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Draft of October 5, 2014

Playing Chicken with Obamacare’s State Exchanges:

The Political Economy of Halbig v. Burwell

[In preparation for a talk to undergraduates at Hillsdale College and for publication in some form. This draft is early and it should not be circulated.]

Abstract

In 2014, a 3-judge panel of the D.C. Circuit held in Halbig v. Burwell that the Affordable Care Act--- Obamacare--- specifies that if a state government decides not to establish an insurance exchange, the federal government may not establish an exchange in that state. If no federal exchange is established, the individual and employer mandates to purchase health insurance do not apply in that state. In this paper I show how the Democratic majority might have written the statute this way for mistaken strategic purposes, and how the court’s decision might nonetheless benefit the Democratic Party politically. I also use this statute to illustrate the difficulties of defining “legislative intent”.

Eric B. Rasmusen: Olin Faculty Fellow, Harvard Law School; Visiting Professor, Department of Economics, Harvard University; Dan R. & Catherine M. Dalton Professor, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University; ; cell:812-345-8573.

I thank David Gamage for helpful comments, and participants in sdfsd for their comments. This paper’s origins lie in several of my posts at the Law and Economics Professors Blog.

Although our decision has major consequences,our role is quite limited: deciding whether the IRS Rule is a permissible reading of the ACA.

--- the majority in Halbig v. Burwell

This case is aboutAppellants’ not-so-veiled attempt to gut the Patient Protection and Affordable Care Act (“ACA”).

--- the dissent in Halbig v. Burwell

1. Introduction

Halbig v. Burwell and King v. Burwell involve one of the many issues raised by Obamacare, the health insurance bill Congressional Democrats passed in March 2010 and tendentiously named, “The Patient Protection and Affordable Care Act (“the ACA”). The proponents of the bill wanted state governments to expand Medicaid eligibility and to set up state insurance exchanges to help implement a scheme in which large employers would be required to provide high-coverage, high-cost health insurance to their employees and anybody not covered by an employer plan would be required to buy their own high-coverage, high-cost insurance, but with a subsidy if their income was low enough. The bill also banned low-coverage insurance (controversially banning insurance policies that did not pay for birth-control pills) and required insurance companies to sell to people even if they had pre-existing medical conditions that would make the insurance unprofitable.

Congress could not constitutionally force a state to set up an insurance exchange, and the bill authorizes the federal government to set up a federal exchange if a state refuses. The issue in Halbig and King was whether the bill’s wording that low-income people were eligible for the insurance subsidy only using an exchange “established by the State”, the words should be interpreted (a) literally, or (b) as using either a federal or state exchange. If the words were taken literally, then not only would states that refused to establish exchanges lose insurance subsidies, but that would also prevent the individual and employer mandates to buy insurance from being triggered. Thus, under the literal interpretation not only the Medicaid expansion part of Obamacare but also the insurance-buying mandates would become optional for each state (other features such as the banning of low-cost low-coverage insurance policies and the requirement to cover people who were already sick would not be optional, though).

I’ll talk about a number of features of these cases. After explaining the legal issues, I will make two points:

1. Simple game theory analysis shows that making Obamacare optional for the states was a rational strategic decision, though perhaps mistaken give how things turned out.

2. Simple economics shows that the Democratic Party should be thankful for the delays in implementation of Obamacare, and making Obamacare optional for the states works to their political advantage.

3. This case offers a good setting to think about what “intent” means. In the context of this case, “legislative intent” is not a useful concept.

2. The History and Legal Issues

Barack Obama was elected President in November 2008 and took office in January 2009. Both the House of Representatives and the Senate were also under Democratic Party control. By April 2009, after contested elections were decided and Republican Senator Spector switched to become a Democrat, Democrats held the Senate 60-40, permitting them to override filibusters. Health policy was one of President Obama’s priorities, and health care bills were passed both in the House and Senate. Everybody thought that the two bills would be reconciled and perhaps substantially changed in conference, but after Senator Kennedy died and was replaced by a Republican in January 2010, the Democrats only had 59 votes. They therefore decided to have the House vote for the Senate bill without modification, avoiding the need to override a Senate filibuster. The bill was made law in March 2010.

The bill’s various provisions were scheduled to go into effect at different dates, and some of these statutory dates were then postponed by Presidential action. The bill was carefully written, however, to avoid putting it into effect before the November 2012 presidential election. As it happened, the Democrats lost control of the House in the 2010 elections, but President Obama was re-elected to his second term in 2012, with no chance of a third term. In May 2012, the Administration promulgated regulations that permitted low-income people to receive subsidies for insurance bought from federal exchanges. 26 C.F.R. § 1.36B–1(k); Health Insurance Premium Tax 7 Credit, 77 Fed.Reg. 30,377, 30,378 (May 23, 2012). People challenged the regulations as violating the words of the statute, in cases which were named Halbig v. Burwell and King v. Burwell by the time they reached the appellate courts in 2014. In Halbig, the government lost 2-1 in the D.C. Circuit, and in King the government won 3-0 in the xxx Circuit. At the time Halbig was decided, only 14 states and the District of Columbia had set up state exchanges.[1]

The section of the Obamacare bill at issue is one that became 26 U.S.C. §36B in the U.S. Code, part of the Tax Code (Title 26) since the IRS administers much of the program.

