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.
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.