The Senate healthcare bill might be unconstitutional

Senate Republicans just won’t let their healthcare bill die. But if the political process doesn’t kill it, the U.S. Constitution might. That’s because the Senate bill now imposes insurance market death spirals on any state that fails to step in to create its own positive health policy. That very well may be unconstitutional under the Tenth Amendment’s prohibition on coercing the states.

On Friday, the Senate’s Better Care Reconciliation Act (“BCRA”) took a Byrd Bath. That’s the process by which the Senate parliamentarian reviews a reconciliation bill to make sure each provision is related to the federal budget. Provisions that aren’t sufficiently related to spending get eliminated from the bill and cannot be passed by a bare majority reconciliation vote.

Unfortunately for the GOP’s already-floundering healthcare effort, the parliamentarian just knocked out some major provisions of BCRA. She ruled that a provision defunding Planned Parenthood requires sixty votes to succeed. And she ruled that a provision prohibiting federal tax credits from paying for abortion services requires sixty votes as well.

These are deep political blows to Republicans, making “passage almost impossible,” according to Rep. Mark Meadows. But perhaps the most devastating decision by the parliamentarian struck down the GOP’s six-month lockout proposal. This policy was meant to be a conservative replacement for Obamacare’s individual mandate. It would make anyone who failed to maintain continuous insurance coverage wait six months before signing up for insurance. This is meant to stabilize insurance markets by nudging healthy people to sign up or face a six-month penalty.

Without the six-month lockup provision, BCRA suddenly has no mechanism to stabilize insurance markets. This leaves Senate Republicans courting insurance market disaster. The GOP would leave in place Obamacare’s politically popular guaranteed issue and community rating requirements. Guaranteed issue means that insurers cannot deny coverage to people with preexisting conditions. Community rating requires insurers to offer coverage to sick people at the same price they offer to healthy people.

For insurance markets to remain stable under these regulations, they must have a broad risk pool with a substantial number of healthy people enrolled in coverage. That’s why the individual mandate to purchase coverage is so crucial, pulling healthy people into the market. Without any type of penalty for forgoing insurance, anyone can buy insurance at any time. This means that more healthy people will decide not to purchase insurance until they need it. With the healthiest people opting out of the market, costs go up for everyone else, leaving a sicker risk pool left over. The next healthiest group then drops coverage, making costs rise and the risk pool sicker still.

This is what’s known as an insurance market death spiral — a process that culminates in a moribund insurance market with few if any insurers willing to sell. And that’s exactly what would happen under either GOP healthcare bill. For Senate Republicans to press ahead with BCRA in its current form would be to deliberately inflict insurance market death spirals.

At the same time, the GOP bill loosens the requirements for states to obtain waivers from federal regulations. As Nicholas Bagley explained at Vox, “Under the Affordable Care Act, a state has to show that its alternative plan would allow it to cover as many people, with coverage as generous, without increasing federal spending. [. . .] [But] [u]nder the Senate bill, to get a waiver, a state doesn’t have to demonstrate anything about coverage. Instead, it just has to show that the plan won’t ‘increase the federal deficit.’”

This makes it significantly easier for states to obtain waivers from national healthcare rules. Indeed, as long as a state’s proposed plan doesn’t increase federal spending, the federal government is required to grant that state’s waiver request under BCRA.

So post-Byrd Bath, the Senate bill pairs disastrous, death-spiral inducing federal insurance market rules with a much more permissive process for states to obtain waivers from those very rules. From one vantage point, it appears that the Republican Congress could even be threatening a booby-trapped insurance market if states don’t take action to seek waivers to implement their own regulatory policies. That is, the GOP healthcare bill is so bad, it could only reasonably be meant to provoke state-based reform.

That’s where the Senate bill gets into constitutional trouble. The Supreme Court has read the Tenth Amendment to prohibit Congress from enacting legislation that coerces the states. The states are sovereign entities, and Congress cannot try to compel desired action from them through overly strong-arm tactics. For instance, when Obamacare threatened to cut off all pre-existing Medicaid funding from any state that declined to expand its program to cover the near poor, the Supreme Court held that this threat amounted to undue coercion. As Chief Justice John Roberts put it in NFIB v. Sebelius, this threat amounted to Congress pointing a “gun to the head” of the states. No reasonable state would have had any meaningful choice.

One could read BCRA as posing a similar threat to the states: adopt state-based health reform, or have your insurance markets destroyed by malicious federal regulation. Indeed, this promotes the conservative preference for federalism and state-level policymaking. Under BCRA, if state lawmakers want healthy insurance markets, they will need to take affirmative legislative action to enact market-stabilizing policies and to seek federal waivers to take steps to save their insurance markets.

This looks awfully coercive. If states don’t act, BCRA’s perverse regulatory regime destroys their insurance markets. BCRA thus becomes a way to compel state action.

But don’t take my word for it. There’s some indication that the Supreme Court considers the threat of insurance death spirals to be constitutionally problematic. In King v. Burwell, opponents of Obamacare argued that Congress had conditioned subsidies for individual insurance enrollees on each state’s decision to run an insurance marketplace. If so, that meant that Congress had threatened states with insurance market death spirals if they didn’t run their own exchanges: without subsidies, the individual mandate would be inoperative while guaranteed issue and community rating remain in effect (the same dynamic as under BCRA). Such a federal regulatory environment would have plunged insurance markets into death spirals in states that refused to comply with the wishes of Congress.

A coalition of law professors and non-profit organizations presented this problem to the Supreme Court in an amicus brief (on which I advised). And at oral arguments, multiple justices worried about the coercive effects of Congress imposing death spirals on the states. Justice Anthony Kennedy called it “a serious constitutional problem.” “The states are being told: Either create your own exchange, or we’ll send your insurance market into a death spiral,” he said.

