Halbig revisted: How Congress can turn apples into oranges

The D.C. Circuit Court of Appeals is expected to issue a decision in the Obamacare subsidy case Halbig v. Sebelius any day now. Recall: Halbig challenges whether the Obamacare statute prevents the millions of Americans who signed up for health insurance on federal exchanges from being eligible for premium subsidies. A ruling that these Americans are not eligible for subsidies would have the effect of gutting health care reform in the 35 states (now including Oregon) that do not operate their own health exchanges, putting health insurance out of reach for millions.

I’ve argued that there is a fundamental flaw in the Obamacare opponents’ theory that has largely gone unnoticed during the litigation. Their theory is that Congress made insurance subsidies available only on state-run exchanges as a way to encourage states to run their own exchanges. Congress, it goes, thought that states would not want to deprive their citizens of valuable subsidies.

This, however, understates the power of the federal incentive in the plaintiffs’ theory because it ignores the implications of Obamacare’s ban on preexisting conditions. A state the declines to create an exchange would lose subsidies, leaving the individual mandate largely inactive in that state (under the mandate’s affordability exemption). But such a state would still be subject to other Obamacare regulations, including the rule that insurance companies cannot refuse to cover people with preexisting medical conditions or price discriminate against them.

This regulatory combination – no individual mandate, coupled with a ban on preexisting condition exclusions – would wreck state insurance markets. People would wait until they became sick to purchase health insurance, making insurance pools increasingly more expensive and comprised of sick people. This is what’s known as an insurance market death spiral.

So the Halbig plaintiffs’ theory is that Congress threatened states not just with a loss of subsidies, but with an all-out insurance market catastrophe if they declined to run an exchange. Such a threat may very well be unconstitutionally coercive under the Supreme Court’s 2012 decision on Obamacare’s Medicaid expansion, NFIB v. Sebelius. But the doctrine of constitutional avoidance – the rule that judges should choose a constitutional interpretation of a statute over a potentially unconstitutional one (which Chief Justice Roberts employed to uphold the individual mandate) – should guide courts away from the plaintiffs’ problematic coercion theory and toward the government’s argument that the statute is messy and ambiguous, but can reasonably be read to give insurance subsidies on all exchanges.

The Obamacare opponents’ theory, then, ultimately disqualifies itself. Yet as best as I can tell, this argument has not been made in full during the course of this litigation. The Commonwealth of Virginia argued in an amicus brief in a related case that courts should use constitutional avoidance because of the unconstitutional coercion at the heart of the challengers’ theory. But it pointed only to the “potentially devastating financial burdens [imposed] directly on State citizens” through the loss of subsidies. The coercion theory is much more powerful when the ban on preexisting condition exclusions is added to the mix.

A group of economists filed a brief in Halbig pointing to the experiences of states like New York, Massachusetts, and New Jersey in “implement[ing] insurance reforms barring discrimination without simultaneously ensuring wide participation through subsidies and mandates.” These states saw insurers exit the market and premiums skyrocket to unaffordable levels – in short, they experienced death spirals. “Congress,” these economists say, “could not have intended a similar outcome for the nation.”

The Cato Institute’s Michael Cannon, one of the architects of the challengers’ argument, characterizes the economists argument as that conditioning subsidies on states running their own exchanges would “trigger an adverse-selection ‘death spiral’; that would be really bad policy; and Congress would never intentionally enact really bad policy.” But the point is not that Congress would never enact this kind of bad policy, or that Congress couldn’t have intended a national death spiral; it’s that Congress flat-out cannot enact this kind of coercive policy – that it would likely be unconstitutional under NFIB.

The complete argument that I’ve laid out takes into account the full implications of subsidies-as-carrots given a regulatory regime that imposes a ban on preexisting condition exclusions. If this argument is right, it lowers the bar for the government. The government must only show that its interpretation of the law is reasonable. It need not be persuasive or the most convincing reading of the statute – it must only be plausible.

So has the government made a reasonable argument? Can the statute reasonably be read to make premium subsidies available on all types of exchanges?

A key piece of the government’s argument is that, under Section 1563(b) of the Affordable Care Act, the word “exchange” is defined as a state-created exchange. This means that the drafters of the Act said that a federal “exchange” is a state exchange. So if subsidies are available on state exchanges, then they are also available on federal exchanges.

But how can that be? How could a federal exchange be a state exchange? The contradictory logic of this has proven to be a stumbling block for many observers, not least of which includes lawyers arguing the case before the D.C. Circuit. Michael Carvin, the lawyer for the Halbig plaintiffs, maintained that “You can’t interpret state to mean federal, you can’t interpret north to mean south.”

Except that you can. There might be perfectly good reasons to interpret state to mean federal or north to mean south. There is not a “no opposites” rule to drafting statutory definitions. Congress uses defined terms as short-hand labels when it drafts statutes. It might then define seemingly opposite things to equal one another because it wants them to have the same powers, privileges, and attributes.

Suppose that, for whatever reason, Congress was enacting comprehensive fruit reform. It begins by legislating about apples. It provides a whole host of rules pertaining to apples: that apples ought to be eaten once a day (presumably to further a governmental interest in keeping the doctor away), that they are to be transported across states on a certain kind of truck, that they are to be stored at a certain temperature, etc.

Finished with apples, Congress then takes up oranges. It wants to give to oranges the same exact rules and requirements that it has prescribed to apples. One quick and efficient way to do this is by simply defining oranges to be apples. This does not literally declare oranges to be apples, of course. It just means that wherever the term “apple” appears in the statute, that provision also applies to oranges. So, voila, Congress has made apples equal oranges.

This appears to be what happened in drafting the Affordable Care Act. It’s clear that Congress’s preference was for states to run their own exchanges. So it began by drafting requirements and powers for state exchanges. One of these rules included the availability of subsidies for consumers on state exchanges.

But Congress realized that if states didn’t create their own exchanges, there needed to be a federal fallback. So it added the possibility of federal exchanges, but wanted these exchanges to have the same rules and attributes that their state counterparts have – subsidies and all. So, again, an efficient and comprehensive way to incorporate these rules and attributes is to define a federal exchange as a state exchange. In mathematical terms, it’s saying, for purposes of this statue, Let “federal exchange” = “state exchange.”

This is the heart of the government’s theory. It seems bizarre and counter-intuitive, but we should not be thrown off by technical meanings and nested definitions. Drafters define statutory terms less for common usage and more for statutory convenience.

Moreover, the government doesn’t need its argument to wholly convince anyone. It just has to show that its theory of what congressional drafters did here is reasonable; that the logic makes some basic degree of sense. That’s because the plaintiffs’ coercion theory proves too much – it backfires on itself by triggering constitutional avoidance doctrine.

I think the government meets this burden. This becomes all the more clear when we leave Halbig fantasy world and ground ourselves in actual reality, where not a single state lawmaker anticipated that losing subsidies and incurring an insurance calamity would be the cost of defaulting to a federal exchange; where no federal legislative history or floor statements even allude to any heavy-handed scheme to coerce the states; and where the insurance status of millions hangs in the balance. This case already asks us to suspend a lot of our disbelief, so it’s hardly a leap through the looking glass to see how federal can mean state; how apples can become oranges.

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3 thoughts on “Halbig revisted: How Congress can turn apples into oranges

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

  2. Pingback: “Such” a mess | J.DODGE blog

  3. Pingback: Halbig’s hellscape | J.DODGE blog

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