Supporters defend subsidies for federally operated exchanges, even though the law only allows them through the states

By Peter Suderman

June 19, 2013

Over the years, Obamacare’s defenders have made plenty of absurd arguments in service of the law, but perhaps the most absurd argument of all is that the language of the law does not actually mean what it plainly says. Yet that is essentially the argument that some of the health law’s defenders are making in public and that they are preparing to make in court.

The law expands health coverage by providing subsidies to people buying health insurance through government-run health exchanges—online marketplaces intended to allow people to compare and purchase health plans. But the text of the law clearly states that those subsidies are only available to individuals who purchase insurance in exchanges erected by states. The Internal Revenue Service, however, has ruled that the subsidies will be also be available in the 34 exchanges run by the federal government. 

Obamacare’s backers now have to defend the IRS ruling, as a challenge to the tax agency’s rule makes its way to court. It’s no mere legalistic squabble. The outcome of this dispute could eventually determine whether the IRS has the authority to disburse some $800 billion in federal funds—the estimated value of the subsidies in the 34 states where the federal government has taken responsibility for creating the exchanges.

The legal text in question is not fuzzy or inscrutable. As Cato Institute Health Policy Director Michael Cannon and Case Western Law Professor Jonathan Adler noted in a recent paper, it clearly states that subsidies are available to individuals who purchase insurance “through an Exchange established by the State under Section 1311 of the Patient Protection and Affordable Care Act.” In case there was any lingering confusion, the law elsewhere defines “State” as any of the 50 states or the District of Columbia. It also refers to exchanges created under section 1311 of the law, which governs state-created exchanges. Nowhere does it mention that subsidies are available to insurance purchased through section 1321—the segment of the law that provides for the creation of exchanges by the federal government.

One does not need to be an ideologue to see that the clearest and most obvious way—indeed, the only way—to understand language is that the law’s insurance subsidies are limited to state-created exchanges. Indeed, one only need be an analyst at the Congressional Research Service, which noted last year that a “strictly textual analysis of the plain meaning of the provision would likely lead to the conclusion that the IRS’ authority to issue the premium tax credits is limited only to situations in which the taxpayer is enrolled in a state-established exchange.” 

Yes, it likely would. But not, apparently, at the IRS, which saw fit to offer a more expansive interpretation. The tax agency issued a rule saying that individuals are eligible for subsidies if they purchase insurance through exchanges “established under section 1311 or 1321 of the Affordable Care Act.” Where did the extra bit come from? We can only guess. Former IRS Commissioner Douglas Shulman defended the rule as “consistent with the language, purpose, and structure” of the health care law, but notably failed to cite any specific legislative language allowing for subsidies in federally run exchanges.

So it’s just the general sense of the thing? Well, more or less. Robert Weiner, a partner at the law firm Arnold & Porter, defended the IRS rule at an event hosted by the Cato Institute on Monday. Much of his argument could be boiled down to the notion that those who oppose the rule fail to see the bigger picture. Critics of the IRS rule, he said, had made “an effort to quarantine” a small portion of the law by “isolating seven words.” That’s an approach that excises the relevant context, he says, such as statute titles that refer to making health care “affordable…for all Americans.” It’s an argument that comes perilously close to suggesting that the health law’s headline generalities should override its specific language.

Weiner also argued that the “Exchange created under 1311” could also be read to include exchanges created by the federal government, which he said would be “standing in the shoes of the state.” If that’s the case, then why does the law elsewhere explicitly set out requirements for exchanges created under either 1311 or 1321—an indication that they are separate entities and cannot stand in for each other?

But forget the legal details. Supporters of the IRS rule say you’d have to be totally nuts to believe that Congress would have written a law that denies subsidies to residents of so many states. Simon Lazarus, Senior Counsel for the liberal Constitutional Accountability Center, said at the Cato event that “it makes no sense” to imagine that the law’s authors would have designed a “poison pill” for their own legislation.

Yet there’s no need to presume that the law’s authors intended the provision as self-destructive. It’s perfectly plausible that the provision was intended to entice states into creating the exchanges themselves, since Congress is constitutionally prohibited from requiring them to do so. In fact, it’s not just plausible, it’s consistent with the way the law handled its Medicaid expansion, which also included various penalties and incentives for states—including, originally, the potential loss of all federal Medicaid funds (a provision that was struck down last year by the Supreme Court). Conditioning the subsidies on state participation would mean that the subsidy funding would function as both carrot and stick—a bonus for states that comply, and a loss for states that don’t.

Lazarus gave perhaps the best objection to this argument, which is that for the threat to work it must be obvious to all involved. “By its nature,” he said, “a threat must be communicated.” And yet he noted that there was essentially no discussion of this threat, and even Cannon and Adler admit that when they first encountered the language, they initially understood it as a glitch. How could the condition have been effective as a threat if no one knew about it?

Like Weiner, Lazarus also urged a holistic sensibility when interpreting the law, one that looks at “the whole statute” and avoids the “quarantine approach.” But the defenders of the IRS rule are the ones who have ignored the relevant historical context. When Obamacare was drafted, everyone—supporters and critics alike—assumed as a given that all states would create their own exchanges. So there was no reason to have much discussion about what would happen if they didn’t. (Nor, for that matter, was there much incentive for the law’s authors to talk up a provision of the bill that would have resulted in fewer individuals getting coverage subsidies.)

As a challenge to the IRS rule heads to court, Obamacare’s supporters hope to convince both the public and the legal system that the argument made by critics is absurd. But what’s truly absurd is their argument that the law’s clear and unambiguous language means anything other than what it clearly says.