A stinging defeat for the government

In a major setback for the Affordable Care Act, the D.C. Circuit just released a fractured opinion invalidating the IRS’s rule extending tax credits to federally facilitated exchanges.

The case, Halbig v. Sebelius, centers on the portion of the ACA governing the calculation of tax credits. The statute specifies that tax credits are available to most people who purchase a health plan “through an Exchange established by the State under 1311.” (See my earlier posts for a more detailed recap.) About two-thirds of the states, however, declined to establish exchanges. In those states, the federal government stepped in and established the exchanges on the states’ behalf.

In today’s opinion, the D.C. Circuit held that a federally facilitated exchange isn’t “established by the State under 1311.” As a result, the IRS can’t offer tax credits to those who purchase plans on such exchanges. Since the average estimated tax credit in 2014 is $4,700, the ruling threatens to deprive tens of thousands of people in Texas, Florida, Ohio, Michigan, and many other states of the means to buy health insurance.

In his opinion for the Court, Judge Griffith starts with the text of the statute. He first acknowledges that a federal exchange is a 1311 exchange, even if it’s established by the Secretary of HHS under 1321 of the ACA. After all, section 1321 instructs the Secretary to establish “such exchange” if a state fails to do so. In context, “such exchange” clearly refers to a 1311 exchange.

But that’s not enough. As Griffith sees it, “[t]he problem confronting the IRS Rule is that subsidies also turn on … who established them.” The statutory text requires the exchanges—even those established under 1311—to be “established by the State.” Because federal exchanges aren’t established by a state, but by the federal government, individuals who purchase a plan on federally established exchanges are ineligible for tax credits.

Griffith then turns to the larger statutory context, and to the government’s claim that a cramped construction of the statute “would render several other provisions of the ACA absurd.” What about the ACA requirement that federally established exchanges report on who receives tax credits? Wouldn’t that be superfluous if no one received any such credits? “Not so,” says Griffith. “Even if credits are unavailable on federal Exchanges, reporting by [federally established] Exchanges still serves the purpose of enforcing the individual mandate.”

What about the ACA provision stating that “qualified individuals” can buy plans on an exchange? Since a “qualified individual” is defined in the statute to mean someone who “resides in the States that established the Exchange,” Griffith acknowledges that giving this provision its plain meaning would mean that “the 36 states with federal Exchanges … have no qualified individuals.” Even so, he says, “[t]he government … tilts at windmills.” In Griffith’s view, “[t]he obvious flaw in this interpretation is that the word ‘only’ does not appear in the provision.” People in states with federally facilitated exchanges should be allowed on those exchanges, even if the statute might at first glance appear to preclude them from doing so.

Finally, Griffith addresses the legislative history of the ACA and concludes that it “sheds little light on the precise question on the availability of subsidies on federal Exchanges.” In Griffith’s view, that silence about whether Congress intended the odd result of depriving individuals on federal exchanges of subsidies is not enough. “[T]here must be evidence that Congress meant something other than what it literally said.”

Griffith concludes his opinion with the following remarkable statement:

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.

In a lengthy and passionate dissent, Judge Edwards notes his disagreement at every turn with the majority:

The majority opinion ignores the obvious ambiguity in the statute and claims to rest on plain meaning where there is none to be found. In so doing, the majority misapplies the applicable standard of review, refuses to give deference to the IRS’s and HHS’s permissible constructions of the ACA, and issues a judgment that portends disastrous consequences. I therefore dissent.

What happens now? Instead of taking the case right to the Supreme Court, the government will probably ask the whole D.C. Circuit to review it. (The government has until September 5 to file its petition.) The court is very likely to review the case en banc: it’s undeniably of “exceptional importance” and the decision is, in my view, quite wrong. It also won’t hurt that, after filibuster reform, the court’s seven Democratic appointees outnumber its four Republican appointees.

In all likelihood, the case would be heard en banc in the late fall or winter. If the government loses again—which is unlikely, in my view—the Supreme Court would almost certainly take the case. If the government wins, it’s more difficult to hazard a prediction. Much will depend on how the other pending cases presenting the same question develop, especially King v. Sebelius, which was recently argued before the Fourth Circuit.

This is by no means is this the final word on the exchange litigation. But that’s not to minimize the significance of the court’s decision today. It lends plausibility to the challengers’ arguments, gives momentum to the litigation—and increases the odds that millions of Americans won’t be able to afford health insurance.


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