Halbig v. Sebelius is a misfire, not a silver bullet

Two important cases challenging different pieces of Obamacare had oral arguments last week. The Hobby Lobby challenge to Obamacare’s contraception mandate before the Supreme Court received most of the attention, but another case with far more significance for the law’s fate was also argued before the D.C. Circuit Court of Appeals. This case – Halbig v. Sebelius – threatens to unravel the law – to render key components of it inoperable in a majority of states.

Halbig’s attack on Obamacare’s subsidies poses existential threat to the law – but I believe it to be an empty existential threat. While the oral arguments in the case left many spectators concerned for the future of federal exchange subsidies, this is because the government and the law’s supporters are failing to make a crucial argument that could deflate the challengers’ central theory.

In short, the implications of the Obamacare challengers’ theory of the law means that Congress attempted to incentivize states not just with subsidy losses but also with sweeping collateral damage to their insurance industries. Such a move may very well be unconstitutionally coercive on the states, so constitutional avoidance doctrine should guide courts away from this interpretation of the statute and toward the government’s argument that the text of the statute is imperfect but does indeed make subsidies available on all exchanges.

1. The Supreme Court’s decision in NFIB v. Sebelius

To understand why Halbig is a misconceived challenge, it is important to recall what happened in the first wave of lawsuits challenging Obamacare. In 2012, opponents of President Obama’s health care reform brought legal challenges against two key pieces of the law: the individual mandate and the Medicaid expansion. The individual mandate requires most Americans to carry health insurance or else pay a fine. In NFIB v. Sebelius, a majority of justices agreed that this mandate exceeds Congress’s power to regulate commerce. However, Chief Justice Roberts cast the decisive fifth vote to save the individual mandate, determining that if Congress couldn’t impose it under its commerce power, it could do so under its power to tax. The individual mandate, therefore, was constitutional.

The other, less discussed part of the law challenged in NFIB was the Medicaid expansion. One way that Obamacare sought to expand health insurance coverage was by expanding the number of people eligible for Medicaid. Specifically, Obamacare sought to make all people earning below 133% of the federal poverty line eligible for health care coverage through Medicaid. Because Medicaid is run jointly by the state and federal governments, the Obama administration could not just order the states to expand their Medicaid programs – the Constitution prohibits the federal government from “commandeering” the states to enact policies. Rather, Obamacare – through an old provision of the Social Security Act, which governs Medicaid – made expanding Medicaid a required condition for any Medicaid funding: that is, if states didn’t expand Medicaid, they could lose all federal Medicaid funding.

The Supreme Court said that this was unconstitutional coercion on the states. Because they heavily rely on federal money to support their Medicaid programs, states could not afford to refuse to expand their Medicaid program. Rejecting the expansion and losing federal funding would decimate state Medicaid programs and wreck state budgets. The Court decided that this wasn’t a real choice – it was akin to being asked to choose with a gun to your head. The upshot of this decision was that the Medicaid expansion became wholly optional with no threat of lost funding.

2. The Arguments in Halbig

So Obamacare opponents won on the Medicaid issue and narrowly lost on the individual mandate. Undeterred, they came up with a new challenge attacking the law’s tax credits that make it easier for lower- and middle-income people to buy health insurance on the individual market. Led by lawyers from the conservative Cato Institute, Obamacare opponents argued that the text of the law itself denies health insurance subsidies to the millions of Americans who have purchased their insurance on exchanges run by the federal government.

This is their argument in a nutshell: A central part of Obamacare was creating health exchanges in each state where people could directly buy health insurance if they couldn’t get it through their employer. These exchanges were meant to be a simple way for people to purchase insurance and to promote greater competition among insurers, leading to lower premiums. Obamacare gave states the option of opening and running their own exchanges. If they chose not to do so, then the federal government would run an exchange in that state for them.