Justice Sonia Sotomayor was similarly troubled by the coercive implications of the plaintiffs’ reading of the ACA. “If we read it the way you’re saying,” she said, “then we’re going to read the statute as intruding on the federal-state relationship, because then the states are going to be coerced into establishing their own exchanges.” (In its opinion, the court ultimately steered clear of any constitutional issues by locating an anti-death spiral constraint in the statute itself.)

Granted, these are the oral argument musings of just two of the Court’s nine justices. But one could imagine a state opposed to Obamacare repeal seizing on these hints from King v. Burwell to attack BCRA in court, pressing the Supreme Court to deal with the “serious constitutional problem.” For BCRA presents a unique perversion of the federal-state relationship: federal legislation so awful that it coerces any reasonable state into action.

The Senate’s healthcare bill was bad when it was introduced, and it got made worse after undergoing its Byrd Bath. The GOP’s healthcare effort is no longer just politically dire. It has now ventured into potentially unconstitutional territory. The same is true of the Senate’s alternative “repeal only” bill, which too would eliminate the individual mandate without bothering to supply any replacement.

The Senate is due to vote to begin debate on Obamacare repeal in a matter of hours. After the parliamentarian’s decision, the Senate’s bill currently lacks any meaningful way to protect insurance markets. If Senate Republicans press on with the bill in its current form, they will be assenting to inflicting grave harm on health insurance markets across the country. And they may be casting a bad vote for a bill that’s on the wrong side of the Constitution.

 

Note: This post is cross-posted at Medium.

King v. Burwell’s shadow constitutional avoidance

It has been nearly two months since the Supreme Court upheld the structure of ObamaCare for the second time in three years. The Court rejected a vision of the law’s insurance subsidies as inducements to compel state action, affirming the availability of these subsidies to insurance consumers nationwide.

It was a resounding victory for the ACA and the Obama administration. Yet there was one curious absence from at least the surface of the Court’s opinion: there was no discussion of the troublesome constitutional implications of the challengers’ interpretation of the law and the need to avoid them.

But a closer view of the majority opinion — and its vulnerabilities raised by Justice Scalia’s dissent — shows that there might be more going on here. Though the Court seemingly avoided avoidance in King, perhaps the coercion issues nonetheless played a role in steering the Court away from the challengers’ interpretation and all of its federalism baggage.

As the challenge to ObamaCare’s subsidies wound its way through the lower courts, I advocated a sort of fail-safe argument for why the Court should endorse nationwide subsidies. This argument drew on the rule against coercing the states and the canon of statutory construction that cautions courts to avoid interpretations of laws that trigger constitutional issues. Putting these two doctrines together, I argued, should lead the Court to reject the challengers’ broadside to the ACA. It was a trump card; a last resort that struck at a potential Achilles’ heel in the challengers’ case.

I began writing about this argument on blogs and then in an amicus brief to the Court with my former professor Abby Moncrieff. Our brief’s argument gained traction at the Supreme Court’s oral arguments, drawing favorable pronouncements from both Justice Kennedy and Justice Sotomayor.

Yet when the opinion dropped, there was nothing at all about coercion or avoidance. Abby came to call avoidance the “argument that wasn’t.” But the more I think about the King opinion, the more I see shades of a more subtle form of avoidance. Ruling for the challengers would have required the Court to grapple with difficult constitutional questions, so the Court steered clear of this legal tangle and affirmed the Obama administration’s implementation of the ACA.

In our brief, Abby and I had argued that (1) Congress is constrained from imposing insurance market death spirals on states that decline to create exchanges, and (2) that this constraint comes from the Tenth Amendment’s anti-coercion principle — that Congress may not pose coercive inducements upon the states. Given the ambiguity of key phrases in the law like “such exchange,” the Court should avoid an interpretation that would threaten states with death spirals, thus affirming the availability of subsidies on all exchanges.

In the section of its opinion analyzing the “broader structure” of the ACA (the focus of my discussion here), a majority of the Supreme Court agreed with Point (1), but not on the grounds proposed in Point (2). Instead, the Court reasoned that the anti-death spiral constraint arose from the statute itself. “[T]he statutory scheme compels us to reject petitioners’ interpretation because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid,” Chief Justice Roberts held.

The problem for Roberts and the rest of the majority, however, is that the ACA never explicitly prohibits death spirals — that is, the anti-death spiral constraint does not arise from the plain text of the statute itself.   Just the opposite, in fact: as Justice Scalia points out in dissent, Congress explicitly enacted death spiral inducing regulations in the long-term care market and in the federal territories. “How could the Court say that Congress would never dream of combining guaranteed-issue and community-rating requirements with a narrow individual mandate,” Scalia asks, “when it combined those requirements with no individual mandate in the context of long-term-care insurance?”

Scalia’s point echoes the decision of a panel of the D.C. Circuit Court of Appeals ruling for the ACA’s challengers a year ago. To argue that Congress is still constrained from imposing death spirals on the states, one would seemingly need to look externally from the statute. One beckoning possibility is the Tenth Amendment. As I wrote last July, “states are entitled to special protections in our constitutional order that the territories and long-term care markets emphatically are not. [ ] One of these protections is the [Tenth Amendment’s] prohibition against federal attempts to coerce the states.”

So the majority could have intercepted Scalia’s objection by relying on an anti-death spiral constraint arising from the Tenth Amendment’s rule against coercion on the states. Yet the Court chose not to do so. Instead, the majority insisted on locating an anti-death spiral principle in the ACA itself, despite statutory text to the contrary. It grounded this principle in a different set of federalism considerations. Instead of focusing on top-down federalism — that is, limits on what the federal government can do to the states — the Court emphasized bottom-up federalism: the states’ roles as policy innovators and so-called “laboratories of democracy.”

In the early pages of its opinion, the Court traces the 1990s health reform efforts at the state level in New York, Washington, and Massachusetts. These states all attempted to expand coverage by imposing community rating and guaranteed issue without an individual mandate. All of these states fell far short of universal coverage, while thoroughly destabilizing their individual insurance markets. Only Massachusetts was able to successfully expand coverage and calm its insurance market by ultimately imposing an individual mandate.

