Tuesday morning, as the Supreme Court hears oral argument in the two cases challenging the so-called contraception mandate (Sebelius v. Hobby Lobby and Conestoga Wood Specialties v. Sebelius), the U.S. Court of Appeals for the District of Columbia Circuit will be hearing oral argument in another significant health care case, Halbig v. Sebelius. Both cases concern the legality of the Obama Administration’s implementation of the PPACA. Reflecting the significance (and complexity) of the issues involved, both cases will also feature extended oral argument.

As has been recounted in this space before, the plain text PPACA authorizes tax credits and cost-sharing subsidies for the purchase of qualifying health insurance plans purchased in health insurance exchanges “established by the State under section 1311” of the Act. PPACA supporters believed every state would create its own exchange. They were mistaken, however, and over thirty states have refused. In response, the IRS promulgated a regulation authorizing tax credits and subsidies in all exchanges, whether or not they were “established by the State under 1311.” Halbig is one of four pending challenges to this regulation.

On January 15, Judge Paul Friedman of the U.S. District Court for the District of Columba upheld the IRS rule. According to Judge Friedman’s opinion, an exchange may provide tax credits and cost-sharing subsidies even if it was neither “established by a State” nor “established . . . under section 1311.” As should be clear, I take a different view. Indeed, my work (with Michael Cannon) has been credited with inspiring this litigation and I co-authored an amicus brief in Halbig expanding on our research (see also here). In this post I will summarize what I think Judge Friedman got wrong (and right) in his opinion.

The central question in Halbig is whether the PPACA authorizes the issuance of tax credits and cost-sharing subsidies for the purchase of qualifying health insurance in exchanges established by the federal government. Section 1311 of the Act calls upon states to establish exchanges in which individuals may shop for health insurance. Section 1321 provides that the federal government shall establish an exchange in any state that fails to create its own exchange. Section 1401 of the Act creates Section 36B of the Internal Revenue Code which, among other things, authorizes tax credits to help qualifying individuals purchase qualifying health insurance plans. Under Section 1401, such tax credits are available for qualifying insurance plans purchased “through an Exchange established by the State under 1311.” This language is repeated more than once and the statute expressly defines a state as one of the 50 states or the District of Columbia. Eligibility for cost-sharing subsidies is tied to eligibility for tax credits.

The plain language of Section 1401 establishes two requirements for exchanges in which tax credits are available. The exchange is to be “established by the State” and “established . . . under section 1311.” The effect of these limitations is to provide an incentive for states to create their own exchanges, operated at their own expense. Such inducements are common in federal law. The IRS rule authorizes tax credits and cost-sharing subsidies in federal exchanges – exchanges that meet neither qualification – thus eliminating the incentive for state cooperation.

Defenders of the IRS rule argue that other provisions of the statute indicate that the IRS has adopted a permissible interpretation of an admittedly complex (and therefore potentially ambiguous) statute. I think the text is clear, but reasonable people may differ on this point. Judge Friedman took a different tack, concluding that the IRS rule was not merely a permissible interpretation of the PPACA, but was actually compelled by the text of the Act. (In AdLaw terms, he ruled for the government at Chevron “step one,” finding the statutory language clear and unambiguous.)

To reach this conclusion, Judge Friedman accepted the government’s argument that Section 1321 authorizes the federal government to operate a Section 1311 exchange. Section 1321 provides that if the state fails to create its own exchange, “the Secretary shall . . . establish and operate such Exchange within the State.” With this language, Judge Friedman concluded, the PPACA provides that a Section 1321 exchange established by the federal government is, by definition, a Section 1311 exchange, and can therefore provide tax credits.

One problem with this approach is that it fails to take account of the repeated qualification “established by the State.” Exchanges are referenced throughout the PPACA, and there is no problem accepting Section 1321 exchanges as such exchanges wherever the word “exchange” appears in isolation. One could even do this for references to “exchanges established under 1311.” But we’re still left with the phrase “established by a state” that is repeated in Section 1401. Judge Friedman’s interpretation reduces these repeated qualifications to mere surplusage. Sometimes the PPACA refers to exchanges “established by the State,” sometimes it does not. Under Judge Friedman’s interpretation, these distinctions are rendered meaningless – not simply ambiguous, but utterly meaningless. Worse, as my co-blogger David Bernstein noted, Judge Friedman suggested that “an exchange established by a state” can be “an exchange established by the Federal Government on behalf of a state.”