The Obamacare opponents argue that the text of the law only gives tax credit subsidies to people who buy insurance on an exchange run by a state. If this interpretation is correct, it will take away subsidies from people in states that refused to create an exchange – that is, those who bought their insurance on federal health exchanges (the embattled Healthcare.gov). These people would then likely be unable to afford the insurance that they have purchased. Moreover, without subsidies, the law’s individual and employer mandates would be weakened to the point of irrelevance. Each mandate is tied to the availability of affordable health coverage, defined as about 8 percent of income. Without subsidies, health coverage becomes a lot less affordable for many people, leaving them exempt from the individual mandate.

Why would the law do this? Obamacare opponents theorize that Congress wanted to create an incentive for states to run their own exchanges. According to them, Congress used the exclusivity of health insurance subsidies as a carrot to entice states to choose to operate health exchanges. Having more states run their own exchanges would, of course, reduce costs for the federal government. According to Obamacare opponents, Congress miscalculated the incentive power of these subsidies, as 34 states have refused to run their own health exchanges.

The law’s supporters, however, resist this interpretation of the law. They acknowledge that the text of the statute is messy, convoluted, and ambiguous in places, but maintain that it can certainly be read to give out subsidies on both types of exchanges. For example, Section 1563 of the statute appears to (counter-intuitively) define a federal exchange as a state exchange. Other parts of the law demand disclosure reports from both state and federal exchanges on the amount of subsidies being issued and otherwise imply that buyers on both types of exchanges are eligible for subsidies. All of which makes it less clear that issuing subsidies on federal exchanges raises any problem at all.

Moreover, the fundamental purpose of the law was to expand health insurance access. Depriving insurance subsidies from federal exchange consumers undermines this goal. Under this reading, Congress merely gave states an option to control their own health exchanges as an act of federal-state cooperation. If states chose not to run their own exchanges, the federal government would step in to do so – subsidies and all.

The goal of Obamacare opponents is to get their case to the Supreme Court and have the federal exchange subsidies struck down. The individual and employer mandates would go down with the subsidies, unraveling the core of the law in 34 states. Obamacare opponents have brought cases in multiple appellate circuits across the country. If two or more circuits disagree about the legality of the federal exchange subsidies, the Supreme Court is almost guaranteed to take the case.

3. Halbig’s Fundamental Flaw

There is one significant flaw in the argument against Obamacare’s subsidies: their theory of what Congress did might not be constitutional. In the opponents’ view, Congress used insurance subsidies to pressure the states to create health exchanges. Beyond this, however, the structure of Obamacare threatened to inflict even graver harm on the states. The law bans insurance companies from excluding people with preexisting conditions or price discriminating against them through medical underwriting. Without an effective individual mandate, people could wait until they got sick to purchase insurance. This would cause massive adverse selection, culminating in what’s known as an insurance death spiral – a phenomenon where insurance pools become increasingly and disproportionately comprised of expensive sick people until the insurance market collapses. Without subsidies, more and more people would be exempt from the individual mandate as the cost of insurance escalated, resulting in a death spiral.

Because Obamacare’s individual mandate is only effective if subsidies are available, the opponents’ theory essentially means that Congress threatened states not just with a loss of subsidies, but with an insurance market meltdown if they failed to create a health exchange. After the Supreme Court’s decision on the Medicaid expansion in NFIB, we must seriously wonder whether it would be constitutional for Congress to do such a thing.

Remember, in NFIB the Supreme Court said that it was unconstitutionally coercive for Congress to tell the states that they would lose all Medicaid funding if they failed to expand their Medicaid programs. The federal demand in that case was that states expand Medicaid to cover more of the poor and near-poor. The coercive “gun to the head” was cutting all funding for traditional Medicaid and wrecking state budgets.

Similar coercive tactics are embedded in the Obamacare opponents’ theory in Halbig. (Indeed, Obamacare opponents have partially argued coercion in court.) The federal demand is that states create health exchanges. The coercive gun to the head is a death spiral on state insurance markets imposed by federal regulation. Without subsidies, the individual and employer mandates are essentially inactive, but the bans on preexisting conditions and underwriting restrictions are active. This regulatory environment would devastate the insurance markets in states that opted out of creating health exchanges.