In the Court’s understanding, Congress watched the 1990s reform efforts play out and lifted Massachusetts’s successful scheme for national primetime: reform based on community rating and guaranteed issue coupled with an individual mandate. Thus, Massachusetts became the national model for successful health reform.

By adopting this narrative of the legislative process behind the ACA, the Court reads an anti-death spiral principle into the law’s legislative history: If Congress wanted to turn the country into Massachusetts, then of course it wouldn’t put in place the kind of regulatory scheme that failed in New York and Washington.

However, the states-as-laboratories view of the ACA’s legislative history could have a darker spin, too. Just as Congress drew on Massachusetts as its chosen model for health reform, it could have drawn on the discredited reform efforts in New York and Washington to prod states toward establishing their own exchanges. That is, if Congress was such a keen observer of state health policy experiments, what if it had threatened the states with deliberate New York-style insurance market instability if they refused to adopt their own exchanges?

This punitive twist on states-as-laboratories federalism would be completely unprecedented — but it was exactly what the ACA challengers’ interpretation of the law entailed. As I wrote in June, such a reading of the law would “cast Congress in the role of evil scientist, resurrecting the failed experiments of the states to bludgeon its way to getting its chosen policies enacted nationwide.” This type of congressional threat would almost certainly require the Court to revisit its nascent coercion jurisprudence.

To avoid dealing with the coercion issue, the Court had to read the ACA in a broad, purpose-driven way. The Court’s thinking goes something like this: In passing the ACA, Congress’s primary aim was to expand health insurance, so it solely wanted to turn states into Massachusetts. It wouldn’t threaten some with becoming New York for the sake of promoting state-run exchanges (a deeply subsidiary goal of the law). Doing so would undermine the overarching aim of expanding health insurance coverage.

Now this is an eminently reasonable understanding of Congress’s priorities. Indeed, it’s a refreshingly broad-minded counter to the ACA challengers’ myopic hypertextualism.

But it also revives old school purposivist interpretation — a mode of statutory construction traditionally associated with liberal jurisprudence. The Court invoked the relatively barren canon of construction cautioning against negating statutory purposes, relying on New York State Dept. of Social Servs. v. Dublino, a case that has been seldom used since the 1970s, and a canon that inherently requires courts to first identify a statute’s overarching purpose based on its structure and presumed aims.

This is uncommon ground for Chief Justice Roberts and Justice Kennedy to tread. Judicial conservatives rarely rely on the supposed purpose of a statute to guide their decision-making. But in doing so in King, Roberts and Kennedy may have turned the ACA into what legal scholar William Eskridge calls a “super statute.”   Certain significant, high profile pieces of legislation are interpreted by courts with great deference to Congress’s legislative purpose. These statutes aren’t subject to plain meaning limitations, and seem to defy the typical rules of statutory interpretation.

So when Justice Scalia laments that King “changes the usual rules of statutory interpretation for the sake of the Affordable Care Act[,]” he’s not entirely wrong. The question is why the Court went to these lengths and bent some interpretive rules to arrive at its decision.

One plausible reason was that the Court really wanted to avoid delving back into coercion doctrine. At oral arguments, Justice Kennedy seemed persuaded that the challengers’ interpretation of the ACA presented a “serious constitutional problem” under the Court’s coercion holdings. Justice Sotomayor too was troubled by these constitutional implications in the challengers’ reading.

The problem with the Court’s anti-coercion principle, however, is that it opens a giant judicial can of worms. The rule against coercion is rife with line-drawing problems and malleable, poorly defined standards. Just how substantial does a federal inducement have to be to cross the line into coercion on the states? How burdensome does a conditional regulation need to be? The whole enterprise plunges the Court into endless difficulties.

Regardless of any line-drawing problems inherent in the anti-coercion constraint, it seemed crystal clear to me that threatening states with insurance markets wrecked by federal regulation — as ObamaCare’s challengers postulated — would be extremely problematic no matter where one draws the coercion-inducement line.

Rather than reckon with this outcome and revisit a vexing constitutional principle, the Court took a different route to reach the same result, upholding the ACA’s subsidies nationwide. To avoid even touching upon the coercion issue, the Court landed on an expansive reading of the ACA that, if anything, bolstered the law’s standing and reach. And it settled for reasoning with glaring weaknesses, teeing up Justice Scalia’s objections based on the federally induced death spirals in the CLASS Act and the federal territories.

Between the lines then, King might read like an odd sort of avoidance opinion after all in its contortions to avoid passing upon the coercion issues at play. Indeed, perhaps this is a pure from of avoidance: stretching alternative reasoning to avoid discussing or developing a constitutional doctrine at all. (If so, then King is the polar opposite of Chief Justice Roberts’s commerce clause opinion in NFIB v. Sebelius, wherein he fully analyzed the individual mandate’s commerce clause implications before invoking avoidance.)

This might explain some of the compromises and strains apparent in the Court’s opinion. In fact, its concluding language echoes that typically found in constitutional avoidance cases: “Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the Act in a way that is consistent with the former, and avoids the latter.” (emphasis added)

A ruling for ObamaCare’s challengers would have forced the Court to directly confront the coercion issues embedded in the challengers’ interpretation. The complexities arising from these issues only made it more difficult for the Court to contemplate a ruling for the challengers.

Justice Kennedy said at oral arguments that the constitutional considerations are “in the background of how we interpret this [law].” If coercion added a judicial hurdle — even if only in the background — that kept the Court from ruling for the challengers, then the constitutional avoidance argument did its job in King.

Why Michael Cannon is wrong about coercion in King v. Burwell

Michael Cannon of the Cato Institute has a thoroughly unconvincing rebuttal to those of us who have pointed out that his own legal gloss on the Affordable Care Act might be unconstitutionally coercive on the states. Cannon’s core error is that he repeatedly ignores the fundamental fact that health insurance markets aren’t like other markets because they are prone to adverse selection problems.