This was not enough for Judge Friedman to conclude that the PPACA requires the provision of tax credits in federal exchanges, however. From the above, Judge Friedman concluded that both sides of the case provided a “credible construction of the language” of the relevant provisions. To resolve the case, Judge Friedman proceeded to consider other evidence of the PPACA’s meaning.

According to the federal government, there are other provisions in the PPACA that, if interpreted consistently with Section 1401’s plain text, would create anomalies. Judge Friedman considered two of these provisions: the reporting requirements added by the Reconciliation bill and the definition of “Qualified Individuals” in Section 1312. According to Judge Friedman, the only plausible interpretation of these provisions confirms that the Act requires the provision of tax credits and cost-sharing subsidies in non-state exchanges. He is mistaken in each case.

During reconciliation, Congress added a set of reporting requirements that apply to both state and federal exchanges. Specifically, these provisions require all exchanges to report information on the individual insured, the level of coverage purchased, the premium paid, and information on any tax credits provided, among other things. Judge Friedman reasons that the only plausible purpose of these requirements is to provide the federal government with information on tax credits, this shows that tax credits must be available in federal exchanges.

Judge Friedman makes several errors here. First, much of the information that must be reported is of interest to the federal government whether or not tax credits are available, including the level of coverage provided and premiums paid. That not every category of information required is applicable in every exchange is no more relevant than the fact that these provisions require the reporting of information on individuals who purchase insurance in exchanges but who are not eligible for tax credits. Under any interpretation, some exchanges will have to report that no credits were issued for some individuals. Further, as the IRS confirmed in a regulation finalized on March 10, much of this information is not otherwise reported to the federal government by insurers (contrary to the express claim the government makes in its brief).

Judge Friedman also missed the fact that this provision was added by Congress during reconciliation as an amendment to the Senate-drafted PPACA. If, as Judge Friedman claimed, a federal exchange could be an “exchange established by the State under 1311,” there would no reason to expressly reference both Sections 1311 and 1321 in the reporting provisions. A simple reference to “exchanges” or even to “section 1311” exchanges would have sufficed. But that is not what Congress did. Instead, Congress expressly referenced both Section 1311 and Section 1321 exchanges, showing that the Congress that enacted the reconciliation bill – which is the exact same Congress that enacted the PPACA – knew the two were distinct and should be referenced separately.  But even if one rejects this view, a 1321 exchange is still not “established by the State.”

Judge Friedman was also troubled by the definition of “qualified individual” in Section 1312. This provision, which appears among a series of requirements for exchanges established by a state under Section 1311, defines “qualified individuals” eligible to purchase insurance on a state-based exchange as a person who “resides in the State that established the Exchange.” Accepting the plain text meaning of Section 1401, Judge Friedman argues, would also require reading this provision literally, thereby barring the purchase of health insurance altogether in states without a state-established exchange.

Judge Friedman’s error here is in failing to consider the structure of the act in interpreting the various provisions. The qualified individual definition is one of a series of requirements that states must meet should they choose to establish an exchange under Section 1311. For such exchanges, only those who reside in the establishing state may purchase insurance. Section 1321, however, provides for what happens if a state fails to establish its own exchange that complies with the relevant requirements. It further instructs the Secretary to both establish an exchange for that state and “take such actions as are necessary to implement such other requirements” – such as to adopt regulations that serve the same purpose as the requirements identified in Sections 1311 and 1312. Thus in the case of a federal exchange the qualified individual requirement is met when the Secretary promulgates a parallel rule limiting the purchase of insurance to those in the relevant state. Thus there is no anomaly in this provision either – nothing that leads to “strange or absurd results — and certainly nothing that allows (let alone requires) abandoning the plain language of Section 1401.

Not finished making the case that the PPACA does not mean what it says, Judge Friedman turned to the “purpose” of the PPACA. According to Judge Friedman, interpreting Section 1401 to limit tax credits to state-established exchanges “runs counter to the central purpose of the ACA: to provide affordable health care to virtually all Americans.” The problem with this claim, however, is that it would require rewriting whole sections of the Act, including provisions limiting tax credits to those who earn between 100 and 400% of the poverty level, provisions that increase the cost of health insurance, provisions that bar the renewal of existing health care plans, and so on.