Such behavior by Congress would seem to raise serious constitutional problems after NFIB. Therefore, in a potential Halbig Supreme Court case, the Court would have to choose between two competing theories of the statute: either that it is a coercive incentive scheme, or that it might be an inartfully drafted statute that meant to make subsidies available on all exchanges. The first theory raises constitutional problems, while the latter does not.

Which gets us to the heart of the matter: this is the same exact choice that Chief Justice Roberts faced with the individual mandate in NFIB. In that case, Chief Justice Roberts analyzed the individual mandate and determined that it would be unconstitutional under a commerce clause theory, but would be constitutional under a taxing power theory. The Chief Justice therefore upheld the mandate as an execution of Congress’s taxing power.

This was not a charitable moment of fleeting liberalism by the Chief. Importantly, the decision that his reasoning led to was compelled by a long-held doctrine of statutory interpretation. When courts are presented with two competing interpretations of a law, one that raises constitutional problems and one that does not, courts must adopt the vision of the law that raises no constitutional problems. Chief Justice Roberts relied on this exact canon – known as constitutional avoidance – in upholding the mandate in NFIB. “[E]very reasonable construction must be resorted to, in order to save a statute from unconstitutionality,” he reiterated.

Therefore, in Halbig, constitutional avoidance would require courts to reject the Obamacare opponents’ theory of the law because it might be unconstitutionally coercive on the states under NFIB. Courts should choose the equally plausible interpretation of the law presented by the government and Obamacare supporters: that although its text may seem ambiguous, it can reasonably be read to offer subsidies on federal exchanges while giving states the option to control their own insurance marketplaces.

4. Other considerations

Some might resist the above analysis on the grounds that the coercion on the states in Halbig is less severe than in NFIB. States declining to create an exchange could impose their own individual mandates to prevent an insurance death spiral, or take other measures to shore up their insurance markets. However, similar arguments could have been made about Medicaid in NFIB. States declining to expand Medicaid could have taken measures to fund their traditional Medicaid program, such as reallocating budget priorities, raising additional tax revenue, or even repealing balanced budget amendments so as to run budget deficits. Therefore, the existence of alternative state actions does not seem to make a coercive federal program any less coercive.

If anything, constitutional avoidance is easier to invoke in Halbig than it was in NFIB. In reading the individual mandate as imposing a tax in NFIB, Chief Justice Roberts had to go against both the explicit text of the statute and public statements of President Obama and other key policymakers claiming that the individual mandate imposed a penalty and not a tax. On the other hand, Halbig deals with a section of Obamacare that is highly ambiguous and open to numerous plausible interpretations. Invoking constitutional avoidance in Halbig does less violence to the text than doing so in NFIB.

Moreover, striking down key components of Obamacare has, if anything, become more politically difficult for the Court now than it was in the heated summer of 2012 when the Court decided NFIB. Commentators praised Chief Justice Roberts’s opinion as a politically savvy masterstroke, simultaneously advancing conservative goals of reining in the federal commerce power while protecting the Court from charges of ignoble politicization. Still, it would have been far easier for Chief Justice Roberts to gut Obamacare in 2012 – when the law’s benefits had not yet fully “gone live” – than in 2014, when millions of Americans have relied upon subsidies to gain coverage through federal exchanges. As the curator of the Court’s legitimacy, the Chief Justice would be acutely aware of the mounting political and social costs of invalidating a now-active health care reform.

As in NFIB, a potential Halbig decision presents the Chief Justice with an opportunity to both advance conservative goals while upholding President Obama’s signature domestic achievement. Invoking constitutional avoidance, and explaining why the Obamacare opponents’ incentive theory raises serious constitutional problems, further fleshes out the Court’s nascent coercion doctrine and protects federalism and states’ rights. Doing so is precisely what compels the Court to interpret Obamacare in line with its supporters’ theory of the law – an interpretation that raises no constitutional violation and leaves the law intact.

Certainly, there are other significant holes in the Obamacare opponents’ theory of the law. If Congress committed a political miscalculation in believing that exchange subsidies would entice states to run their own exchanges, then certainly the states too committed a gross miscalculation. Refusing to create an exchange as an act of protest against the president may have been a politically beneficial move for some governors and state legislators. But would it have been worth a self-inflicted insurance market death spiral? There appears to be no evidence that anyone – policymakers or otherwise – at the state level debated or even anticipated that the loss of subsidies or the ensuing insurance market calamity would be a consequence of declining to establish an exchange. If the subsidies were a carrot for the states, then the law’s supporters certainly did an incompetent job of communicating this.