Remember, Cannon helped spearhead the legal challenge that became King v. Burwell, premised on the theory that Congress made subsidies available exclusively to states that created their own exchanges. I have argued (as have others) that such a tactic by Congress might be unconstitutionally coercive because it would threaten the states with insurance market death spirals if they refuse to comply. In a battle of statutory interpretations, the Court thus cannot sustain Cannon’s.

Cannon argues that this isn’t coercive at all under current Supreme Court precedent. His mistake, however, is brushing past the full scale of the consequences that follow if a state declines to create an exchange under King. Cannon argues that killing the individual mandate by cutting off subsidies would just impose additional costs on state residents. But this ignores the fact that on health insurance markets, these costs aren’t stagnant. Rather, these costs are dynamic and self-perpetuating until markets seize up altogether. Health care is different, and that difference makes the “choice” in King unusually coercive.

Cannon raises three separate points pushing back against the coercion argument:

Cannon #1: “The ACA’s Exchange provisions don’t penalize states. They let states make tradeoffs between taxes, jobs, and insurance coverage.”

Response: Whether Congress penalizes the states or their residents should be irrelevant under the Constitution’s federalism protections. And the tradeoff that states would have to make to decline to create an exchange under King is significantly more burdensome than Cannon admits.

“If a state fails to establish an Exchange, the ACA withholds subsidies from a state’s residents, not the state,” Cannon argues. This is overstated for two reasons. First, withholding subsidies under King not only has individual effects, but debilitating statewide effects, too. Because withholding subsidies triggers the individual mandate’s affordability exception for most consumers, state insurance markets (still obligated to comply with the ACA’s guaranteed-issue and community-rating requirements) will plunge into death spirals. That’s very much a penalty on a state as a whole, rather than just on its citizens.

Cannon goes to great lengths to contort the death spiral phenomenon into a mere imposition of costs.  Rather than call it a death spiral, he says that “withholding subsidies in uncooperative states would make the costs of the ACA’s community-rating price controls transparent to consumers, and those costs might have the effect of coercing states into implementing Exchanges.”

This is a deeply understated and incomplete formulation of what’s coercive about King. Cannon’s sleight of hand is treating the “costs” in an uncooperative state’s insurance market as if they were the costs typical of any other market. But this just isn’t the case. Health insurance markets are fundamentally different, and are singularly prone to adverse selection problems. The individual mandate is the lynchpin that secures stability in insurance markets with consumer-protecting regulations like guaranteed-issue and community rating. Removing this lynchpin doesn’t just unveil the ACA’s “true cost” (i.e., it’s cost without cross-subsidization from the young and healthy). Rather, it unleashes uncontrollable cost increases that culminate in a market collapse. That’s what would coerce the states, for the consequences of withholding subsidies impact far more than just the individuals that would have otherwise been eligible for them.

It’s also hardly clear that, for purposes of federalism constraints on congressional power, the distinction between states as sovereigns and their residents really matters. Certainly, New York v. United States suggests that it matters some. But New York itself reminds us that the underlying rationale of these federalism constraints is to protect individuals, not states. As the Court put it, “federalism secures to citizens the liberties that derive from the diffusion of sovereign power.” Drawing a bright-line and limiting coercion to direct federal salvos against state governments’ budgets would be an artificial formality that makes little sense given the whole raison d’etre of the federalism enterprise.

Such a formality would also be too easily circumvented for the Court to accept. In fact, at oral arguments in King, Justice Kennedy signaled that this very distinction matters less than Cannon thinks to the coercion inquiry. Kennedy said that the court “wouldn’t allow” Congress to impose a thirty-five mile per hour speed limit on states that don’t go along with a federal command (at 19:3). As in King, such a restriction wouldn’t impose a direct penalty on state budgets, but would instead negatively impact its residents directly. But such a negative impact would still be coercive, according to Justice Kennedy. That means that a regulation can still be coercive even if it doesn’t directly affect state budgets.

Moreover, if King contemplates the states making well-considered “tradeoffs” under the ACA, it’s hardly clear that they have been able to do so, which gets to Cannon’s second point:

Cannon #2: “Roughly half of states appear to consider those costs [of declining to create an exchange] tolerable.”

Response: These states haven’t reckoned with the full costs of declining to create an exchange under King. And just because a state chooses to accept the federal government’s punishment doesn’t make it constitutionally acceptable for Congress to pose a coercive choice in the first place.

This state acquiescence argument has appeared frequently since oral arguments. How could the exchange choice be coercive, its proponents ask, if so many states have refused to create exchanges?

The problem, as I’ve written, is that not a single state has yet embraced the full range of consequences of refusing to create an exchange under King. No state has publicly indicated that it has knowingly and voluntarily accepted an insurance death spiral as a consequence of this choice. States may be willing to take ownership of losing subsidies, and are happy to trumpet freedom from the individual mandate. Some even now claim, post hoc, that they knew they’d lose subsidies at the time they declined to create an exchange. But so far, not a single state has acknowledged the deeply destabilizing impact on their insurance markets that follows from that choice under King.

But suppose a state did claim to accept this dire consequence. Would it make a legal difference to the coercion inquiry if states (even many states) decided to take the federal government’s punishment? What if before NFIB, states had decided to end their Medicaid programs in order to avoid Obamacare’s expansion of that program? Would the threatened loss of all Medicaid funding still be coercive? In fact, Texas — one of the country’s biggest potential markets for expanded Medicaid — was making noise about abandoning Medicaid altogether to avoid the mandatory expansion even before NFIB. I doubt that the Court would permit Congress to impose an otherwise coercive choice on the states just because it wasn’t perfectly airtight coercion.

