How the Court Case Against Obamacare Subsidies Stacks Up

By Sean Trende

Last week, the most important case that you've never heard of survived its first legal hurdle. Judge Paul Friedman of the United States District Court for the District of Columbia ruled that plaintiffs had standing to advance a broadside attack on the subsidy system at the heart of the Patient Protection and Affordable Care Act, colloquially known as Obamacare.

Although the Clinton appointee refused the plaintiffs’ requests to temporarily enjoin -- that is, block -- the subsidies, he did so because there would be no harm to delaying an injunction until the conclusion of the case; he did not directly speak to the merits of the underlying claim (though he did note that both sides had made, in his view, credible cases). Friedman promised to rule by Feb. 15, and if he does enjoin the subsidies to the federal exchanges -- or if any judge in three other pending cases does so -- the law might well prove unworkable.

The challenge revolves around three provisions in the Affordable Care Act. Section 1311 of the law establishes state insurance exchanges. It provides, in part, that “[e]ach State shall . . . establish an American Health Benefit Exchange . . . for the State.”

Of course, Congress can’t actually force states to take such a step, as that would be an unconstitutional commandeering of state governments. While the administration believed that all states would eventually create these marketplaces, the ACA nevertheless provides a backstop in case that didn’t happen: Section 1321 specifies that “the Secretary [of Health and Human Services] shall . . . establish and operate such Exchange within the State and the Secretary shall take such actions as are necessary to implement such other requirements.”

A related provision deals with the calculation and payment of insurance subsidies. To cushion the blow of the individual mandate to purchase coverage and pay for associated increased costs, the ACA includes “premium assistance” for lower-income taxpayers. These subsidies are available to people whose plans “were enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act.”

If you’ve been reading carefully, you can see the problem. By its plain text, the ACA only provides for subsidies for people enrolled in an exchange that was (a) established by the state and (b) established under section 1311. (In case you were wondering, the law defines “State” as “each of the 50 States and the District of Columbia.”) This is the argument, in a nutshell, of those bringing the lawsuit. If you live in, say, Oklahoma, which didn’t set up an exchange, the ACA doesn’t appear to offer a mechanism for you to receive any subsidies.

If you’re an opponent of Obamacare, you’re probably nodding along vigorously. This case is made all the stronger because we’re talking about a congressional appropriation, and appropriations have to be expressly made by Congress under the Constitution.

But if you’re a supporter of Obamacare, you’re probably saying, “Oh, come on! It’s pretty clear Congress wanted everyone to get the subsidies.” That, in a nutshell, is the government’s response. The IRS therefore set forth a rule that extended the subsidies to those enrolled in a “State Exchange, regional Exchange, subsidiary Exchange, [or] a Federally-facilitated Exchange.”

The government has defended this rule by arguing that section 1321 instructs the head of HHS to implement “such Exchange” when faced with a recalcitrant state. The word “such,” in this telling, means that an exchange established under section 1321 is for all intents and purposes the same as one established under section 1311.

It’s probably the strongest argument the government can make, but it runs into three problems. First, it is tough to argue that if, say, Kentucky suddenly cancelled its (well-functioning) exchange, that healthcare.gov would be the same as the Kentucky operation; users of the two systems would almost certainly disagree. Second, the federal exchange is still authorized under section 1321 of the Act, not section 1311. (With that said, the use of “such” does connote unity, so a court might determine that the federal exchanges are actually authorized under section 1311; there’s enough ambiguity here that this might be the most natural reading.)

But a final problem remains: Even if you accept that the federal exchange is really just the exchange set up under section 1311, the statute still specifies that the subsidies are only available to exchanges established by a state. This is a tough one for the government to get around, since courts will generally (though not always) balk at construing a statute in such a way that effectively eliminates words from that statute. Additionally, the fact that Congress at other points in the law used broader language, referring to exchanges “established under this Act,” suggests that Congress knew how to write broader language if it wanted to.

In a brief responding to the lawsuit, the government also sets forth examples of provisions of the ACA that would be superfluous or nonsensical if a court adopted the plaintiffs’ interpretation of the law. The government here is drawing upon the legal principle that laws must be construed as a whole, and that the court should avoid interpreting a section of a statute in a way that renders a different section non-functioning (of course, this presumes there's some ambiguity in the section being interpreted).

