The Halbig Challengers’ Biggest Textual Obstacle: Cato Reflections Part IV

On October 30, I was invited to participate in a Cato Institute panel discussion on Halbig, King, and related challenges to the Affordable Care Act. In the wake of the conference, I’ll be writing a few posts based on the panel discussion. If you’d like to watch the entire law-focused panel, I’ve created a C-SPAN clip here. Other reflections at Part I (Isolationism), Part II (Textualism), Part III (The Whole-Text Canon), Part IV (Halbig’s “Two Exchanges” Problem), and Part V (Creeping Constitutionalism).

In response to Halbig, many of the government’s defenders turned to arguments based on purpose to criticize the D.C. Circuit’s opinion. If the entire purpose of the ACA is to ensure that people get affordable healthcare, then how could a court possibly interpret the law in a manner that makes so many people ineligible for affordable healthcare?

I have been critical of these sorts of generalized purposivist arguments for a couple of reasons. First, statutory interpretation should start with the text of the statute, not an appeal to general purpose. Sure, perhaps eventually, as a double check or in close cases, one must resort to general purpose to resolve ambiguity. But before we get there we need to wrestle with the text.

Second, the challengers have an answer to the government’s generalized “purpose” argument: Sure, the general goal was to provide everyone with insurance. But Congress doesn’t blindly pursue its goals at all costs. There are compromises, incentives, and other limitations that come into play.

The challengers argue that with the ACA, Congress wanted the states to take the laboring oar in creating exchanges. But because of constitutional limits on commandeering state governments, Congress had to induce (or attempt to induce) states to set up exchanges through an incentive system: set up an exchange or your citizens won’t get any tax subsidies.

On the challengers’ view, this incentive system would work just like Medicaid. Congress bribes (but doesn’t impermissibly compel!) the states to participate in Medicaid; if they refuse, then Congress withholds funds—lots of funds. However, the challengers contend that Congress miscalculated in the ACA. Congress thought every state would jump at the change to get all of that federal subsidy money. And therefore Congress thought their plan would work: every citizen in every state would get tax subsidies and affordable insurance on a state exchange. When that supposed miscalculation came to fruition, the challengers argue that it was not the courts’ job to rewrite the statute to correct Congress’s “mistake.”

But the challengers have a big textual obstacle standing in their way: the statute’s provision for federal exchanges in section 1321.

Two Exchanges

As Abbe Gluck has argued, the challengers’ “cooperative federalism” incentive argument doesn’t hold up:

Unlike the ACA’s Medicaid provisions, the exchange provisions have a federal fallback: Medicaid is use it or lose it; the exchanges are do it, or the feds step in and do it for you. In other words, this isn’t Medicaid; it’s the Clean Air Act (CAA). If a state decides not to create its own implementation plan under the CAA, its citizens do not lose the benefit of the federal program—the feds run it. The same goes for the ACA’s exchanges and so it would be nonsensical to deprive citizens in federal-exchange states of the subsidies.

This is perhaps the best text/context-based argument the government has, and its worth unpacking. As Gluck explains, incentive programs like Medicaid work differently than the ACA. If a state turns down Medicaid money then that’s it; they just don’t get the money.

But the existence of the federal fallback makes the ACA’s structure completely different. If the state turns down the ACA’s inducement to create an exchange, then under the challengers’ view the state’s “punishment” is not merely the withholding of funds—it’s the withholding of funds and the creation of a federal exchange to operate in the state.

This is an odd kind of inducement. Without the availability of subsidies, the federal exchange is an empty shell of a thing. The “three-legged stool” of the ACA completely breaks down without tax subsidies. The individual mandate only applies if available insurance is sufficiently “affordable.” Without the subsidies, insurance is no longer affordable for many people and therefore the mandate won’t apply. Moreover, because penalties under the employer mandate are predicated on at least one employee’s receipt of a subsidy through an exchange, the unavailability of subsidies also disrupts the employer mandate.