Both in theory and in practice, the number of states declining to create exchanges should have little bearing on the degree of coercion in King. If anything, the fact that so many states have made this choice in the face of the draconian implications of King’s version of the ACA points toward other doctrines that cast doubt on the petitioners’ interpretation. Maybe the thirty-six states that declined exchanges didn’t have clear notice of the consequences of such a choice, in which case the petitioners’ interpretation violates the Pennhurst doctrine. Or maybe the states simply didn’t see the elephantine implications of the petitioners’ version of the ACA because Congress hid it in a statutory mouse-hole — another legislative no-no that Justice Sotomayor raised in oral arguments (at 23:5). However you cut it, the Fantasy Affordable Care Act conjured by the King petitioners ultimately collapses in on itself.

Cannon #3: “This ‘deal’ is comparable to what the Court allowed in NFIB v. Sebelius.”

Response: The “deal” here in unlike NFIB in that it threatens grave economic harm on the states that extends beyond depriving the program’s would-be beneficiaries of insurance.

Cannon draws an analogy between the Medicaid expansion remedy in NFIB and how the ACA would operate under King: “In NFIB, the Court allowed states collectively to turn down Medicaid subsidies for as many as 16 million poor people. The Exchange provisions permit states to do the same for 16 million higher-income residents.”

Again, the coercion here is about far more than just subsidies. The yes-or-no Medicaid expansion decision didn’t threaten broader economic harm on state insurance markets. There, the consequences of state refusal were borne entirely by those eligible for expanded Medicaid.

The consequences of the choice in King aren’t nearly so cabined. Under the petitioners’ reasoning, the choice of whether or not to accept subsidies has huge economic consequences for the sustainability of state insurance markets as a whole. As I’ve explained above, foregoing these subsidies doesn’t just mean passing up on help for “16 million higher-income residents”—it also means an insurance market collapse. If a state wants a functioning health insurance market, it’s very hard to turn down subsidies. That wasn’t a consequence states had to consider three years ago under NFIB’s Medicaid expansion holding.

*          *          *

Cannon’s rejection of the coercion argument thus doesn’t hold water. The threat levied against the states under his reading of the ACA is significantly graver than he’s willing to admit — and it’s grave precisely because of the unique problems endemic to health insurance markets.

There’s a telling moment in Cannon’s article, however. As a result of a state’s decision not to create an exchange, Cannon argues, “residents would then see lower taxes, more jobs, more hours, higher incomes, and more flexible health benefits.”

The supposed economic gains are sheer speculation by Cannon, and they are highly doubtful speculation at that given how frantically business has sought to stave off the consequences of a ruling in favor of the petitioners in King. But Cannon tips his hand with the last “benefit”: “more flexible health benefits.”

Cannon presumably envisions Red states increasing reliance on a conservative favorite: health savings accounts — personal accounts where an individual funds much of his or her own medical costs rather than counting on insurance.

This is a useful reminder that the conservative vendetta against health reform is about more than just health exchanges, government subsidies, the individual mandate, or Barack Obama. At core, it’s about rejecting the basic risk-pooling function of insurance in favor of a go-it-alone, bootstraps approach. It’s part of what Jacob Hacker calls the “personal responsibility crusade,” taking us from a society that pitches in together to protect one another and transforming us into one where you’re on your own instead. That, at heart, is what’s at stake in King v. Burwell and the continued fight for universal health reform.

The looming constitutional icebergs in King v. Burwell

I wanted to point out a new amicus brief that has been filed with the Supreme Court in King v. Burwell. Professor Abigail Moncrieff of Boston University School of Law and the Jewish Alliance for Law and Social Action have filed a brief drawing the Court’s attention to the numerous constitutional difficulties that arise directly from the petitioners’ understanding of how ObamaCare works. (Full disclosure: I advised on this brief.)

In short, the brief argues that the King petitioners’ interpretation of the Affordable Care Act leads to drastically different regulatory systems in states that create exchanges and in states that do not, targeting refusing states with a destructive and potentially unconstitutional regulatory threat. Under basic interpretive principles, the Supreme Court should avoid this reading of the law and adopt the government’s interpretation, making subsidies available on all exchanges.

In King, the Supreme Court is asked to resolve a question of statutory interpretation. The petitioners argue that the ACA denies subsidies to people who purchase insurance on federal exchanges. The government argues that the law makes subsidies available on any exchange. The Court will decide who’s right.

When determining the meaning of a statute, courts typically draw on a number of interpretive canons. One of these is the canon of constitutional avoidance, whereby courts disfavor statutory interpretations that raise constitutional questions. This is based on the presumption that Congress doesn’t intend to pass laws that violate the Constitution.

Indeed, as Chief Justice Roberts reminded us when upholding the ACA’s individual mandate as a tax three years ago, even when a constitutionally problematic reading is “the most natural interpretation” of a statute, “every reasonable construction must be resorted to, in order to save a statute from unconstitutionality.”

Under this mode of interpretation, the petitioners’ theory of how the ACA operates raises several significant constitutional problems.

First, conditioning subsidies for individuals on whether states establish health exchanges might run afoul of the prohibition on federal coercion of the states. In NFIB v. Sebelius, the Supreme Court ruled that Congress could not threaten to cut states’ Medicaid funding if they didn’t comply with the Medicaid expansion. This threat, the Court said, went beyond a run-of-the-mill incentive and amounted to a “gun to the head” of the states.

The same might well be true for the petitioners’ interpretation of the ACA. (Indeed, the petitioners have repeatedly argued that Congress tried to “coerce” the states to create exchanges, analogizing the subsidies to the Medicaid expansion.) Like Medicaid funding, the value of the subsidies is a massive fiscal inducement, reaching up to $2 billion per state. The condition attached to the subsidies is meant to encourage states to establish an entirely different program — a health exchange. The Court invalidated a similar arrangement in NFIB, where Congress leveraged funds for states’ preexisting Medicaid programs to encourage states to adopt a “new” program — expanded Medicaid. Therefore, petitioners’ interpretation that the subsidies are an incentive for states to create exchanges might ultimately make their reading of the ACA unconstitutional.

