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Obamacare Has Been Operating in Violation of Its Own Rules


In a potentially crippling setback to the Affordable Care Act, a panel of judges from a federal court of appeals ruled it is illegal for the federal government to provide subsidies for health insurance purchased through federally run exchanges.

On July 22, a panel of 3 judges from the US Court of Appeals for the District of Columbia Circuit ruled in a 2-1 decision that, based on a close reading of the text of the Affordable Care Act (ACA), the law does not authorize the federal government to provide tax credits to help pay for health insurance purchased through one of the exchanges set up by the federal government.

This ruling, if upheld, could have potentially far-reaching implications for millions of people who have purchased what they thought was federally subsidized health insurance. To date, only 14 states and the District of Columbia have set up state-run exchanges, leaving the federal government to establish exchanges in the remaining 36 states (in some cases with cooperation and assistance from the state).

At the heart of the matter is whether the text of the law as enacted should govern how the ACA is implemented and enforced, or whether the intent of Congress can be discerned from the totality of the law, and, if so, should that intent determine how the law is implemented.

The relevant text of the law (Section 36B of the Internal Revenue Code, enacted as part of the ACA) states that tax credits are to be made available to subsidize health insurance purchased on exchanges that are “established by the state under section 1311” of the ACA. Section 1311 says “each state shall” establish an exchange by January 2014. However, because Congress cannot force states to implement federal law, section 1321 of the ACA explicitly authorized the feds to “establish and operate such exchange within the state” in states that refused to set up their own exchanges.

The decision handed down by the panel of appeals court judges notes that several other passages in the text of the ACA specifically refer to “exchanges established by the State under section 1311” when determining who is eligible to receive subsidies under the law.

The Obama administration, not surprisingly, has taken a broader view of the meaning of the language of the law and what it permits. According to the decision, the IRS (which is part of the executive branch) defined an exchange for the purposes of tax subsidies under the ACA as “an exchange serving the individual market for qualified individuals… regardless of whether the exchange is established and operated by a state (including a regional exchange or subsidiary exchange) or by HHS” (the federal exchanges are set up by the Department of Health and Human Services).

based on that interpretation

The IRS supported this interpretation of the law by citing the statutory language of section 36B and other provisions of the ACA, along with “the relevant legislative history” of the law. In other words, the IRS took for itself the power to decide what Congress had intended when it wrote the law and made a decision that affects millions of Americans .

The IRS’s interpretation of the law not only affects the people who have purchased insurance through a federal exchange under the assumption that their insurance would in large part be subsidized by tax credits, it will determine how many people are subject to the penalties specified under the “individual mandate” and “employer mandate” portions of the ACA.

In their decision, the judges noted that “by making tax credits available in the 36 states with federal Exchanges, the IRS Rule significantly increases the number of people who must purchase health insurance or face a penalty.”

The judges also noted that this practice “affects the employer mandate in a similar way. Like the individual mandate, the employer mandate uses the threat of penalties to induce large employers—defined as those with at least 50 employeesto provide their full-time employees with health insurance.” The judges argued that “even more than with the individual mandate, the employer mandate’s penalties hinge on the availability of credits. If credits were unavailable in states with federal Exchanges, employers there would face no penalties for failing to offer coverage. The IRS Rule has the opposite effect: by allowing credits in such states, it exposes employers there to penalties and thereby gives the employer mandate broader reach.”

The ambiguity in the text of the law is a byproduct of the severely flawed and deeply undemocratic process by which the original bill was passed. As Yale law professor Abbe Gluck explained back in December, “the ACA is a very badly drafted statute” because, due to the death of Sen. Ted Kennedy during negotiations, “the statute never went through the usual legislative process, including the usual legislative clean-up process.” Because Kennedy’s death left Senate Democrats one vote short of a filibuster-proof majority, the version of the ACA that passed the Senate “had to effectively serve as the final version, unchangeable by the House, because nothing else could get through the Senate. In the end, the statute was synthesized across both chambers by an alternative process, called 'reconciliation,' which allows for only limited changes…”

Thanks to the administration’s efforts to force the bill through Congress, we ended up with a weak bill that has been open to all sorts of legal challenges in the years since the president signed it into law, with this latest being the most significant since the Supreme Court ruled on the Constitutionality of the individual mandate and other provisions.

The administration and supporters of the ACA argue that the flaws in the law should be overlooked and literal meaning of the text of the law ignored in favor of an interpretation that allows more people to qualify for subsidized health insurance. If the current decision is upheld following review by the entire 11-member DC Circuit court (and it’s all but a certainty this decision will be revisited soon), they argue that millions of people who have signed up for insurance on the federal exchanges would lose their subsidies and be unable to afford their coverage. This would make the ACA financially unworkable.

However, to do so would only allow the administration to continue its end-run around Congress and the majority of the American public that still views the ACA unfavorably. Whether through advancing the bill through Congress through the process of reconciliation, unilaterally exempting some sectors of society from being covered by the ACA, or selectively enforcing some provisions of the law while ignoring others, the Obama administration has over and over again shown it is willing to bend and distort the law and the legislative process to achieve its desired outcomes.

The judges who handed down this decision knew the stakes were high and that their decision may ultimately affect millions of people and the insurance markets in dozens of states. However, they also rightly reaffirmed the principle of legislative supremacy, writing that “within constitutional limits, Congress is supreme in matters of policy, and the consequence of that supremacy is that our duty when interpreting a statute is to ascertain the meaning of the words of the statute duly enacted through the formal legislative process. This limited role serves democratic interests by ensuring that policy is made by elected, politically accountable representatives.”

Congress clearly intended through the language in the bill that referred repeatedly and exclusively to state-run exchanges that the subsidies created under the ACA were only created to act as incentives for the states to create their own exchanges.

If Congress had intended the subsidies to apply to the federal exchanges, it would have written that into the text. The decision by the DC Circuit panel merely affirms that laws as written actually mean something and that we should prevent unaccountable officials in federal agencies from abrogating powers to themselves that rightly belong to the elected representatives of the people.

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