The federal exchange therefore becomes a one-legged stool under the challengers’ view. Michael Cannon and Jonathan Adler, the forefathers of the Halbig litigation, proclaim that removing even one “leg” of the stool could “cause the structure to collapse.” Cannon & Adler, Taxation Without Representation at 128-29. Similarly, as Richard Epstein explained:

The issue has momentous significance because in some 36 states — through which over half the present enrollees have obtained their coverage — the exchanges are owned and operated by the federal government, not the states. Any judicial decision that knocks out these subsidies will lead to a two-tier system, which in turn will lead to a collapse of the overall program.

Epstein, Understanding the Obamacare Subsidy Rulings (emphasis added). Everyone agrees: The exchange system collapses without the subsidies.

The challengers’ interpretation therefore renders the federal exchanges wholly ineffective. For devotees of the Cato Institute, perhaps this would be a convincing pitch: “If you don’t create a state exchange then we’ll set up a costly, ineffective, useless federal program in your state.” But that’s not how the federal government usually threatens states in a system of cooperative federalism.

The challengers like to compare the ACA to Medicaid, but imagine what Medicaid would look like with a Halbig-style incentive system:

Attention states! You need to set up a program to provide health care to low-income individuals. If you set up such a program, then the federal government will give you lots of money to help run it. However, if you decline, then you don’t get the money. Moreover, if you decline we’ll spend millions of dollars on a totally useless web portal for low-income individuals to purchase health care in your state. But the health care on the portal will be too expensive for those folks to afford. And the website won’t even work well.

Under the challengers’ view, that is the system of incentives and cooperative federalism that Congress intended to create in the ACA. It doesn’t make a whole lot of sense. And it renders the federal exchanges entirely ineffective.

Alternatively, we could avoid all of this assumed ineffectiveness and just adopt a reading of section 1321 that allows federal exchanges to stand in the shoes of state exchanges. Then the ACA’s “fallback” structure actually makes sense.

Additionally, the existence of the federal exchanges is directly contrary to the challengers’ arguments based on legislative intent. As Adler and Cannon argue:

[T]he IRS is trying to rewrite the statute because supporters failed to anticipate the widespread rejection by states of the role the law had assigned them. As was widely reported at the time of the PPACA’s enactment, PPACA proponents were confident that all states would establish Exchanges and never even contemplated the possibility that numerous states would refuse.

This mistaken assumption accounts for why Congress did not authorize funding for the creation of federal Exchanges. It accounts for why the [CBO] scored the PPACA without considering whether tax credits would be limited to state-run exchanges.

Cannon & Adler Halbig Amicus at 27 (en banc). The challengers need this argument for a number of reasons, not least of which is the amount of legislative history that presumes subsidies will be available on all exchanges. Those pro-government arguments dissolve once we assume that Congress assumed (that’s a lot of assumption!) that all states would set up exchanges, and therefore subsidies would indeed be available on all exchanges. If Congress guessed wrong, then all those statements that, on first glance, appear to support the government’s position, are no longer a problem for the challengers.

Whatever the merits of the various legislative history arguments on both sides, there is one clear textual argument that proves Congress did not assume every state would opt in and create a state exchange: the ACA provides for federal exchanges.

Why the two exchanges? If Congress intended the subsidies to operate as a threat, and Congress thought the threat would uniformly be effective, then there shouldn’t have been any need for a fallback. Why would it be necessary to provide for federal exchanges? The very existence of the federal exchanges in the text of the ACA implies two things: (1) they must serve some purpose and (2) Congress understood that the federal exchange would be necessary in at least some number of states.

Some commentators have implied that the federal exchanges were necessary to avoid anti-commandeering problems. There needed to be some fallback, they argue, because otherwise the statute’s command that states “shall” establish an exchange would violate the Constitution’s anti-commandeering principle.

But the move from anti-commandeering to federal exchanges is a non sequitur. The usual way to avoid commandeering is not the creation of a complex-but-useless federal fallback—the alternative is nothing, like the Medicaid example. Congress can avoid a charge of commandeering by simply leaving open the possibility that no program will operate in a given state. The structure of the ACA, however, provides for a completely different system.

