A divided panel of the DC Circuit this morning handed down its long-awaited decision in Halbig v Burwell, holding 2-1 that Obamacare does not provide subsidies for purchases of insurance on the federal Healthcare.gov exchange, and that the individual mandate does not apply in states that have not established their own state exchanges. The decision, based on the plain language of the statute (and not any Constitutional issue), is a huge blow to Obamacare, but is almost certainly not the last word in this litigation (which may yet go to the full DC Circuit and/or the Supreme Court) or in the political battle over the exchanges.
The Court's Reasoning
The legal issue is fairly straightforward. The Affordable Care Act statute provides tax credit subsidies to individuals who buy insurance on exchanges "established by the State under section 1311" of the ACA. To an ordinary reader, an exchange "established by the State" would seem to refer to exchanges established by states, unless the statute defines the word "State" to include the federal government, or unless section 1311 has some other, broader definition. Neither is the case - in fact, a separate section of the ACA, section 1321, allows the federal government to "establish and operate such Exchanges within the State" if the State does not.
The court, reviewing this language, concluded that Obama's IRS had gone too far and exceeded the authority the statute provided when, in a May 2012 regulation, it extended the subsidies to buyers of policies on the federal exchange. Notably, the IRS regulation did not try to define the federal exchange as a "State" exchange, but instead stated it was covering buyers "regardless of whether the Exchange is established and operated by a State".
Under longstanding rules, if the plain language of a statute says something, courts will enforce it unless it produces "absurd results" (i.e., there is no possible way it was meant to say that), it renders other parts of the statute meaningless, or the larger context of the statute shows that it was meant to be read some other way. The DC Circuit was unconvinced that any of these arguments could salvage the IRS' insistence that "established by a State" really meant "regardless of whether the Exchange is established and operated by a State".
The problem confronting the IRS Rule is that subsidies also turn on a third attribute of Exchanges: who established them. 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.” 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.
(p. 17-18) (Notably, the Administration just yesterday did an about-face on whether a territory is treated as a state under the statute. As the DC Circuit notes, at p. 37-38, the ACA also does not impose an individual mandate on the territories, despite the Administration's longstanding position that core elements of the statute would collapse without the mandate). The decision doesn't just affect the subsidies, however - it also effectively repeals the individual and employer mandates for many individuals and employers, because the scope of those mandates is for certain practical reasons limited to places where the subsidies are in effect (for example, because it keys the individual mandate to the availability of coverage, including subsidies, below a certain cost threshold). The mandate issue is why the taxpayers who brought suit had standing to sue (see p. 9-11).
More broadly, the court found that the statute's structure - contrary to the Administration's argument - treats the federal exchange as different from the State exchanges, as of course it is in its personnel and operations:
[S]ection 1311(d) assumes that states will carry out the specific requirements Exchanges must meet. But if those assumptions prove wrong, section 1321 assigns the federal government responsibility both to establish the Exchange and to ensure that it satisfies the particulars of section 1311(d)...In other words, section 1321 creates a limited scheme of substitution: the requirements assigned to states by 1311(d) are transferred to the federal government if a state fails to establish an Exchange. The specific requirement that (d)(1) assumes each state will fulfill is to establish an Exchange in the form of “a governmental agency or nonprofit entity.” So if a state elects not to participate in the creation of an Exchange, section 1321 directs the federal government that it must create “a governmental agency or nonprofit entity” to serve as the Exchange. Crucially, this construction does not entail ignoring the plain meaning of “established by a State” in section 1311(d)(1); here, section 1321 tells us to substitute the federal government for the state under a certain scenario. But there is nothing comparable with respect to section 36B: no analogue to section 1321 says that section 36B should be read to encompass federally-established Exchanges. Accordingly, we reject the dissent’s argument that, because federal Exchanges are established under section 1311, they are by definition “established by a State.”
We have seen, in practice, that the federal and state exchanges are not the same - they run on different technological platforms established by different contractors, overseen by different officials, and some have been more or less successful than others.
