James Blumstein on Halbig v. Sebelius

Next week, the U.S. Court of Appeals for the D.C. Circuit will hear oral arguments in Halbig v. Sebelius, a challenge to the legality of an IRS rule purporting to authorize tax credits and cost-sharing subsidies in federal exchanges. Below is a brief commentary on the issues in Halbig by James F. Blumstein, university professor of constitutional law and health law and policy and director of the Health Policy Center at Vanderbilt University.

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President Obama has not been covert about his extension of executive power, openly asserting his intent to use his “pen” to push the envelope of executive powers and his “phone” to announce and secure support for his unilateral initiatives.

These unilateral executive-branch actions have been very strategic.

Politically, they have softened the impact of some of the Affordable Care Act’s harsher elements, offsetting potential political fallout.

Legally, this conduct has gone unchallenged in court because these actions have insulated affected stakeholders from adverse consequences of full implementation. Nobody has sufficient direct injury – legal standing – to sue. Taxpayers who benefit from postponements of penalties have no direct harm, and citizens or other taxpayers cannot sue under existing standing doctrine.

But what is perhaps the most significant of the Obama Administration’s executive actions in stretching the ACA does adversely affect an individual, and litigation on the issue is set to be heard before the Court of Appeals in D.C. on March 25 (Halbig v. Sebelius). The hearing has been expedited,, so the issue is clearly on the court’s radar.

This is what’s involved.

When Congress enacted the ACA, it provided for two types of marketplaces (“exchanges”) where consumers could purchase and carriers could sell health insurance. Section 1311 says that states “shall” establish exchanges, typically mandatory language not giving states a choice. But advocates eventually realized that, under the “anti-commandeering principle,” the federal government cannot just compel states to set up an exchange. The federal government cannot order states to participate in federal programs.

So, without rewording Section 1311, Congress adopted an “oops” provision (Section 1321). It requires the federal government to establish and operate an exchange if a state chooses not to do so –a recognition that, by itself, the mandate in Section 1311 was unconstitutional.

While the federal government cannot force states to set up exchanges, it can establish financial incentives that induce states to do so. Two-thirds of the states decided that, economically and politically, it was not such a good idea to develop and operate an exchange. They would have to fund the exchanges and take political responsibility if, as was the case, the exchanges did not roll out too well.

Some commentators have concluded that Congress recognized the disincentives states faced and therefore decided to encourage states to establish exchanges. The mechanism was to authorize federal subsidies for income-qualified consumers who purchase insurance on a state-run exchange, while not providing for such subsidies on the federally-run exchanges.

The thinking was that states would likely set up exchanges to allow residents to receive federal subsidies. But another dynamic developed. Most states decided that the advantages were outweighed by the detriments.

If an employer with 50 or more employees fails to provide health insurance that meets federal standards, and one employee receives a federal subsidy, the employer then faces a $2,000 per employee penalty (with an exemption for the first 30 employees). Businesses could avoid this penalty if there were no state-run exchanges, since only purchases on the state-run exchanges could qualify for the subsidy and thereby trigger the employer penalty.

In the states, it became a political battle about federal subsidy vs. business climate, with advocates making the case that job creation with some health insurance was a better deal for states, even if the insurance did not meet federal standards. That scenario was preferable to a regime with less robust job creation or even job loss but with federal subsidy for the purchase of health insurance.

But whatever the rationale, the reality is that the ACA establishes two kinds of health insurance exchanges – state-run exchanges, with income-qualified purchasers eligible to receive a federal subsidy, and federally-run exchanges, with no federal subsidies provided for under the ACA.

Enter the Obama Administration. It recognized a problem. Many more states than anticipated were deciding not to run exchanges. The federal government had to run exchanges in about two-thirds of the states. That would mean no federal subsidies in two-thirds of the states.

The highly unpopular individual mandate would require persons to buy qualifying health insurance. The individual mandate was not popular, even with subsidy for income-qualified purchasers; but a mandate without subsidy would likely be politically unsustainable. It would force some political reconsideration of key components of the ACA.

So, the IRS rode to the rescue. It wrote a regulation that, despite the provisions in the ACA itself, provided a subsidy for all income-qualified purchasers, even those on federally-run exchanges. A result is that an employer could face a substantial new tax if just one employee receives a federal subsidy, even if the employer’s state has chosen not to set up an exchange. And the states would no longer have an incentive to run an exchange since residents would receive federal subsidy on federally-run exchanges.

This seems pretty straightforward: There are two types of exchanges under the ACA, one established by states, and another established by the federal government. The statute only authorizes subsidy on state-run exchanges.

The Halbig plaintiffs are challenging the IRS’s authority to extend the subsidy (and thereby the penalty) to federally-run exchanges. This is the type of overreaching that softens the impact of the ACA, improving its political position and acceptance.

The key difference, however, is that there is a party with standing to challenge this action. The trial court ruled for the government on the theory that the ACA intended to subsidize those buying insurance on all exchanges. But the issue is not some abstract question of what Congress intended, but what Congress actually did. And about that there can be no serious dispute. The Court of Appeals should rein in the IRS by invalidating its contrary regulation.

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James Blumstein also testified on the legality of the IRS rule in September 2012.

For more background on the issues in Halbig, see these prior VC posts. George Will also wrote about the issue in this January column. For more, see this reference guide created by Michael Cannon and this summary of the plaintiff-side briefs (including an amicus brief Cannon and I co-authored).

Jonathan H. Adler teaches courses in constitutional, administrative, and environmental law at the Case Western University School of Law, where he is the inaugural Johan Verheij Memorial Professor of Law and Director of the Center for Business Law and Regulation.

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Will Baude · March 19, 2014