The authors of the PPACA did not pursue the aim of expanding coverage at all cost. They made compromises and accepted trade-offs. And, in this provision, they sought to encourage state participation so as to blunt accusations that the PPACA represented a “federal takeover” of the health care system. Judge Friedman claims “there is simply no evidence in the statute itself of in the legislative history of any intent by Congress to ensure that states established their own Exchanges.” This is absurd. For starters, the act authorized HHS to finance state exchange startup costs. How is this not evidence that Congress wanted to encourage states? In addition, the language of Section 1311, calling upon states to create exchanges, is evidence of Congress’s intent (as the Supreme Court has found in cases involving similar statutory language, such as New York v. U.S.). My article and amicus briefs with Michael Cannon recounts additional evidence, including the history of the relevant Senate provisions.

Judge Friedman’s discussion of legislative history is even worse. For instance, Judge Friedman wrote that “there is no evidence that either the House or the Senate considered making tax credits dependent upon whether a state participated in the Exchanges,” adding that “there is no evidence in the legislative record that the House, the Senate, any relevant committee of either House, or any legislator ever entertained this idea.” This is categorically false. As we document in our article and amicus – and as multiple amici supporting the government before the D.C. Circuit concede – this same idea was embodied in prior versions of the Senate bill and was considered. (For links to all the relevant documents, see this site.)

Judge Friedman also seemed not to understand how the PPACA became law, as he cites early House bills as probative evidence of a bill written in and enacted by the Senate. Though the PPACA was based upon the Senate bill – and was never merged with a House bill through a conference – Judge Friedman cites House legislation as relevant evidence. Judge Friedman claimed that the reconciliation process “synthesized” House and Senate bills, but this is not true. Reconciliation only allowed for a limited set of amendments concerning limited subject matter. It did not – indeed, could not – rework the fundamental structure of the Senate bill. This is important because, as we note in our article, the final bill was quite different than anything that would have been drafted in the House.

While I strongly disagree with Judge Friedman’s disposition of the merits in Halbig, I was more satisfied with his treatment of the jurisdictional questions. In each of the cases challenging the IRS rule, the federal government has raised a series of jurisdictional claims, such as that the plaintiffs lack standing or that the suit is barred by the Anti-Injunction Act. Judge Friedman dispatched most of these arguments easily. There is no question that both the individual and employer plaintiffs are exposed to financial liabilities due to the interaction of the tax credit provisions with other portions of the Act, and Judge Friedman so ruled. He also rejected the government’s argument that plaintiffs’ proper remedy was a tax refund suit, rather than a challenge to the facial validity of the IRS rule. Such a holding, Friedman wrote, “would force plaintiffs to make a choice between purchasing insurance, thereby waiving their claims, or foregoing insurance and incurring the tax penalty, which they will recover much later, and only if they prevail.” This is not an adequate alternative to an action under the APA.

The one jurisdictional argument Judge Friedman did accept was that the Anti-Injunction Act bars employers from challenging the IRS rule because their only injury is the employer mandate penalty which, in Judge Friedman’s view, constitutes a tax: “Although the employer plaintiffs are challenging the legality of a regulation governing tax credits, not a tax collection, they do so in order to restrain the IRS from assessing” penalties on them – and these penalties, Judge Friedman concluded, are taxes for purposes of the AIA. I am skeptical of this conclusion, as one need not characterize the cause of action under the AIA in terms of the Article III injury alleged. Further, as Judge Friedman acknowledges, to federal appellate courts (the Fourth and Seventh Circuits) concluded the AIA does not apply to the employer mandate.

I am often asked how I expect the D.C. Circuit to rule. I’m obviously close to the issues here and will not hazard a guess as to how they will ultimately rule. If the IRS again prevails, however, I would be surprised if the D.C. Circuit affirms Judge Friedman’s reasoning. I’ve seen colorable (if ultimately unconvincing) arguments that the PPACA is sufficiently ambiguous to justify Chevron deference – the complexity of the PPACA as a whole certainly helps the government with this argument — but Judge Friedman is one of the few to claim that the statute unambiguously requires the issuance of tax credits in federal exchanges, despite apparently clear language to the contrary.  Whether or not the government prevails, I would be surprised if the D.C. Circuit follows Judge Friedman’s lead — and I would certainly prefer the D.C. Circuit to recognize that the “law of the land” is the PPACA Congress actually enacted, not the PPACA some might have preferred.

For more critical commentary on Judge Freidman’s decision, see these posts by Michael Greve, James Blumstein, and Michael Cannon.  For a more favorable take on Judge Friedman’s opinion, see this post from Nicholas Bagley.

For a roundup of resources on the decision, including links to all the relevant documents and briefs, see this reference guide.