More significantly, petitioners’ interpretation sets in motion radically different federal regulatory schemes for different states, targeting states that decline to create an exchange with a perverse subset of federal policies that would wreak havoc on their insurance markets. All states would be subject to the ACA’s community-rating requirements and its prohibition on denying coverage for a preexisting condition. But the employer and individual mandates would be virtually inoperative in states where subsidies are not available. Thus, under the petitioners’ interpretation, states that decline to create exchanges lose subsidies, which means that the mandates will not be enforced in those states.

This regulatory arrangement would devastate state insurance markets. Community rating and prohibited medical underwriting without an individual mandate is the precise recipe for rampant instability and adverse selection on insurance markets, as states like New York, New Jersey, and Massachusetts can attest. Without an individual mandate, individuals face a strong incentive to wait until becoming sick to purchase insurance. This means that insurance pools will become sicker and costlier, causing more healthy people to drop insurance, making pools still sicker and costlier again. Under this regulatory regime, insurance premiums will skyrocket and insurers will ultimately exit the market, making it exceedingly difficult for individuals to get coverage.

Under petitioners’ interpretation of the law, the ACA punishes states that decline to create exchanges with this destructive policy package. Simultaneously, it rewards states that do create exchanges with a fully comprehensive and stabilizing regulatory structure.

This disparate state treatment is constitutionally problematic under the fundamental principle of equal state sovereignty that the Supreme Court relied on in Shelby County v. Holder. In that case, the Court invalidated the Voting Rights Act’s coverage formula that subjected some states to federal preclearance for their voting laws, but not others. This “disparate geographic treatment” is disfavored, for the constitutional presumption is that the states be treated as equals. In the absence of an exceptional circumstance, such an arrangement is likely unconstitutional.

Petitioners’ interpretation inherently creates disparate geographic treatment based on whether a state creates an exchange. And there’s little exceptional circumstance to justify this treatment. The Voting Rights Act was sustained from the 1960s until 2013 by the exceptional condition of historic racial discrimination in voting. There’s no comparable condition that would justify subjecting state insurance markets to such categorically different treatment.

Moreover, the only practical relief from this harsh regulatory treatment available to states declining to create exchanges is to apply for a federal waiver — a procedure highly reminiscent of the preclearance regime under the Voting Rights Act struck down in Shelby County.

This disparate regulatory treatment also likely points a gun to the head of the states under NFIB. In essence, petitioners think that Congress threatened the states with grave economic destruction in their insurance industries if they failed to comply with federal demands to create a health exchange. This seems highly coercive, going well beyond a normal incentive where states retain actual autonomy to make a choice.

Each of these highly problematic scenarios is a direct consequence of the petitioners’ reading of the ACA in King. Never before has Congress threatened to impose a different and destructive set of substantive federal policies in states that don’t cooperate with federal demands.

Fortunately, the Court can avoid wrestling with the problems raised by this unprecedented brand of punitive federalism. It can do so by simply adopting the government’s reading of the law. Because the government reasonably interprets the ACA to make subsidies available on both federal and state exchanges, the subsidies are not wielded as an incentive of any kind. This structure creates none of the constitutional problems that arise from the petitioners’ interpretation, for it treats all states equally.

Therefore, the brief argues, the Court should disfavor the petitioners’ argument because it may render large pieces of the ACA’s operation unconstitutional. The Court should instead adopt the government’s plausible argument that the IRS may make subsidies available on all exchanges under the ACA, protecting insurance subsidies for millions of Americans across the country.

I’ve written about some of these constitutional flaws in the petitioners’ argument on several occasions (among others). It will be interesting to see whether this thread of argument gains any traction before the Court. If the Court rules for the petitioners in King without seeing these constitutional icebergs coming, it will undoubtedly confront them someday soon. And given the scant evidence that Congress intended to use the subsidies as an incentive — let alone that it intended to torch the insurance markets in non-compliant states — the Court should wonder whether it really must let the petitioners steer us toward these icebergs.

More than (four) words

The viability of the Affordable Care Act’s subsidies in 36 states is going to be decided by the Supreme Court.  King v. Burwell, the Fourth Circuit iteration of a multi-pronged challenge to availability of health insurance tax credits across much of the country, has been granted cert by the Court to be heard this term.

I’ve written about these cases (focusing on the D.C. Circuit case, Halbig v. Sebelius Burwell) frequently (I, II, III, IV, and V). But as the case readies for it’s moment before the Highest Court, I wanted to take a moment to address a clever rhetorical deceit that is being propagated by those cheering on the subsidy challenge.

That’s the idea that this is a cut and dry case, a foretold outcome based on the unambiguous text of the statute. Take George Will: “Four words in the ACA could spell its doom.” “The four words that threaten disaster for the ACA,” Will writes, “say the subsidies shall be available to persons who purchase health insurance in an exchange ‘established by the state.’ But 34 states have chosen not to establish exchanges.”

Or take Patrick Wyrick, the solicitor general of Oklahoma, who is challenging the law’s subsidies in a separate suit.  “The phrase ‘Exchange established by a state under Section 1311’ ​leaves nothing to the IRS’s imagination​,” he argues at SCOTUSblog.

Indeed, the architect of these lawsuits, Michael Cannon of the Cato Institute, asserts much the same, contending that “the tax-credit eligibility rules ‘clearly say’ exchange subsidies are available only through state-established exchanges,” and that any ambiguity has been retrospectively manufactured by the government’s lawyers.

There’s a reason the challengers in King are so adamant that this is a simple, unambiguous case. If there is any ambiguity in the statute — any uncertainty whatsoever in whether the text permits subsidies in non-exchange states — the challengers likely lose. That’s because ambiguity triggers so-called Chevron deference to the IRS’s interpretation of the law, which favors making subsidies available in all states.