Like my previous posts, this is argument from purpose and structure is a textualist argument. Let me make clear what this argument is not. It is not an argument that for a threat to work it needs to be communicated clearly: like Nicholas Bagley’s “Vito Corleone” analogy or Mike Konczal’s Dr. Strangelove “Doomsday Machine” analogy. And it is not an argument that Congress would never have given states the ability to torpedo the ACA. After all, Congress does play this sort of game with Medicaid and other cooperative-federalism programs. Those are all good and fine arguments, but they are not directly tied to the ACA’s text.

And based on the text, the challengers’ “incentive” argument and “Congress thought every state would establish an exchange” argument just don’t hold up. The ACA’s provision for federal exchanges should not be interpreted in a manner that renders those exchanges ineffective.

23 thoughts on “The Halbig Challengers’ Biggest Textual Obstacle: Cato Reflections Part IV

  1. Pingback: Halbig and the Problem of Creeping Constitutionalism: Cato Reflections Part V | Ziff Blog

  2. Pingback: Halbig and the Problem of Creeping Constitutionalism: Cato Reflections Part V | Ziff Blog

  3. I watched your Cato link and listened intently to both sides of this issue. I am educated but not in law or legal issues. I have also read the ACA, and every post you have made since Cato regarding the ACA. Because I don’t have a law degree, but am required to follow the laws written by congress, I must say this. When I read a law to understand it and what I am required to do as a US citizen, the only thing that matters is what the law is telling me to do. Trying to consider what was meant rather than what is said is much too complicated for the average person. I don’t know who is correct in their interpretation, but I am sure that the average Joe would only look at the plain language. The plain language is An Exchange Established by the State. The federal backdrop, is an exchange set up by HHS inside the boundaries of each state(within) that does not or can not successfully set up it’s own. It is my view, the method chosen to deliver the subsidies was an exchange in each state even when it was a federal exchange. The chosen method goes directly to the purpose, to have 51 exchanges to deliver subsidies. Congress wanted 51 exchanges, one in each state and DC, to be closer to the people it was serving, to be closer to the state insurers, to be closer to the state insurance commissioners, to see which states developed models of example to help those who didn’t, to create innovation in health care, to be closer to verify income and immigration status, to reduce the time and effort of required reporting requirements and to create state ownership by choosing names of exchanges as well as companies to develop them, adding other subsidized health programs to exchanges which overall would simplify all processes. If this is not what congress wanted, the law would have stated they were setting up a federal exchange, for all states to participate in, except in states that were willing to create their own exchange. By using the argument that the Medicaid expansion was allowed and elimination of Medicaid funding without compliance was allowed based on language in the Medicaid law that it could be changed, demonstrates the heavy handedness Congress believed it had, to put a gun to the head of states.

    I know that it is a politicians job to spin language into the meaning they want it to be and you make good arguments to support their spin. Textual interpretation sounds like it is the way you paint walls not the way the average Joe should read a law that requires them to act or behave in a certain way. There is no massive federal exchange in the law that resembles what we presently have and there is no allocation of funds for such an exchange. Words matter. They mattered when we were told if you like your plan you can keep your plan and they matter even more when our money and insurance plans are being taken away. Words matter when an administration spins them to take funding for a law that does not clearly fund what he is using them for. Words matter when 6% of GDP is affected. My view, legally may not be right, but SCOTUS needs to review this law to provide clarity among the different views. We the people deserve to know that our money is collected earnestly or it needs to stop. We all need closure on this issue in order to move forward. Your beliefs or Cannons beliefs do not matter. Words matter and we need SCOTUS to determine in what way these ACA words matter and should be applied. It is in the best interest of the people of the USA to know and believe that our President is not doing something illegal. If you support the law and all it stands for and believe you are right, you should not fear a SCOTUS review.

    Kelly Proper
    Just an average US Citizen

    • Thanks for the comment Kelly, and for such a close reading of the ACA and a lot of commentary.

      I think we agree on some things. Words matter and the text matters. That’s why my posts focus on the text. (Compare that to the challengers’ arguments.) Unfortunately, interpretation of laws is rarely easy and it’s often complicated. Though interpreters look for plain meaning, the task is difficult bc Congress rarely uses plain language.

      Under either side’s view, Congress could have been more clear. The Medicare incentive for example. It says “Do X get $. Don’t do X you don’t get money.” If ACA was an incentive like that Congress could have used plain language to make it clear.

