There’s one big legal challenge left against Obamacare. But a D.C. judge just ruled against it.

January 15

The effort to kill Obamacare through the courts didn't end when Chief Justice John Roberts declared the law constitutional in June of 2012. More recently, Cato's Michael Cannon has been crisscrossing the nation arguing that a plain reading of the ACA statute suggests that the IRS can't offer subsidies through the federal exchanges. If the courts agree with him, then more than 30 states would see their subsidies choked off unless and until they built their own insurance exchange. Legal scholars have been skeptical of this lawsuit, but after the unexpectedly strong initial challenge to Obamacare, no one has wanted to write it off.


A good day for Obamacare in court. (Melina Mara/The Washington Post)

The dispute settles around a single sentence: The Affordable Care Act's defining a health insurance exchange, in Section 1311, as a "governmental agency or nonprofit entity that is established by a state." Since the law says subsidies only go to people buying insurance "through an Exchange established by the State under 1311," Cannon and some others argue that the federal exchanges, though specifically envisioned in the law, can't receive subsidies. 

Wednesday, a D.C. circuit court disagreed. Over at the Incidental Economist, Nicholas Bagley explains the Judge Paul L. Friedman's reasoning:

He starts with the observation that “the plain language” of the statute, “viewed in isolation, appears to support plaintiffs’ interpretation.” After all, tax credits are linked to health plans purchased on exchanges “established by the State under 1311.” And federally operated exchanges are established by the Secretary of HHS under Section 1321, not 1311.

But Friedman also points out that the statutory text has to be construed in context. Part of that context is the language of section 1321 itself. The judge notes that, when a state fails to establish a workable exchange, the ACA instructs the Secretary to establish “such exchange.” That little word “such” clarifies that an exchange established by the federal government is a 1311 exchange. “In other words,” Friedman says, “if a state will not or cannot establish its own Exchange, the ACA directs the Secretary of HHS to step in and create ‘such Exchange’—that is, by definition under the statute, ‘an American Health Benefit Exchange established under [section 1311].’”

To reinforce the point, Friedman walks through provisions of the ACA that would make little sense if federal tax credits were unavailable on the exchanges. Why would the ACA require federal exchanges to inform the IRS when they give tax credits to people if they’re not allowed to give them tax credits at all? If the challengers were right, the provision would“serve no purpose” and be “superfluous.”

Similarly, the ACA says that only “qualified individuals” can purchase plans on the exchange, but defines “qualified individual” to be someone who “resides in the States that established the exchange.” “If this provision were read literally,” Friedman writes, “no ‘qualified individuals’ would exist in the thirty-four states with federally-facilitated Exchanges. … The federal Exchanges would have no customers, and no purpose.”

This is, of course, only one court -- and it's only a district court at that. Similar lawsuits are pending in other jurisdictions, and the plaintiffs will almost certainly appeal in D.C., too. So this probably isn't the last word. But it's the first word, and it's a clean win for Obamacare.

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Brian Fung · January 15