Without getting too far into the weeds, I’ll just note that plaintiffs argue that these provisions are neither superfluous nor nonsensical, and that, in any event, this isn’t an excuse for ignoring the plain, unambiguous language of the ACA.

Finally, the government argues that nothing in the law’s legislative history suggests that it intended to set up two different subsidy schemes, while plaintiffs assert that the government’s own arguments suggest that this is precisely what was intended. The government points to the House-passed bill, which provided for a federal exchange with a waiver provision for states, and which provided subsidies for both sorts of exchanges. But plaintiffs note that the Senate purposely took a different approach, with state exchanges operating as the default mechanism. As an inducement for states to create such an exchange, they argue, Congress gave them subsidies that aren’t present on a federal exchange. It’s not necessarily the most compelling argument, but it is plausible; one influential health care expert had suggested just such a “carrot/stick” for states in early 2009. Senate Finance Committee Chairman Max Baucus seemed to express awareness of the dichotomy in a committee hearing in late 2009, using it as a basis for asserting jurisdiction over a related issue. Moreover, many -- though not all, and perhaps even not most -- jurists won’t look to legislative intent if there is unambiguous language, which takes us back to step one.

If this were any other law, I’d actually be fairly confident that the court would rule for the plaintiffs and leave it to Congress to fix the language if it wanted to. At bottom, the government is asking the courts to take the language “established by the State” and interpret it to mean “or by the federal government.” That’s significant, especially in the context of an appropriation.

But this isn’t just any law, as we saw in 2012. In the wake of the National Federation of Independent Business case upholding the ACA, lower courts may be wary of weakening the law. At the same time, though, this case is in a different posture than NFIB. In that one, plaintiffs were asking the court to invalidate as unconstitutional the most significant piece of social legislation in two generations on something of a technicality. Chief Justice Roberts took the long-standing proposition that the court should avoid striking down legislation as unconstitutional, examined the individual mandate, said that it looked like a tax, and called it a tax.

Here, plaintiffs may get some more wiggle room because they aren’t challenging the constitutionality of the law, nor are they asking a court to be “activist” in its rulemaking. They are asking for a reasonably straightforward application of canons of statutory construction. Perhaps more importantly, the court would leave the door open for Congress to implement a fix, if it wants.

Here’s where the proponents of the suit may be too clever by half. It’s assumed that, if the courts block the subsidies for people on the federal exchange, Republicans will dig in, the government will have to declare hardship exemptions from the mandate for those who can’t afford insurance without subsidies, and that the framework will collapse.

But a different approach is at least as plausible: This is an election year, and Democrats will likely mount a full-bore assault on state legislators, governors, and congressmen in states without exchanges. The arguments would almost write themselves: Why won’t you let people in our state have the same benefits that people get in New York? Why won’t you set up a marketplace where our citizens could get insurance for one-tenth the price? I’m not sure such a campaign would be as unsuccessful as a lot of Republicans imagine.

In the end, the Supreme Court is not going to be eager to wade into another ACA case. It will probably have to be forced in. For that to happen, one of the courts of appeals is probably going to have to rule in the plaintiffs’ favor. Three of the four cases are actually in reasonably good circuits for such a ruling to occur: Only three of 10 judges on the 7th Circuit is a Democratic appointee; only five of 10 on the 10th Circuit is a Democratic appointee; and only four of eight on the D.C. Circuit is a Democratic appointee (and one of those clerked for Republican-appointed Justice Sandra Day O’Connor).

If the case does get to the Supreme Court, I’d actually give it better chances of succeeding than I would have given the original ACA challenge. The law really did present novel questions, and operated in the hinterlands of Commerce Clause and cooperative federalism jurisprudence. I could have seen, to widely varying degrees, any of the justices (with the exception of Clarence Thomas) voting to uphold it. On the other hand, this case deals with some well-established canons of statutory construction; there are almost certainly four liberal votes in favor of the government’s position, and three conservative votes opposed to it. Anthony Kennedy was willing to strike down the whole law wholesale to begin with, and Roberts voted to uphold it only reluctantly. Faced with creating a national precedent and the language of this statute, I would not be surprised if this time they rejected the government’s position -- though I wouldn’t be surprised if they accepted it, either. If the former happens, the current fights over the ACA website will likely seem like child’s play compared to what follows.