      I think it’s a tough case. That’s why both sides’ briefs are so long and judges have disagreed. I don’t fear SCOTUS review generally. But I doubt Justices who agree w the King holding would vote for cert. So a grant implies 4+ Justices likely agree w Halbig. I disfavor that outcome! So I’m rooting for a denial.

  4. A slightly more technical way to put this is that in New York v. U.S., 505 U.S. 144, 166-67 (1992), the Supreme Court gave Congress some alternatives, as follows:

    ‘Our cases have identified a variety of methods, short of outright coercion, by which Congress may urge a State to adopt a legislative program consistent with federal interests. Two of these methods are of particular relevance here.
    ‘First, under Congress’ spending power, “Congress may attach conditions on the receipt of federal funds.” South Dakota v. Dole, 483 U. S., at 206.
    * * *
    ‘Second, where Congress has the authority to regulate private activity under the Commerce Clause, we have recognized Congress’ power to offer States the choice of regulating that activity according to federal standards or having state law pre-empted by federal regulation. Hodel v. Virginia Surface Mining & Reclamation Assn., Inc., supra, at 288. See also FERC v. Mississippi, supra, at 764-765. This arrangement, which has been termed “a program of cooperative federalism,” Hodel, supra, at 289, is replicated in numerous federal statutory schemes.’

    Medicaid, and the Medicaid expansion in the ACA, are examples of the first method. If a State doesn’t take the grant, the program doesn’t operate in the state.

    The ACA’s Exchange system is an example of the second method. When a federal Exchange operates in a State, State law on health insurance is pre-empted by federal regulation and by federally sponsored regulators.

    I know of no system of the second type where a state or federal program operates in every State, but there are also penalties against the citizens of a State with a federal program to try to press the State to run the program instead. The Clean Air Act operates in every State and includes a system of sanctions, but those sanctions don’t operate against individuals, and they’re not comprehensive. There have been other systems where tax credits have been available to help fund health coverage that have depended partly on state action, but those systems don’t operate through federal backup regulation, so they’re more like Medicaid than the ACA.

    The basic way a federal backup system encourages States to regulate is by displacing their regulation of an area unless and until they do, with the federal regulators standing in the shoes of the displaced state regulators. There is litigation in the Eighth Circuit about Missouri’s attempts to regulate federally sponsored Navigators. St. Louis Effort for Aids v. Huff, 996 F.Supp.2d 798 (W.D. Mo. 2014), appeal from preliminary injunction, No. 14-1520 (8th Cir.). A major question in that litigation is the extent to which the ACA’s Exchange provisions preempt state insurance regulation. That is a Hodel v. Virginia Surface Mining question, not a South Dakota v. Dole question.

    • Thanks Mark. Apologies for failing to respond to your email, which also had some great thoughts. Glad you found the rest of this series of posts. As you can imagine, I’ve had to leave out and simplify things a bit for the blog. Though I have no page limit, I do have an attention-span limit, and I just can’t compete with the 100+ page appellate briefs!

  5. Genius Few Good Men reference

    Kaffee: You said he was in danger, I said “grave danger?” You said “is there another kind?”–
    Jessep: I recall what I said–
    Kaffee: I can have the court reporter read back to you–
    Jessep: I know what I said! I don’t have to have it read back to me like I’m–!
    Kaffee: Then why the two orders? Colonel?
    Jessep: Sometimes men take matters into their own hands.
    Kaffee: No, Sir. You made it clear a moment ago that your men never take matters in to their own hands. Your men follow orders or people die. So Santiago shouldn’t have been in any danger at all, should he have, Colonel?
    Jessep: You snotty little bastard.
    Ross: Your Honor, I’d like to ask for a recess!
    Kaffee: I’d like an answer to the question, Judge.

    • Thanks! It doesn’t work perfectly, since the “two orders” line comes after the “If you gave an order, and your orders are always followed” line. But conceptually…. I sort of love it.