It could also trigger constitutional avoidance doctrine, since the challengers’ constitutionally troublesome and coercive reading of the law would have to compete with the government’s abjectly constitutional, non-coercive reading of how the subsidies operate.

But if what the law says is clear and unambiguous, then there’s no discretion for the IRS to employ, and no deference owed to its interpretation. And there’s no constitutional avoidance obstructing the challengers’ path to victory, because there would be no alternative reasonable interpretation at hand.

Now “established by the State” sounds pretty unambiguous, right? Pretty damning for the government and the law’s supporters, no?

Of course it does. But it’s also a neat sleight of hand, because those four dooming words aren’t the ones that this case hinges on.

Instead, the case turns on two words, not four. Those two words are “such Exchange.” See, Section 1311 of the law instructs that each state create a health exchange. But Congress can’t order the states to do anything, so it created a federal fallback. For states that don’t elect to run their own exchanges, Congress said, the federal government would step in to “establish and operate such Exchange within the State.”

What’s more, the term “Exchange” in the statute is defined as “an American Health Benefit Exchange established under [section 1311 of the ACA].” That’s the section that directs states to create exchanges.

So what does “such Exchange” mean, exactly? One eminently plausible interpretation is that, if you connect the daisy chain of definitions and provisions laid out above, the federal government creates the functional equivalent of an exchange established by the state in each non-compliant state. That is, for purposes of the statute, the federal government can create an “exchange established by the State.”

Counterintuitive, sure. But it’s clearly a reasonable interpretation, as I’ve explained before. And the meaning of “such” is what split the lower courts in the first place. Shouldn’t this alone be enough to suggest ambiguity, which in turn triggers deference to the IRS’s interpretation?

One would think so.  But the ObamaCare challengers evidently insist that the federal government can only create “an exchange,” not “such Exchange,” for it can create one with all the attributes of a state-created exchange except for subsidy availability. Where’s the support for this in the text?

The challengers’ case looks a lot weaker when we hone in on the text of the law that really matters to this case. And liberals like Paul Krugman ought to stop arguing that the law is facing “death by typo,” for it concedes that the law’s text as written can’t accommodate subsidies on the federal exchange.

That’s only the case if you accept the challengers’ false framing of the language that this case turns on. They’re trying to hide the ball behind the seemingly open-and-shut certainty of “established by the State.” But that’s not the language that really matters. And the fact that “such Exchange” is ambiguous is just enough to expose the challengers’ case to potentially crippling vulnerabilities that could spell their doom before the Supreme Court.

Halbig’s hellscape

I’ve written (several times) about the Achilles’ heel in the subsidies-as-incentives theory of Obamacare – the cornerstone of the Halbig argument. In short, eliminating subsidies while retaining the ban on community rating and pre-existing condition exclusions will lead to insurance death spirals on Red State individual markets. This is because without subsidies, many more Americans would be exempt from the individual mandate on affordability grounds. They could then wait until becoming sick to purchase insurance, and insurers would be legally obligated to accept them.

The Kaiser Family Foundation crunches the numbers and figures out exactly how many more Americans would be exempt from the individual mandate if Halbig were the law of the land:

With subsidies available, less than 3% of uninsured people eligible for subsidies in the 36 federal marketplace states would be exempt. However, if the Halbig case prevails and the subsidies are invalidated in federal marketplace states, we estimate that 8.1 million (or 83%) of those formerly subsidy-eligible uninsured people would end up being exempt from the individual mandate. With the subsidies unavailable and the individual mandate rendered partially ineffective, it might be difficult to attract healthy people into the individual market and premiums could rise significantly in these states. The result could be what is commonly called a “death spiral,” as healthy people exit the market and premiums rise even more.

That’s a huge number. Of course, this would only be the first wave of Halbig‘s effects. As the healthiest people drop out of insurance pools, insurance premiums would rise further, making insurance unaffordable for even more people.

The legal import of this dynamic cannot go ignored. A full reading of Halbig means that Congress threatened states with a devastated insurance market if they didn’t create health exchanges. Such behavior can’t be constitutional — so the Halbig reading of the law cannot be right.

“Such” a mess

Wow. This morning was a doozy for ObamaCare, as two federal appellate courts issued opposite rulings on the validity of the law’s crucial insurance subsidies. Plaintiffs in each of these cases challenge whether the language of the Affordable Care Act gives the IRS authority to give subsidies to all Americans or to only those living in the 14 states that elected to create their own health exchanges. (I have previewed the D.C. Circuit iteration of this lawsuit previously: I, II, and III.)

How did the two courts reach different conclusions? After a quick read through of the two opinions, it looks like the divergence comes down to the meaning of the word “such.” Really.

First, consider the key statutory sections of the law at play:

  • Section 1311 of the law directs states to create health exchanges.
  • If states fail to do so, the law directs the federal government (through the Department of Health and Human Services) to “establish and operate such Exchange within the State.”
  • Section 36B gives subsidies to those who enroll in plans “through an Exchange established by the State under section 1311.”
  • But the law also defines the term “Exchange” as “an American Health Benefit Exchange established under [section 1311 of the ACA]” — the section that directs states to create exchanges.

How did the courts reconcile this mess? First, let’s start with the D.C. Circuit case, Halbig v. Burwell. The court there determined that the statute requires three elements to receive subsidies: “(1) an Exchange (2) established by the State (3) under section 1311.” “[F]ederal Exchanges satisfy only two: they are Exchanges established under section 1311. Nothing in section 1321 deems federally-established Exchanges to be ‘Exchange[s] established by the State.'”

It’s the court’s second element that dictates its resultant decision against the government and against broad subsidy availability. Does “such exchange” mean that an HHS-created exchange is (for statutory purposes) an “exchange established by the state”?