Finally, the court noted the narrow scope of the basis for rewriting the statute's plain language simply because it was badly drafted, so long as it is internally logical: "The Constitution assigns the legislative power to Congress, and Congress alone, see U.S. CONST. art. I, § 1, and legislating often entails compromises that courts must respect." (p. 22). As the court concluded (p. 41):
We reach this conclusion, frankly, with reluctance. At least until states that wish to can set up Exchanges, our ruling will likely have significant consequences both for the millions of individuals receiving tax credits through federal Exchanges and for health insurance markets more broadly. But, high as those stakes are, the principle of legislative supremacy that guides us is higher still. 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, not by appointed, life-tenured judges.
UPDATE: The Fourth Circuit agreed with the DC Circuit's initial reading of the language - "There can be no question that there is a certain sense to the plaintiffs’ position. If Congress did in fact intend to make the tax credits available to consumers on both state and federal Exchanges, it would have been easy to write in broader language, as it did in other places in the statute" (p. 18) - but concluded that " the court is of the opinion that the defendants have
the stronger position, although only slightly" and thus deferred to the IRS to make the final call. (p. 20)
Why It Matters
Limiting subsidies to states with their own exchanges is important because only fourteen states plus DC have their own exchanges. Congress would have required the others to establish exchanges, but the Supreme Court, in particular in a line of cases in the 1980s and 1990s, has held that the federal government cannot just give orders to the states about what laws they must pass. Instead, the most the federal government can do is offer carrot-and-stick incentives. That was the basis on which the Court held, 7-2, that Obamacare's Medicaid expansion went too far in pushing states to expand the criteria for Medicaid to cover more able-bodied adults above the poverty line.
As a result of that decision, many states with Republican governors refused to expand Medicaid, and many of those same states (and even some that expanded Medicaid) refused to establish their own exchanges. The possibility that states might need to be encouraged to establish an exchange is, in fact, one theory why the ACA was written as it was - that at some point in the drafting process, it was thought that limiting subsidies to state exchanges would encourage that (see p. 32-34 of the decision; Cato has some great background on the legislative history and language here; Michael Cannon has done yeoman work on this case). Nonetheless, nobody really disputes that most of the Congress that voted on the ACA simply had no idea what the statute said - they had to pass the bill, as Nancy Pelosi said, to find out what was in it.
The decision is unlikely to be the end of the line. Senior Circuit Judge Harry Edwards dissented, and with Democratic appointees now an 8-5 majority on the DC Circuit, the Administration could appeal first for an en banc hearing by the whole court, which would drag things out before the inevitable appeal to the Supreme Court (which was unlikely to want this case if no lower court had ruled against the Administration, but which is now much more likely to have the final say). In the interim, even the panel's reluctance suggests that the decision may not go into immediate effect, as the Administration will likely seek a stay of the ruling while it appeals.
It is never good news for Democrats to get yet another ruling that the Obama Administration overreached and tried to rewrite legislation passed by Congress, and because House Republicans will not cooperate further with efforts to keep Obamacare from imploding, Democrats must face the real risk that the litigation could confine the statute's reach, after all, to just the states with their own exchanges, as shown on this map from the Kaiser Family Foundation:
You will notice that map is dominated by blue states, with one very noticeable exception (Kentucky, where Mitch McConnell has been more than a little evasive about the state exchange). And the list of state exchanges has been shrinking, given the fiascos and scandals surrounding the Cover Oregon and Maryland exchanges and even the failures of the previously functional Romneycare exchange in Massachusetts, to say nothing of Vermont, Colorado, Minnesota and other states. Republican governors who wanted nothing to do with this mess now look a lot wiser than those who claimed that there was no real difference if they established an exchange.
But the news will put some Republican governors in a tight spot, as well, because even as the ruling promises to free their states from mandates, it cannot entirely undo the mess made by Obamacare in burning the ships of the previous individual insurance market. People have lost other forms of insurance, and been thrown into dependence on the subsidies; as happens with government programs, in some places the subsidies have become popular with their recipients. The resolve and the policy creativity of GOP Governors up for re-election in the states with only the federal exchange will now be put to the test. And conservative activists should be prepared to keep the heat on their statehouses to make sure they don't end up agreeing to something worse.