  6. Pingback: Halbig and the “Whole-Text Canon”: Cato Reflections Part III | Ziff Blog

  7. Pingback: The Halbig Argument from Text: Cato Reflections Part II | Ziff Blog

  8. Pingback: Reflections from Cato: Halbig and the “Isolationist” Theory of Statutory Interpretation | Ziff Blog

  9. Pingback: Here We Go Again: Jeffrey Toobin Wades into Halbig’s Waters | Ziff Blog

  10. Pingback: TPM’s Halbig/PPACA “BOOM” Goes Boom | Ziff Blog

  11. Pingback: Halbig, Statutory Interpretation, and Lessons I Learned in Practice | Ziff Blog

  12. Pingback: In King v. Burwell, the Challengers Find Their Inner Bill Clinton | Ziff Blog

  13. What you ignore in this is that Sen Ben Nelson, D Neb (IIRC) was utterly opposed to having the Federal Gov’t run Health insurance, and refused to support the ACA unless the power was put in State hands. Merely encouraging the States to create Exchanges, but giving them absolutely no incentive to do so, was not enough to meet his objections. Thus tax subsidies only for State Exchanges.

    Absent those subsidies, why would a State go to the expense and effort of setting up a State Exchange? What’s in it for the State?

    Why Federal Exchanges, too? Because the entirety of the ACA falls apart if there’s no Exchange. So they had to be there as a backup.

    But as I point out in my comments to the phrase “an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act” only appears in the ACA in four places: setting up the subsidies, describing an Exchange that is being set up by the State to take the place of a Federal Exchange, setting up a requirement for such Exchanges to report to the Secretary so the Secretary can decide if their plans meet Federal requirements, and acting in partnership with CHIP.

    The first is the one we’re arguing about, the second is unambiguously NOT a Federal Exchange, the third is logically not a Federal Exchange, and the fourth could be either, but there’s not textual evidence that it’s referring to Federal Exchanges.

    So, we have plain text meaning, and other uses that clearly agree with that meaning. Do you have a single place in the 2000+ pages of the ACA where it is clearly stated that Federal Exchanges should get subsidies? No?

    Do you have a good reason why a State would go to the effort and expense of setting upa State Exchange, other than to get the subsidies?

    • A few responses: First, I remember a time when conservatives/textualists would not rely so heavily on recollections of what one Senator said he wanted. Sure, maybe that’s what he wanted. But really, I’m just focused on the text.

      As for incentives and the preference for state-run exchanges: I agree! I think the bill (the text, that is) demonstrates a default for state-run exchanges. That’s why it says states “shall” and defines Exchange in *all* uses as a 1311 exchange.

      So why would states want to set up exchanges? For one thing, back when conservatives were concerned about federalism, the idea of states running their own insurance exchanges was in and of itself a good thing! The threat of “if you don’t set it up the feds will come in and do it for you!” was *itself* a “threat” of sorts. But really, it was more of an alternative. States who wanted to keep the feds out of the insurance regulation business could opt to do that. If not, then here come the feds. I’d think the folks at Cato and other federalists would think *that’s* a threat worth taking seriously! (Also, I need to check the details, but I know that states would get funding to set up their own exchanges.)

      As for the wording of how the ACA refers to exchanges differently throughout the statute: based on my reading of the statute and all the different inconsistent ways the statute refers to exchanges, I’m just not willing to put that much weight on “by the State” given how that would effect other sections and (more importantly) how randomly *other* phrases are used, “under section 1311” for example. If we know that *many* descriptions are useless surplusage, then why assume that “by the State” is not, when that assumption creates so much trouble elsewhere.

      Also, if we’re focused on text, what about “such Exchange”? There’s no reason *not* to think that section 1321 provides for federal exchanges that should be considered state exchanges for all functional purposes. That’s normally what “such” does. For example, see this:

    • Greg,

      There are a few flaws in your argument above.

      1. Sen. Ben Nelson never said he was opposed to federal exchanges, just that he a) did not want one national exchange and b) he DID want states to have the opportunity to run their own exchange if they wanted to do that. Avik Roy (noted conservative health policy expert actually tweeted back in July that he had seen Sen. Nelson in an airport and asked him about it. Sen. Nelson had the same comments as above.)