The Fourth Circuit Court of Appeals in King v. Burwell determined that it did. “Given that Congress defined ‘Exchange’ as an Exchange established by the state, it makes sense to read § 1321(c)’s directive that HHS establish ‘such Exchange’ to mean that the federal government acts on behalf of the state when it establishes its own Exchange.”

In other words, the Fourth Circuit thinks that the D.C. Circuit parsed the statute too finely. By authorizing HHS to create an exchange under Section 1311, the law lets the federal government fill in for the state. “Such” encompasses more than just a 1311 exchange — it means a 1311 exchange established by a state.

That’s the threshold disagreement here. And it’s a really, really important disagreement, for it determines whether health care reform will function in most of the country. I think the government has the better of the argument for reasons beyond the basic arguments over statutory text, which is frankly a mess to make sense of. But the consequences of that mess, to paraphrase Vice President Biden, are a big f***ing deal.

The anatomy of a death spiral

We are still waiting for the D.C. Circuit Court of Appeals’ decision in the Obamacare subsidy case Halbig v. Sebelius. I’ve written before (here and here) on a significant glaring flaw in the challengers’ case. In short, their theory that Congress threatened states that refused to create exchanges with an inactive individual mandate (due to lost insurance subsidies) and an active ban on preexisting condition exclusions raises constitutional issues regarding improper coercion upon the states. This is because such a regulatory regime would plunge state insurance markets into adverse selection death spirals. Because the challengers’ theory raises constitutional problems, basic statutory interpretation principles will guide courts toward the government’s reading of the statute – a reading that permits subsidies to be offered on all exchanges. Therefore, the plaintiffs’ challenge to Obamacare will fail.

I’ve explained the contours of this argument, and I’ve justified why the government’s interpretation of the relevant Affordable Care Act provisions is reasonable. But I haven’t yet walked through the anatomy of an insurance market death spiral in much depth. Indeed, this is the linchpin of the theory of why the Halbig plaintiffs’ argument fails on its face.

An amicus brief filed by a group of health economists in Halbig provides a succinct outline of how a death spiral occurs:

Without premium subsidies, millions of people will be exempt from the mandate altogether or will choose to pay the tax penalty rather than purchase unaffordable insurance. Yet the sickest people will continue to sign up for insurance and insurers will have to cover them. The resulting higher premiums will threaten an adverse selection “death spiral”: as premiums increase, more and more healthy people will be exempt from the mandate or will choose to pay the tax penalty rather than buy insurance, leaving sicker people an ever greater portion of the risk pool, leading to escalating premiums, and even fewer enrollees.

The economists explain the death spirals of this kind have occurred in Massachusetts, New York, New Jersey, and the U.S. Virgin Islands.

Looking at two pertinent case studies is instructive. First, the individual insurance market in New York. New York experienced some of the sharpest post-Obamacare premium declines in the country. New Yorkers who were previously paying over $1,000 a month for individual insurance plans are now barely paying $300 – and that was even before Obamacare’s subsidies kicked in.

This rapid price decline was due to the fact that, prior to national health reform, New York had one of the most expensive and severely broken individual markets in the country. The reason, according to Sarah Kliff, was “a law passed in 1993, which required insurance plans to accept all applicants, regardless of how sick or healthy they were. That law did not, however, require everyone to sign up, as the Affordable Care Act does. [ ] New York has, for 20 years now, been a long-running experiment in what happens to universal coverage without an individual mandate.”

The result of the experiment was the highest health premiums in the nation. Insurers had to accept all comers, but there was no reciprocal obligation on all New Yorkers – both healthy and sick – to carry health coverage. This led to a sicker risk pool, leading to higher prices, leading healthier people to drop out of the risk pool in greater numbers, leading to a still sicker and more expensive risk pool. In short, a death spiral.

Second, consider the case of child-only insurance plans. In 2010, insurance companies started dropping child-only insurance plans. The reason? The Affordable Care Act was imposing a ban on preexisting conditions but no individual mandate (until 2014). A spokesman for America’s Health Insurance Plans explained the danger of this regulatory structure, fearing that it “provides a very powerful incentive for a parent to wait until their child becomes very sick before purchasing coverage.” Rather than face a market meltdown, many insurers simply stopped offering child-only policies under the new rules.

The meltdown in the child-only markets has not gone unnoticed, including by Halbig architect Michael Cannon. Importantly, Cannon concedes that the deliberate imposition of insurance market death spirals by Congress is on par with the coercive “gun to the head” threat of losing Medicaid funds in NFIB v. Sebelius:

Congress enacted even worse policy (community-rating price controls with zero protections against adverse selection) in both the CLASS Act and the markets for child-only health insurance, and enacted similarly bad policy (community rating with weak protections against adverse selection) in the non-Exchange individual market and in U.S. territories. Moreover, the potential adverse-selection effects amici describe are not out of character for a Congress that was trying to put “a gun to the head” of uncooperative states, which is what the Supreme Court found this Congress was trying to do.

Cannon fails to appreciate how this accusation of congressional coercion – the logical endpoint of the plaintiffs’ argument – undermines the anti-Obamacare case. If the plaintiffs’ theory depends on coercion by Congress, constitutional avoidance doctrine commands courts to adopt the government’s theory that the hastily-drafted Affordable Care Act sections at issue can be plausibly read to make subsidies available on all health exchanges.

The experiences of New York and the child-only insurance market shares the same characteristics as the Halbig plaintiffs’ understanding of congressional intent in Obamacare: the absence of an individual mandate, coupled with a requirement that insurers accept all customers regardless of their preexisting conditions. Under the Court’s coercion doctrine, Congress could not have constitutionally threatened states with becoming New York if they didn’t create health exchanges. It would have devastated their insurance markets.

So on the threshold question of how exactly we are to interpret the statute, and how Congress meant Obamacare’s subsidies to work, courts can’t buy what the plaintiffs are selling. In their quest to kill Obamacare and escape the individual mandate, the Halbig challengers prove too much by bringing on a death spiral.

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.

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.