§36B(b)(2) Premium assistance amount

The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—

(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311[2] of the Patient Protection and Affordable Care Act, or

(B) the excess (if any) of—

(i) the adjusted monthly premium for such month for the applicable second lowest cost silver plan with respect to the taxpayer, over

(ii) an amount equal to 1/12 of the product of the applicable percentage and the taxpayer’s household income for the taxable year.

and

§36B(c)(2) Coverage month

For purposes of this subsection—

(A) In general

The term “coverage month” means, with respect to an applicable taxpayer, any month if—

(i) as of the first day of such month the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer is covered by a qualified health plan described in subsection (b)(2)(A) that was enrolled in through an Exchange established by the State under section 1311 of the Patient Protection and Affordable Care Act, and

(ii) the premium for coverage under such plan for such month is paid by the taxpayer (or through advance payment of the credit under subsection (a) under section 1412 of the Patient Protection and Affordable Care Act).

It seems odd to put the important requirement that subsidies are only available to people who purchase insurance through state exchanges in the rules for premium assistance amounts and coverage months, and the government made that argument. The Halbig court noted, however, that is equally strange to put there the important requirement that subsidies are only available to people who purchase insurance through exchanges instead of private markets.[3] Oddity of drafting is a pervasive feature of the bill.

The IRS wrote the regulations to say that the premium assistance amount and whether the person was enrolled during a coverage month would not depend on whether the person enrolled in a state exchange or a federal exchange: either way, he would be eligible for the tax credit. The IRS did not give much explanation, but it did say (quoting from King):

The statutory language of section 36B and other provisions of the Affordable Care Act support the interpretation that credits are available to taxpayers who obtain coverage through a State Exchange, regional Exchange, subsidiary Exchange, and the Federally-facilitated Exchange. Moreover, the relevant legislative history does not demonstrate that Congress intended to limit the premium tax credit to State Exchanges. Accordingly, the final regulations maintain the rule in the proposed regulations because it is consistent with the language, purpose, and structure of section 36B and the Affordable Care Act as a whole.

The IRS interpretation had an important effect on the mandate. As Halbig puts it:

This broader interpretation has major ramifications. By making credits more widely available, the IRS Rule gives the individual and employer mandates—key provisions of the ACA—broader effect than they would have if credits were limited to state-established Exchanges. The individual mandate requires individuals to maintain “minimum essential coverage” and, in general, enforces that requirement with a penalty. See 26 U.S.C. § 5000A(a)-(b). The penalty does not apply, however, to individuals for whom the annual cost of the cheapest available coverage, less any tax credits, would exceed eight percent of their projected household income. See id. § 5000A(e)(1)(A)-(B). By some estimates, credits will determine on which side of the eight-percent threshold millions of individuals fall. See Br. of Economic Scholars in Support of Appellees 18. Thus, 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 IRS Rule 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 employees, see 26 U.S.C. § 4980H(c)(2)(A)—to provide their full-time employees with health insurance. See generally id. § 4980H(a). Specifically, the ACA penalizes any large employer who fails to offer its full-time employees suitable coverage if one or more of those employees “enroll[s] . . . in a qualified health plan with respect to which an applicable tax credit . . . is allowed or paid with respect to the employee.” Id. § 4980H(a)(2); see also id. § 4980H(b) (linking another penalty on employers to employees’ receipt of tax credits). Thus, 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 Halbig Court decided that (a) the words “established by a State” were not ambiguous, whether in isolation or in context, and (b) using the literal meaning would not make the bill so absurd that no rational (or actual) Congress could possibly have wanted to pass a bill like that. The Court said:

Under section 36B, subsidies are available only for plans “enrolled in through an Exchange established by the State under section 1311 of the [ACA].” 26 U.S.C. § 36B(c)(2)(A)(i) (emphasis added); see also id. § 36B(b)(2)(A). Of the three elements of that provision— (1) an Exchange (2) established by the State (3) under section 1311—federal 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.” This omission is particularly significant since Congress knew how to provide that a non-state entity should be treated as if it were a state when it sets up an Exchange. In a nearby section, the ACA provides that a U.S. territory that “elects . . . to establish an Exchange . . . shall be treated as a State.”2 42 U.S.C. § 18043(a)(1). The absence of similar language in section 1321 suggests that even though the federal government may establish an Exchange “within the State,” it does not in fact stand in the state’s shoes when doing so...

The government argues that we should not adopt the plain meaning of section 36B, however, because doing so would render several other provisions of the ACA absurd. Our obligation to avoid adopting statutory constructions with absurd results is well-established. See Pub. Citizen v. U.S. Dep’t of Justice, 491 U.S. 440, 454-55 (1989). Under this principle, we will not give effect to a statute’s literal meaning when doing so would “render[ the] statute nonsensical or superfluous or . . . create[] an outcome so contrary to perceived social values that Congress could not have intended it.” United States v. Cook, 594 F.3d 883, 891 (D.C. Cir. 2010)...