All of which is to say that Obamacare should be safe from a Halbig-style challenge before the Supreme Court. Constitutional avoidance doctrine, coupled with the full coercive implications of the Halbig litigants’ arguments, should guide the Court away from the position of the law’s opponents. Obamacare, then, will live to fight another day.

10 thoughts on “Halbig v. Sebelius is a misfire, not a silver bullet

  1. Wouldn’t a plain text reading of the law say a 1311 Exchange is different than a 1321 Exchange and “such Exchange” could never be a 1311 based on the requirements to be a 1311? It seems the law is pretty clear when it differentiates the two then allows only one named specifically “established by a state under 1311″ to despise tax credits.

    • BG – Section 1563(b) of the law gives defines the term “Exchange” to mean “an American Health Benefit Exchange established under section 1311 of the Patient Protection and Affordable Care Act.” So the government’s argument is that, per this definition, “such exchange” under 1321 means a section 1311 exchange — that is, an exchange established by the federal government is a state (1311) exchange. (Tim Jost explains this at the top of page 3 here: http://ssrn.com/abstract=2150237) It’s a bizarre and counter-intuitive way to construct a statute, but Congress can define statutory terms in bizarre and counter-intuitive ways if it wants to

  2. Thanks for the reply. If the #1 requirement to be a 1311 Exchange is “An Exchange shall be a governmental agency or nonprofit entity that is established by a State.” how could the federal government assume they can be a 1311 when their Exchange is explicitly defined in 1321. Moreover, why didn’t they provide on the multiple times they expressed a “established by a state under 1311″ to be their true intent? which would be “an Exchange” where they’ve used that language to in the Act to refer to all exchanges. Also. wouldn’t “No federal funds for continued operations” as stated in 1311 leave the federal exchange unfunded after January 2015?

    • Sure. So I definitely won’t defend this statute as an example of clear or artful drafting, but I think if you look at it from the drafters’ point of view, you can see what happened: The first preference was to have states create their own exchanges, but to have a federal fallback option if they couldn’t/wouldn’t do so. This federal fallback was to have all the same characteristics as a state-created exchange, and the simplest way (drafting-wise) to incorporate these characteristics is by just defining a federal exchange to be a state exchange. This is mechanically clumsy, but I think it’s at least a plausible reading of what went on here. As you’ve pointed out, the statute certainly didn’t have all of its rough edges rounded or cleaned up, which makes arriving at a definitive interpretation difficult for all sides. But as I suggested, the government’s interpretation just needs to be reasonable given the constitutional problems with the plaintiffs’ theory

      • Yes, that’s the debate. If it’s reasonable that the IRS rule which is a 1311 is actually a 1311 and 1321, which is counter to the text of the law and intent to have state based exchanges distribute the subsidy’s I’m not sure what the constitutional problems would be.

  3. The law was designed to create political pressure on the states that didn’t setup an exchange. Knowing the new coverage standards of the law were going to raise prices offset by subsidies it was assumed with the pressure from constituents states would establish an exchange. States saw this is an opt in or out proposition. Opt in and you get all the subsidies or opt out and save your employers and certain individuals from mandates but lose the subsidies. It is clearly the way the law was written and insisted upon by Nelson and Lieberman to be this way. The government miscalculated the number of states that would participate thus the IRS rewrote the law and without authority from the house imposed $700 billion in new taxes.

  4. Pingback: Halbig revisted: How Congress can turn apples into oranges | J.DODGE blog

  5. Pingback: The anatomy of a death spiral | J.DODGE blog

  6. IJust for the record, I definitely want Obamacare repealed. That being said, this is a terriffic article. It is well thought out and easy to understand. Because we know this is going to go to the Supreme Court wink wink, It will be interesting to see how it turns out. You have a convincing argument.

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