      2. As for your question about why would a State setup an exchange, David makes a good point about federalism. This argument was put forth by many of the right wing think tanks (Heritage for sure). Setting up your own exchange would keep the Feds out of your state as much as possible. As an aside, I saw a blog from one right-wing writer who suggested that if States allowed the Feds to setup their Exchange, the Feds would be in control of determinations for the state’s Medicaid program (because everyone applying on the Exchanges is checked for eligibility for Medicaid or CHIP first). This would be a HUGE incentive for those states that assert Gollum-esque control of their “ring”…..I mean Medicaid eligibility and enrollment.

      There were also massive financial incentives to setup your exchange. Congress allowed for startup grants in 1311(a)(1). There was NO cap on these grants, and states could get as much as they needed so long as they showed that they were making progress. The ACA is also littered throughout with mandates on the HHS Secretary to do things to help states (create an internet portal that states can copy, create enrollment forms, create exchange infrastructure that can be copied).

      3. There are actually 9 instances where exchange established by the state are used. All of those instances vary wildly with respect to subject matter, location in the Act, and the consequences that result from giving this phrase a “Halbig interpretation”. It ranges from the mundane such as omitting reporting requirements for pharmacuetical companies on Federal exchanges to the shockingly massive, conditioning of ALL of a state’s Medicaid funds on the establishment of an Exchange. All the while, none of these consequences were discussed during the committee/floor debates (I know, I watched most of them on C-Span or read the transcripts from the CR) nor was even the possibility of such an outcome discussed. Now, Halbiggers argue that this is because the authors thought that all states would establish exchanges, but that completely ignores the federal fall-back exchanges (something that is not included in the Medicaid expansion provisions). So, they assumed that all states would expand Medicaid (because of the incredibly large and clearly stated stick) that they did not put in a federal fall-back. So, if they assumed that all states would establish exchanges (because this subsidy “stick” would be, in some cases, up to 7-8% of a state’s annual budget in federal dollars), why put in a fall-back? There’s no reason for a fall-back unless it works exactly as the authors said it did which was that the federally-facilitated state exchanges were to be the exact same. By the way, I mentioned it in a different post, but there is NO such thing as a “federal exchange”, only state exchanges (which were established under 1311 (which are necessarily “established by the state” by requirements 1311(d)(1))).

  14. Pingback: A Walk Through Halbig, King, and the ACA Litigation | Ziff Blog

  15. Have you sent something like this in as an amicus brief? When the Supreme Court makes its lawless, political ruling, it’s good to have amicus briefs on the record explaining why it’s wrong. Helps with the impeachments later.

  16. You are seriously trying to have it both ways here. You first say that a purpose-based interpretation is not the best way to go, but then you completely run, headlong, into a purpose-based argument. Saying that the federal exchanges would be an “empty shell of thing” is accurate, but that doesn’t mean the interpretation as such is inaccurate. It may very well be that Congress wanted there to be an Exchange in every State, tax subsidies or not.

    The reason for “two exchanges” is clear: to make sure that an exchange exists in every state! Nothing more, nothing less. It may be odd when compared to other laws, such as Medicaid, but that doesn’t keep it from being the actual legislative intent. They are two separate laws, so judging one by the other is not entirely fair. Put more succinctly, just because Congress did something stupid, doesn’t mean that they didn’t intend for it to be stupid. Otherwise, you are devolving right back into the purpose-based argument you claim we should eschew. Also, Courts will fix murky. They won’t fix stupid and/or sloppy.

    • Thanks for the comment Bryan. I agree that I’m making a purpose-based argument here. But it’s a specific kind of purpose-based argument, one focused on the text and structure of the statute, as opposed to broad “people should get health coverage!” or “we want to help people!” types of extra-textual purposes you hear people knock around.

      Ultimately, the question is which view of the statute as a whole is most faithful to the text. That question requires different interpreters to perhaps value different parts of the statute differently. They challengers, for instance, seem to think the single most important textual value is the avoidance of surplusage. Based on my reading of the statute as a whole, I don’t think surplusage is such a huge problem here. I tend to think the structure of the federal exchange is more important.

      But, as you demonstrate, reasonable minds can disagree! That’s why this is an interesting case.

  17. Pingback: The Chief Justice’s Brand of Textualism | Ziff Blog

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