women’s restroom.

This is essentially what happened in the two decisions issued on July 22.

A Quick and Dirty Summary of the Cases

Halbig v. Burwell (D.C. Circuit Ruling)  The more news-making of the two opinions was surely the D.C. Circuit ruling, which held 2-1 that the provisions of the ACA did not permit the IRS to grant refundable credits to individuals who enrolled in an insurance plan through an Exchange run by the federal government in a state which had declined to create and run its own Exchange.  After considering issues of standing (could Halbig et. al even bring their suit), the Court noted that the word “State” is a term defined in the U.S. Code to specifically refer to the 50 states plus the District of Columbia.  Therefore, the Court held that when the Tax Code says “Exchange established by the State,” it is unambiguously excluding Exchanges established and maintained by the federal government.  To reach this point, the ACA must have created more than one type of Exchange.  The Court finds that the law did because it elsewhere provides that a U.S. Territory may elect to establish an Exchange and “be treated as a State.”  Since no such language accompanies the creation of Exchanges by the Federal government, the Court concludes that federal Exchanges are of a type not eligible for generating credits.

King v. Burwell (4th Circuit Ruling)  The 4th Circuit Ruling cuts a different way.  After dealing with the standing issue and coming to the same conclusion as Halbig, the Court does a Chevron analysis as well.  The distinction here is that the Court, while strongly swayed by the common sense that “Exchange established by the State” means “Exchange established by the State,” does not believe that the ACA creates different kinds of Exchanges, and so they see merit in the idea that the language of the law is a bit muddy and ambiguous.  Because of this ambiguity, the Court goes to Chevron Step 2, where it concludes that the IRS’ interpretation falls within the realm of permissible constructions, and the Court therefore defers to the IRS’ judgment.

So Which Court Got it Right?

At this point, I hope I’ve explained things clearly enough that you can make your own judgment as to the correctness of the different rulings.  For me, I appreciate the 4th Circuit’s reasoning, but I would say that if you’re having to buck the clear implication of the text to say “Exchange established by the State” doesn’t mean just Exchanges established by the States (or electing Territories), then you should listen to that little birdie on your shoulder and just conclude that the Statute says what it says.  I’m completely swayed by arguments that Congress’ intent in drafting the ACA was to provide tax credits to everyone, but it seems equally clear to me that even if that’s what Congress meant, that’s not what Congress said.

I think that about a half dozen different constructions could have created the ambiguity that the IRS was looking for.  From “Exchange established by the state” to “State Exchange” to my preference: just say “Exchange.”  Like “State,”  “Exchange” is a defined term, and yes, the ACA defines the word as an Exchange established under 1311 (the rules for Exchanges established by States), but leaving it to stand alone adds a whole lot more weight to the idea that there aren’t multiple types of Exchange created by the ACA and that a qualified person enrolling in any of them should be eligible for a tax credit.

The Bigger Implication

In the end, I think that people’s feelings on this will turn on whether they feel we are a nation ruled by law or by people.  That is, if we are ruled by law, then the words on the page are of ultimate importance, and this type of person would be less inclined to give the IRS the sort of flexibility they’re looking for.  However, if we are ruled instead by Congress, the President, and the Courts, then this type of person would be much more likely to try to give effect to Congressional intent, even when it might run counter to the seeming common sense reading of a statute.  In truth, I think most of us will say that the reality is somewhere in the middle of those two options, but the direction that we lean on the spectrum will have the same sort of effect.

Based on this, it should be no secret that I lean toward the rule by law direction, and I do so for some practical and some philosophical reasons.  As a practical matter, I think that tying ourselves to what is written down can act as a way to rein in the natural tendency to tyranny.  Given unbridled discretion, there are countless examples of how individuals have abused their authority.  However, this isn’t to say that discretion is bad, only that it works best within clear guidelines.  As a philosophical matter, I think that rule by law encourages us to recognize the delegated nature of authority.  A legislature is bound to what it says in its official capacity, leaving something tangible for us to examine and hold and executive body accountable to.  Similarly, an orientation toward law reminds us that there is a higher, natural law which even the governing authorities are subject to.  In the end, I think a balance favoring law is more compatible with the recognition that all authority is God-given and therefore subject to His will, whether that be recorded on covenant documents or engraved on our hearts.

A Strategic Opportunity

Overall, I believe that this legislative mistake offers a golden opportunity to the Republicans.  Really, the best legal solution to this problem is to pass a bill which amends the language of the ACA to accomplish what it was meant to do.  In that process, everyone expects the Republicans to refuse to play ball on the grounds that they will see the ACA killed by any means necessary.  Similarly, the inevitable Democratic line would be that it’s more Republican obstructionism, with rich white guys willing to hold your wallet hostage if it will let them get their way.

So why steer into that narrative?  There is ample space here for Republicans to act like the grown up in the room.  Pass an amendment repairing the bill.  Publicly announce that you remain opposed to what the bill does but that you’re not willing to see the little guy hurt because the President and his cronies didn’t take the time to properly proofread their work while they were ramming it down our throats.  Let the Democrats have their way, but do on Republican terms and with a Republican narrative.  Do it even before it comes down to the wire of whether the D.C. Circuit will review their opinion en banc (the next step before the ruling would take effect).  By doing so, the Republicans would help ensure that middle and low income taxpayers aren’t the ones suffering, and it would help to uphold what tends to be the more Conservative judicial philosophy that the words on the page are what really matter, protecting us from bad judicial decision-making down the line by judges more concerned about the impact of striking down the credits than the damage done to good jurisprudence by a strained legal interpretation.


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Filed under Court Cases, Jurisprudence & Lawmaking, Tax Law

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