Obamacare Litigation 2.0

Last week, business owners and individuals from several states sued the IRS and HHS over the agencies’ interpretation and implementation of the Affordable Care Act. The case was engineered by the Competitive Enterprise Institute. CEI’s press release appears here; it contains a link to the Complaint, filed in the federal district court for the D.C. Circuit. This is huge: all of Obamacare hangs on the outcome.

(Disclosure: I serve as CEI’s Chairman, and I have the privilege of knowing every other participant in this particular enterprise.)

ACA mavens, as well as followers of the volokhconspiracy (or any other forum of the VRWC), will be familiar with the issue. A brief, non-technical summary:

Sec. 1311 of the ACA says that each State “shall” establish a health care “Exchange.” Though widely touted as simply a kind of expedia for health insurance, these are regulatory bodies. Individuals who obtain insurance through an Exchange may qualify for certain federal subsidies and tax credits, administered by the IRS. And, if an employer with 50 or more employees fails to offer a “qualified” health plan and only one of his employees purchases insurance through an Exchange, that employer will be subject to a penalty payment for all of his employees.

Constitutional hiccup: the federal government has no business telling states what they “shall” do. Thus, Sec. 1321 instructs the Secretary of HHS to establish Federal Exchanges in non-cooperating states. The genius architects of the ACA didn’t expect that to happen: the subsidy carrot, they thought, would simply be too attractive. As it turns out, though, over half of all states have now declined to establish an Exchange.

Now it comes: the ACA explicitly links the subsidy, tax credit, and employer penalty provisions to exchanges established “by a State”—that is, Sec. 1311 Exchanges. If the statute means what it says, Obamacare’s machinery simply doesn’t apply in half the country.

Not a problem, according to the IRS: it’s gunned out a rule saying that Congress meant to include Federal (Sec. 1321) Exchanges. There’s nothing in the statute or its legislative history to support that position; but there’s also nothing to contradict it, and so never mind the specific language. (I kid you not.) HHS has echoed the IRS’s position.

That’s what the plaintiffs in this case, hailing from States where Federal Exchanges are scheduled to open on October 1, are challenging. (A similar case, brought by and on behalf of the State of Oklahoma, is pending.) The argument was first noted by Tom Christina—well-known to faithful followers of this blog, and a fearless explorer of the ACA jungle. (Dr. Livingston, I presume?) It has been developed and defended at considerable length by Jonathan Adler and Michael Cannon—see here. The litigation is headed by the one and only Michael Carvin of Jones, Day.

I’ll have more on this as things progress. For now, two quick points:

  • There’s a potent competitive federalism consideration here. Under the statute as written, a state that refuses to establish an exchange deprives some of its citizens (in a manner of speaking) of the subsidies and tax credits that travel with a Sec. 1311 Exchange. But it also keeps its employers free from Obamacare’s mandates; and on balance, that may be a very attractive choice. The feds’ interpretation, in contrast, eliminates that choice and flattens the world; the only “choice” left to states is to wreck their health care markets under Mrs. Sebelius’s commands or else, have her do it on her own. In my book, that’s probably unconstitutional; in any event, it’s an awful federalism model.
  • Note the disjunction between legal salience and practical importance. The NFIB v. Sebelius brawl over the “individual mandate” was a big constitutional confrontation. In operational terms, though, it wasn’t all that important. (The mandate was mostly a $30 billion gift to the health insurance lobbies, to say “thank you” for their active cooperation in the slow-motion destruction of private health insurance.) This case is the reverse. There’s no constitutional claim at all, only a straight-up administrative law challenge: Chevron Zero, One, Two; arbitrary and capricious; out of here. It must and will be done right, but there’s nothing unprecedented about it. If successful, though, the case will bring Obamacare’s Exchange engine to a screeching halt. Theoretically, Congress could fix the problem with a minor tweak of the statutory language. Practically, it can’t—not without re-opening the entire statute.

In short, this is for all the marbles.